Section 196B of the Income Tax Act, 1961: TDS on Offshore Funds

Introduction

Section 196B of the Income Tax Act governed TDS on specified income paid to a qualifying Offshore Fund. It covered income from eligible units purchased in foreign currency and long-term capital gains arising from the transfer of those units. This provision did not apply to every non-resident or mutual fund investor. The recipient, investment arrangement, and units had to satisfy specific legal conditions.

From 1 April 2026, the taxation of such income is covered under Section 208 of the Income-tax Act, 2025. The corresponding TDS provisions are contained in Section 393(2), Table Serial Numbers 11 and 12.

This article explains the applicability, rates, deduction timing, compliance requirements and new-law mapping of Section 196B.

What is Section 196B of the Income Tax Act?

Section 196B of the Income Tax Act, 1961 required a person responsible for paying specified income to an Offshore Fund to deduct tax at source.

It covered:

• Income received in respect of eligible units purchased in foreign currency; and
• Long-term capital gains arising from the transfer of those units.

The eligible units included units of a mutual fund specified under Section 10(23D) of the old Act and units of the Unit Trust of India. The corresponding taxation provision was contained in Section 115AB.

From 1 April 2026:

• Section 208 governs the taxation of such income;
• Section 393(2), Table Serial Number 11 prescribes TDS at 10% on income from eligible units; and
• Section 393(2), Table Serial Number 12 prescribes TDS at 12.5% on long-term capital gains from the transfer of eligible units.

Applicability of Section 196B of the Income Tax Act

Section 196B applied only when all the prescribed conditions were satisfied.

It applied where:

• The recipient qualified as an Offshore Fund;
• The relevant units were purchased in foreign currency;
• The payment represented income from eligible units; or
• The payment represented long-term capital gains from the transfer of those units.

Section 196B of the Income Tax Act did not apply to:

• Ordinary resident investors receiving mutual fund income;
• A non-resident who did not qualify as an Offshore Fund;
• Units purchased in Indian rupees;
• Short-term capital gains under this specific provision; or
• Payments that did not satisfy the conditions prescribed under Sections 115AB and 196B.

Merely being a non-resident, foreign company or overseas investor was not sufficient. An Offshore Fund was required to be a fund, institution, association or body established under the laws of a country outside India. It must also have entered into an arrangement for investment in India with a public sector bank, public financial institution or eligible mutual fund, and the arrangement must have been approved by SEBI.

Payments to non-residents may also attract other provisions depending on the nature of income. Read our guide on TDS on payments to non-residents for a broader understanding.

TDS Rates under Section 196B of the Income Tax Act

The applicable base rates are as follows:

Note: These are the statutory base rates. The deductor should also examine whether surcharge and Health and Education Cess apply based on the recipient’s legal status and the relevant rate provisions.

Before applying the domestic TDS rate, the payer should examine whether a more beneficial rate is available under an applicable Double Taxation Avoidance Agreement. The payer should also review the availability of a lower or nil deduction certificate under Section 395 and the higher TDS provisions under Section 397(2) for failure to furnish a valid PAN, subject to the applicable exceptions.

You can also refer to the TDS rates chart for FY 2026-27 for section-wise rates applicable to resident and non-resident payments.

Is there a threshold limit?

No specific monetary threshold is prescribed under Section 196B of the Income Tax Act or the corresponding entries under Section 393(2). Therefore, TDS may apply even when the payment amount is relatively small, provided all the conditions of the provision are satisfied.

Time of TDS Deduction

TDS must be deducted at the earlier of:

• The date on which the income is credited to the account of the Offshore Fund; or
• The date on which the payment is made through cash, cheque, draft, or any other mode.

Therefore, postponing the actual payment does not defer the TDS obligation when the income has already been credited to the Offshore Fund’s account.

Procedure for TDS Compliance

1. Verify the recipient’s status

The payer should verify whether the recipient satisfies the conditions of an Offshore Fund. Section 196B should not be applied merely because the recipient is a non-resident or foreign entity.

2. Verify the units

The payer should confirm that the payment relates to eligible units purchased in foreign currency.

3. Classify the income

The payment should be classified as:

• Income received in respect of eligible units; or
• Long-term capital gains arising from the transfer of those units.

