TDS on Income from Units of Offshore Funds: A Complete Guide

Introduction

India has a tax framework for overseas financial organisations investing in specified Indian units through foreign currency. When an organisation receives income or earns long-term capital gains from those units, the payer may have to deduct tax at source. Understanding income from units of Offshore Funds is therefore important for the fund and payer.

The Income-tax Act, 2025 came into force on 1 April 2026. Section 208 now governs the tax payable on income from units of Offshore Funds, while Section 393(2), Table Serial Numbers 11 and 12, contains the related TDS provisions. Before 1 April 2026, Sections 115AB and 196B of the Income-tax Act, 1961 contained the comparable rules.

What Is Income from Units of Offshore Funds?

The expression income from units of Offshore Funds must be understood in its legal context. It does not refer to an Indian resident receiving income from a mutual fund established outside India. It refers to income earned by a qualifying overseas financial organisation from specified Indian units purchased in foreign currency.

Section 208 covers income received in respect of eligible units and long-term capital gains arising from their transfer. A foreign entity does not qualify merely because it is located outside India. The recipient and the units must satisfy Section 208.

Other payments to non-resident unit holders may follow different provisions. The rules for income from units of Offshore Funds do not apply merely because the payee is foreign.

Who Qualifies as an Offshore Fund Under Section 208?

Section 208 treats an eligible overseas financial organisation as an Offshore Fund. It may be a fund, institution, association or body, incorporated or unincorporated, established under foreign law.

The organisation must have an investment arrangement in India with a public sector bank, public financial institution or mutual fund specified in Schedule VII, Table Serial Number 20 or 21. The arrangement must be approved by SEBI.

A “unit” means a unit of a mutual fund covered by those entries or a unit of the Unit Trust of India. Therefore, income from units of Offshore Funds does not include every security or mutual fund investment held by a non-resident.

Tax Treatment Under the Income-tax Act, 2025

Section 208 determines the tax payable by the Offshore Fund. Qualifying income from units of Offshore Funds is taxed at 10%. Long-term capital gains from transferring eligible units purchased in foreign currency are taxed at 12.5%. The remaining total income is taxed at the rates in force.

Section 208 calculates the fund’s tax liability, while Section 393(2) creates the payer’s TDS obligation. A payer reviewing income from units of Offshore Funds must identify both provisions.

TDS on Income from Units of Offshore Funds Under Section 393

Section 393(2) contains the TDS table for specified payments to non-residents. Table Serial Number 11 applies to income in respect of units referred to in Section 208. The payee must be an Offshore Fund, the payer may be any person and the prescribed rate is 10%.

Table Serial Number 12 applies to long-term capital gains arising from the transfer of units referred to in Section 208. The payee must again be an Offshore Fund, the payer may be any person and the prescribed rate is 12.5%.

Thus, income from units of Offshore Funds attracts the 10% entry, while qualifying long-term capital gains attract 12.5%. These are statutory base rates. Surcharge, health and education cess, an applicable treaty and any valid lower or nil deduction certificate may also need consideration.

The tax treatment may differ for other cross-border transactions. Payers can refer to this guide on TDS on payments to non-residents to understand the broader withholding framework for payments made outside India. If an incorrect rate, amount, section or payee information has already been reported, the deductor may need a TDS return revision to correct the relevant statement.

Earlier Provisions Under the Income-tax Act, 1961

Before 1 April 2026, Section 115AB governed the tax treatment of income from units of Offshore Funds and related long-term capital gains. Section 196B contained the corresponding TDS obligation.

Under the old law, qualifying unit income was subject to a 10% base rate. Long-term capital gains were subject to 10% for transfers before 23 July 2024 and 12.5% for transfers on or after that date. For Tax Year 2026-27 onwards, Sections 208 and 393 are the principal provisions. The 1961 Act remains relevant to earlier periods preserved by the transition rules.

Old and New TDS Rates on Offshore Fund Income

The base rate on income from units of Offshore Funds continues at 10%, so income from units of Offshore Funds has no change in its base rate under the new Act. The current 12.5% rate continues the long-term capital gains rate that applied under the old Act from 23 July 2024.

When Does TDS Apply to Offshore Funds?

