Section 196B of the Income-tax Act: TDS on Income from Units of Offshore Funds
Section 196B governed deduction of tax at source on specified unit income and long-term capital gains payable to an offshore fund under the Income-tax Act, 1961. The withholding framework changed from 1 April 2026 under the Income-tax Act, 2025.
1. Meaning and scope of Section 196B
Section 196B applied where a person was responsible for paying an offshore fund income in respect of units covered by Section 115AB, or long-term capital gains arising on transfer of those units. Tax was deductible when the income was credited to the payee's account or paid, whichever occurred earlier.
Section 115AB concerns an overseas financial organisation investing in qualifying units purchased in foreign currency. Not every foreign investor or mutual fund distribution automatically qualifies: the status of the recipient, the investment and the nature of the income must be established.
2. Applicable TDS rates under Section 196B
| Nature of payment | Statutory base TDS rate | Relevant period |
|---|---|---|
| Income from units referred to in Section 115AB(1)(i) | 10% | Under the 1961 Act |
| Long-term capital gains on transfer of qualifying units | 10% | Transfers before 23 July 2024 |
| Long-term capital gains on transfer of qualifying units | 12.5% | Transfers on or after 23 July 2024 |
The Finance (No. 2) Act, 2024 amended the rate structure with effect from 23 July 2024. The rates shown are statutory base rates; surcharge, cess, treaty provisions and any legally applicable relief require separate consideration.
3. Income-tax Act, 2025: corresponding provisions
For the TDS event occurring on or after 1 April 2026, the corresponding withholding provisions are in Section 393(2), Table for payments to non-residents, Serial Numbers 11 and 12, read with Section 208 of the Income-tax Act, 2025.
- Serial Number 11: Income in respect of units referred to in Section 208 payable to an offshore fund.
- Serial Number 12: Long-term capital gains arising from transfer of units referred to in Section 208 payable to an offshore fund.
- Section 208: Special taxation of qualifying offshore-fund income from units purchased in foreign currency and gains from their transfer.
The new Act consolidates TDS provisions into tables. The earlier Section 196B number should not be used as the operative TDS citation for events governed by the 2025 Act.
4. When should tax be deducted?
Under the former provision, deduction arose at the earlier of credit or payment. The Income Tax Department confirms the same earlier-event principle for determining which Act applies at the transition: if that event occurred on or before 31 March 2026, the 1961 Act applies; if it occurred on or after 1 April 2026, the corresponding 2025 Act provision applies.
Illustration
Assume a qualifying offshore fund receives INR 1,00,000 as unit income. At the statutory base rate of 10%, TDS is INR 10,000 before considering any other applicable adjustments. If qualifying long-term capital gains of INR 1,00,000 arise from a transfer dated 1 August 2024, the base TDS calculation at 12.5% is INR 12,500. These are simplified illustrations, not final tax computations.
5. Treaty relief and compliance
Where the recipient claims relief under a Double Taxation Avoidance Agreement, the payer should examine eligibility, tax residency documentation, beneficial ownership and other applicable requirements. A lower treaty rate must not be assumed without verifying the relevant treaty and statutory conditions.
Deductors should verify the payee's offshore-fund status, qualifying unit acquisition, transaction date, income classification, applicable TDS rate, PAN and reporting requirements. TDS deposits, statements and certificates should follow the applicable rules for the relevant tax year.
6. Legislative background
Section 196B was inserted by the Finance (No. 2) Act, 1991 with effect from 1 October 1991. Its scope was subsequently amended by the Finance Act, 1993 with effect from 1 June 1993. The Finance (No. 2) Act, 2024 replaced the uniform 10% deduction with the differentiated rate structure for long-term capital gains noted above.
7. Official references
- Income Tax Department: Section 196B, Income-tax Act, 1961
- Income Tax Department: Section 115AB
- Income Tax Department: Special tax provisions under the 2025 Act
- Income Tax Department: TDS transition and compliance FAQs
- Official Income-tax Rules, 2026
Updated: . This article is general legal information; applicable law and facts should be verified before acting.