This classification determines the applicable TDS rate.

4. Deduct tax at the correct rate

Tax should generally be deducted at:

• 10% on income from eligible units; or
• The applicable 10% or 12.5% rate on LTCG, depending on the date and law governing the transfer.

From 1 April 2026, the applicable LTCG TDS rate under Section 393(2), Table Serial Number 12 is 12.5%.

5. Deposit the deducted tax

For a deductor other than a government office, TDS must generally be deposited:

• On or before 30 April for tax deducted during March; and
• Within seven days from the end of the month in which tax was deducted for other months.

These timelines are prescribed under Rule 218 of the Income-tax Rules, 2026.

6. File the quarterly TDS statement

TDS deducted on payments to an Offshore Fund must generally be reported in Form 144. Form 144 replaces the earlier Form 27Q for non-salary payments made to non-residents.

7. Issue the TDS certificate

The deductor must issue the non-salary TDS certificate in Form 131.

Under Rule 215, Form 131 must generally be issued within 15 days from the due date for furnishing the applicable quarterly TDS statement under Rule 219.

8. Examine Form 145 and Form 146 requirements

The payer should separately examine whether information regarding the foreign remittance must be furnished in Form 145 under Rule 220.

Depending on the amount, taxability, and circumstances of the payment:

• Part A of Form 145 may apply where the remittance is taxable under the Act and the remittance or aggregate remittances during the tax year do not exceed ₹5 lakh;
• Part B may apply where the remittance is taxable, exceeds ₹5 lakh and an Assessing Officer’s certificate or order has been obtained;
• Part C may apply where the remittance is taxable, exceeds ₹5 lakh and an accountant’s certificate in Form 146 has been obtained; or
• Part D may apply where the remittance is not taxable under the Act, subject to the prescribed exclusions and conditions.

The applicable part should be selected after examining the taxability of the payment, the status of the Offshore Fund and the nature of the foreign remittance.

9. Maintain supporting records

The deductor should retain:

• Documents proving the recipient’s Offshore Fund status;
• Evidence that the units were purchased in foreign currency;
• The relevant SEBI-approved arrangement;
• Income or capital-gain calculations;
• Payment records and TDS challans;
• Form 144 acknowledgements;
• Form 131; and
• Form 145 and Form 146, where applicable.

Penalty for Non-Compliance

Failure to deduct or deposit TDS can result in interest, penalty and other legal consequences.

Under Section 398 of the Income-tax Act, 2025:

• Interest at 1% per month or part of a month may apply where tax was not deducted on time.
• Interest at 1.5% per month or part of a month may apply where tax was deducted but not deposited with the government on time.
• The deductor may also be treated as an assessee in default.

Under Section 448, the Assessing Officer may impose a penalty equal to the amount of tax that the person failed to deduct or pay, subject to the applicable provisions and circumstances of the case.

Defaults relating to periods before 1 April 2026 will continue to be examined under the relevant provisions of the Income-tax Act, 1961, including the applicable interest and penalty provisions.

Professional Support for Offshore Fund TDS Compliance

Correctly determining the applicability of TDS on foreign payments can be difficult because the deductor must examine the status of the recipient, nature of income, applicable rate and reporting requirements.

Ebizfiling can assist with:

• Reviewing the applicability of TDS on Offshore Fund payments;
• Identifying the appropriate TDS provision and rate;
• Supporting TDS payment and return filing;
• Assisting with Form 144 reporting;
• Supporting the issuance of Form 131; and
• Assisting with Form 145 filing for applicable foreign remittances.

Ebizfiling can assist with TDS return filing, transaction classification, Form 144 reporting and Form 145 filing for foreign remittances.

Conclusion

Section 196B of the Income Tax Act applied to income and long-term capital gains from eligible units paid to a qualifying Offshore Fund. The applicable rate was 10% on income from eligible units, while the LTCG rate was 10% or 12.5%, depending on the date of transfer.

From 1 April 2026, these provisions are governed by Section 208 and Section 393(2) of the Income-tax Act, 2025. The payer must verify the recipient’s eligibility, deduct and deposit tax at the correct rate, file Form 144, issue Form 131 and examine whether Form 145 or Form 146 is required.

Frequently Asked Questions