Lesson

Indian mutual funds and German tax: the Vorabpauschale

What the Vorabpauschale is, why January matters, where the Basiszins comes from and how the partial exemption works when you hold Indian mutual funds while living in Germany.

4 min read · Reviewed on 28 September 2026 by the founder

Made with AI assistance, reviewed by inWst

The idea in one line

German tax law gives funds that pay out little or nothing a yearly minimum taxable amount, the Vorabpauschale, and a growth-option Indian mutual fund held by someone living in Germany is generally no exception.

Why it matters

German investment tax law counts three kinds of fund income: distributions, the Vorabpauschale and gains on a sale (§ 16 InvStG). The Vorabpauschale exists so that a fund that reinvests everything still produces some taxable income each year. It is the amount by which the year's distributions fall short of a base yield: the fund's price at the start of the year multiplied by 70%^[1] of the Basiszins, a rate the Federal Ministry of Finance publishes each January. The base yield is capped at the fund's actual rise in value over the year plus its distributions, so a year in which the fund fell produces no Vorabpauschale (§ 18 InvStG).

The Basiszins announced for 2026 is 3.20%^[3]. The Vorabpauschale for 2026 counts as received on the first working day of 2027, which the ministry's letter gives as 4 January 2027. For fund units kept at a German bank, that is when the bank generally collects the tax, and the law lets it take the amount from the customer's account there (§ 44 EStG). An Indian mutual fund held through an Indian account has no German bank to do this, so nothing is debited in January. Instead the amount belongs in the German tax return, because capital income that no German bank taxed at source has to be stated there (§ 32d(3) EStG).

The timing also decides the year. The Vorabpauschale for 2025, worked out with a Basiszins of 2.53%^[4], counted as received on 2 January 2026 and so falls in the return for 2026; the one for 2026 falls in the return for 2027.

How to check yours

For each Indian fund, a short record covers what the calculation needs:

growth or IDCW option, and any payouts received in the calendar year;
the first and the last NAV of the calendar year (your consolidated account statement shows both);
the month of purchase, for units bought during the year, because in the year of purchase the amount shrinks by one twelfth for each full month before that month;
the fund's category, for the partial exemption below.

The free Indian income checker lists growth-option funds as their own item and shows which section of the German return they generally belong in.

What people commonly do

Part of fund income is tax-free, depending on the fund type (§ 20 InvStG): 30%^[7] for an equity fund held privately and 15%^[7] for a mixed fund. An equity fund is one whose investment terms commit it to keep more than 50%^[8] of its assets in shares at all times (§ 2(6) InvStG). Indian scheme documents are not written with German law in mind, so whether a given Indian fund counts as an equity fund is its own question. The law also lets an investor show in the return that a fund actually stayed above the quota throughout the year (§ 20(4) InvStG).

A common rule among advisers is to keep the year-start and year-end statements for every fund with the tax papers, since the calculation cannot be redone without them. Individual cases, especially the fund category, the exchange rate to use and units bought or sold during the year, are a question for a Steuerberater.

Cross-border twist

India has no Vorabpauschale. Indian tax on mutual funds generally arises when units are redeemed or a payout is made, so there is usually no Indian tax to set against the German tax on a Vorabpauschale, and the two countries tax at different moments. When the units are sold later, German law reduces the gain by the Vorabpauschalen already taxed while you held them (§ 19(1) InvStG), so the same growth is not counted twice in Germany. The rupee amounts also have to be converted to euros, and the method is one of the points to settle with the Steuerberater.

Sources

60-second video script

Hook: Your Indian growth fund paid you nothing this year. Germany may still count some of it as income.

Point 1: German law has a yearly minimum for funds that don't pay out: the Vorabpauschale. It's based on the fund's price in January and a rate the finance ministry publishes each year.

Point 2: For 2026 it counts as received on 4 January 2027. A German bank collects the tax then. For an Indian fund, nobody collects it: it goes into your German return.

Point 3: Equity funds are partly tax-free in Germany. Whether your Indian fund counts as one is a question for a Steuerberater.

Call to action: See where your Indian funds generally go in the German return with the free checker at inwst.com/tools/indian-income.