Income Tax 2025

Appearance

Tax on income from units purchased in foreign currency or capital gains arising from their transfer. ​

208(1) ​

The income-tax payable on the total income of an assessee, being an overseas financial organisation (herein referred to as Offshore Fund), which includes income specified in column B of the Table below, shall be the aggregate of the amount specified in column C thereof. --Table--

208(2) ​

Where the gross total income of the Offshore Fund—

  • (a) consists only of income from units or income by way of long-term capital gains arising from the transfer of units, or both, no deduction shall be allowed to the assessee under sections 26 to 61 or section 93(1)(a) and (e) or under Chapter VIII;
  • (b) includes any income referred to in clause (a),–– (i) the gross total income shall be reduced by such income; and (ii) the deduction under Chapter VIII shall be allowed as if the gross total income so reduced were the gross total income of the assessee.

208(3) ​

In this section,––

  • (a) “overseas financial organisation” means any fund, institution, association or body, whether incorporated or not, established under the laws of a country outside India,––

    • (i) which has entered into an arrangement for investment in India with any public sector bank or public financial institution or a mutual fund specified in Schedule VII (Table: Sl. No. 20 or 21); and
    • (ii) such arrangement is approved by the Securities and Exchange Board of India, established under the Securities and Exchange Board of India Act, 1992, for this purpose;

  • (b) “public financial institution” shall have the same meaning as assigned to it in section 2(72) of the Companies Act, 2013;

  • (c) “unit” means unit of,––

    • (i) a mutual fund specified in Schedule VII (Table: Sl. No. 20) or (Table: Sl. No. 20 or 21); or
    • (ii) the Unit Trust of India.
Explanation

Section Summary: ​

This section deals with the taxation of income earned by Offshore Funds (overseas financial organizations) from units purchased in foreign currency or capital gains arising from the transfer of such units. It specifies how the income-tax payable by these Offshore Funds is calculated and outlines the conditions under which deductions are allowed or disallowed.

Key Changes: ​

  1. Introduction of Specific Taxation for Offshore Funds: This section introduces a specific tax treatment for Offshore Funds, which was not explicitly detailed in the prior income tax law.
  2. Deduction Restrictions: Offshore Funds earning income solely from units or long-term capital gains from unit transfers are not allowed to claim deductions under certain sections (e.g., sections 26 to 61, section 93(1)(a) and (e), or Chapter VIII).
  3. Reduction in Gross Total Income: If the Offshore Fund’s income includes income from units or long-term capital gains, the gross total income is reduced by such income before allowing deductions under Chapter VIII.

Practical Implications: ​

  1. For Offshore Funds: Offshore Funds will now have a clear tax framework for income earned from units or capital gains. They must ensure compliance with the specific tax calculation and deduction rules outlined in this section.
  2. For Indian Financial Institutions: Public sector banks, public financial institutions, and mutual funds collaborating with Offshore Funds must ensure that the arrangements are approved by SEBI to qualify under this section.
  3. Tax Compliance: Offshore Funds need to carefully segregate their income from units or capital gains to determine the correct taxable income and applicable deductions.

Critical Concepts: ​

  1. Offshore Fund: Defined as any fund, institution, association, or body established outside India that has an approved investment arrangement with Indian public sector banks, public financial institutions, or specified mutual funds.
  2. Unit: Refers to units of mutual funds specified in Schedule VII or the Unit Trust of India.
  3. Gross Total Income Reduction: If an Offshore Fund has mixed income (e.g., income from units and other sources), the income from units or capital gains is excluded from the gross total income before applying deductions under Chapter VIII.

Compliance Steps: ​

  1. Income Segregation: Offshore Funds must separate income from units or capital gains from other income sources.
  2. Tax Calculation: Calculate the tax payable based on the aggregate amount specified in the table under Section 208(1).
  3. Deduction Application: If the income includes other sources, reduce the gross total income by the income from units or capital gains before applying deductions under Chapter VIII.
  4. SEBI Approval: Ensure that the investment arrangement with Indian entities is approved by SEBI to qualify as an Offshore Fund under this section.

Examples: ​

  1. Scenario 1: An Offshore Fund earns ₹10 crore solely from long-term capital gains on the transfer of units. Under Section 208(2)(a), no deductions under sections 26 to 61 or Chapter VIII are allowed. The tax is calculated on the full ₹10 crore as per the table in Section 208(1).
  2. Scenario 2: An Offshore Fund earns ₹8 crore from units and ₹2 crore from other sources. Under Section 208(2)(b), the gross total income is reduced by ₹8 crore (income from units). Deductions under Chapter VIII are then applied to the remaining ₹2 crore.

This section provides clarity on the taxation of Offshore Funds, ensuring proper compliance and tax treatment for income derived from units or capital gains.