TDS under Table Serial Number 11 or 12 applies only when the statutory conditions are met. The recipient must qualify as an Offshore Fund under Section 208. The units must be covered by that section and must have been purchased in foreign currency.

The payer must determine whether the amount represents income from units of Offshore Funds or long-term capital gains and confirm that it is chargeable in India. An ordinary non-resident unit holder should not automatically be placed under these entries.

When Should TDS Be Deducted?

For payments covered by Section 393(2), tax is deducted at the earlier of credit to the payee’s account and actual payment in cash, by cheque, draft or any other mode.

The payer should not wait for final remittance if income from units of Offshore Funds has already been credited. A credit to a suspense account or another account is also treated as credit to the payee. Table Serial Numbers 11 and 12 do not state a separate monetary threshold. The payment must nevertheless fall within Section 208 and be chargeable under the Act.

Deductions Allowed Against Offshore Fund Income

Section 208(2) restricts deductions when computing income from units of Offshore Funds and related long-term capital gains. If gross total income consists only of such income, no deduction is allowed under Sections 28 to 58, Sections 60 and 61, Section 93(1)(a) or (e), or Chapter VIII.

Where other income is included, the special-rate income is removed from gross total income. Chapter VIII deductions are then considered against the reduced amount. This prevents income from units of Offshore Funds from being reduced through deductions restricted by Section 208.

TDS Calculation on Offshore Fund Income

Suppose an eligible Offshore Fund receives ₹40 lakh as income from units of Offshore Funds. At the base rate of 10%, the TDS is:

₹40,00,000 × 10% = ₹4,00,000

If the fund earns ₹60 lakh as qualifying long-term capital gains, the base TDS at 12.5% is:

₹60,00,000 × 12.5% = ₹7,50,000

These examples show only the base calculation. Surcharge, cess, treaty eligibility and any valid lower or nil deduction certificate should be examined separately.

DTAA Benefits for Offshore Funds

Section 159 governs agreements for tax relief and avoidance of double taxation. Where a notified treaty applies, the Act operates to the extent it is more beneficial to the assessee, subject to statutory conditions.

Treaty relief for income from units of Offshore Funds is not automatic. The non-resident must obtain a valid Tax Residency Certificate and provide the prescribed documents and information. The payer should also examine the relevant treaty article, beneficial ownership requirements, limitation of benefits conditions and the principal purpose test, where applicable.

From 1 April 2026, eligible non-residents may also need to complete Form 41 filing for non-residents along with a valid Tax Residency Certificate and other prescribed information to support a treaty claim.

Compliance Requirements for the Payer

Before deducting TDS on income from units of Offshore Funds, the payer should verify the recipient’s status, approved investment arrangement, eligible units and evidence of purchase in foreign currency.

It must classify the payment as unit income, long-term capital gains or another category. For treaty relief, it should retain the Tax Residency Certificate, prescribed information, investment records and rate working. Payers requiring professional support can use Ebizfiling’s TDS return filing service for return preparation, challan verification, filing and post-filing guidance.

The tax must be deposited on time, reported in the applicable TDS statement and supported by the required TDS certificate. Proper records matter where income from units of Offshore Funds has components taxable at different rates.

Deductors should also refer to the TDS and TCS compliance calendar for FY 2026-27 to track deposit dates, return filing dates and certificate-related compliance.

Need Help with TDS Compliance for Offshore Fund Income?

TDS on income from units of Offshore Funds involves careful review of the applicable section, tax rate, treaty eligibility, supporting documents, and reporting requirements. An incorrect classification or rate may result in short deduction, interest, notices, or filing corrections.

Ebizfiling can help you understand the applicable TDS provisions, prepare the required documentation, file TDS returns, and manage compliance under the Income-tax Act, 2025.

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Conclusion

The tax framework for income from units of Offshore Funds is now mainly contained in Sections 208 and 393(2) of the Income-tax Act, 2025. The statutory base rate on income from units of Offshore Funds is 10%, while qualifying long-term capital gains attract 12.5%.

Under the Income-tax Act, 1961, Sections 115AB and 196B performed comparable functions. Before deducting tax on income from units of Offshore Funds, the payer should verify the fund’s status, eligible units, foreign-currency purchase, nature of payment, applicable tax year and any valid treaty claim.

Frequently Asked Questions