Section 196A Income Tax Act - Income in Respect of Units of Non-Residents
Section 196A of the Income-tax Act, 1961 prescribed tax deduction at source (TDS) on specified mutual fund and specified-company unit income paid to non-residents. From 1 April 2026, the corresponding rule is contained in section 393 of the Income-tax Act, 2025.
Meaning and scope of section 196A
Section 196A dealt with income payable to a non-resident individual or other non-resident person (other than a company), or to a foreign company, in respect of units of a mutual fund specified under section 10(23D), or units from the specified company referred to in the explanation to section 10(35). The payer was required to deduct tax when the income was credited or paid, whichever occurred first.
TDS means tax deducted at source: the payer withholds the prescribed amount from income and remits it to the Government. Non-resident refers to a person who does not satisfy the applicable income-tax residence tests; the applicable rules depend on the relevant year and taxpayer category. Foreign company is a company that is not a domestic company under the applicable tax law.
Applicable rate and treaty relief
| Issue | Position |
|---|---|
| Ordinary withholding rate | 20% under section 196A(1) of the 1961 Act; 20% under section 393(2), non-resident table, serial number 10 read with Note 2 of the 2025 Act. |
| Tax treaty relief | A lower applicable DTAA rate may be used where the statutory conditions and required tax-residency documentation are satisfied. |
| Deduction trigger | Generally the earlier of credit or payment, including relevant bookkeeping credits. |
| Threshold | No minimum monetary threshold is specified for this particular non-resident withholding entry. |
The 20% statutory withholding rate must be considered together with applicable surcharge, cess and other provisions where relevant. The treaty rate is not automatic: eligibility, the tax residency certificate and supporting documentation must be reviewed before applying a lower rate.
Income-tax Act, 2025: corresponding provision
Section 393(2), in the table for payments to non-residents, serial number 10, covers income in respect of units of specified mutual funds or units from the specified company payable to a non-resident (other than a company) or a foreign company. Note 2 sets the 20% rate or a lower eligible treaty rate when the required certificate is furnished under section 159(8).
Section 393(4), table for no deduction at source, serial number 15, separately preserves a conditional exemption for specified Unit Trust of India income payable to a non-resident Indian or non-resident Hindu undivided family.
Unit Trust of India exemption
Under section 196A(2) of the 1961 Act, no deduction was required on specified income payable in respect of Unit Trust of India units to an eligible non-resident Indian or non-resident Hindu undivided family where the units were acquired using funds from a Non-resident (External) Account or qualifying foreign-currency remittance, in accordance with the Foreign Exchange Management Act, 1999 and relevant rules.
The corresponding 2025 Act exemption is subject to prescribed conditions. It should not be treated as a blanket exemption for all mutual fund investments by NRIs.
Definitions and related provisions
Section 10(23D) and specified mutual funds
Section 10(23D) identified qualifying mutual funds under the 1961 Act. Under the 2025 Act, the relevant reference is Schedule VII, Table serial numbers 20 or 21.
Section 90 and section 90A
These provisions of the 1961 Act dealt with tax treaty relief and specified arrangements. Under the 2025 Act, section 159 provides the corresponding treaty framework and documentary requirements.
Section 115C and foreign currency
Section 115C(e) defined non-resident Indian for the relevant special provisions under the 1961 Act. Foreign currency is understood in accordance with the Foreign Exchange Management Act, 1999. These definitions matter particularly for the historical UTI exemption.
Practical examples
Example 1: If a qualifying mutual fund credits Rs. 50,000 of covered income to a non-resident in October 2026, the section 393(2) withholding entry ordinarily points to 20%, or Rs. 10,000 before any additional applicable adjustments, unless a lower eligible treaty rate applies.
Example 2: If covered income was credited on 30 March 2026 but paid in April 2026, the earlier credit event generally makes the 1961 Act withholding provision applicable.
Compliance checklist for payers and investors
- Confirm whether the payment is covered unit income, rather than a capital gain or another category of income.
- Determine the payee's residential status and the date of first credit or payment.
- Check treaty eligibility and obtain the necessary tax residency and supporting documents before applying a reduced rate.
- Apply the correct section or table reference for the applicable tax period and complete TDS deposit, reporting and certificates as required.
- Keep documentary proof where the special UTI exemption is claimed.
Official references
- Income Tax Department - Section 196A, Income-tax Act, 1961
- Income Tax Department - Section 393, Income-tax Act, 2025
- Income Tax Department - TDS transition and compliance FAQs
- Income Tax Department - official tax law portal
Updated: 27 October 2026. This article is for general legal information. The precise treatment depends on the income, payee status, applicable treaty and law governing the transaction.