Section 196B of the Income Tax Act, 1961 governs the Tax Deducted at Source (TDS) on income paid to non-residents or foreign companies from units of Offshore Funds. This provision ensures tax collection at the source for cross-border investments in Indian securities or assets through offshore vehicles.
1. Applicability
- Payee: Non-residents or foreign companies receiving income from units of Offshore Funds.
- Income Covered:
- Dividends or other income from units purchased in foreign currency.
- Long-term capital gains (LTCG)from the transfer of such units.
2. TDS Rate
- Default Rate: 10%(prior to surcharge/cess).
- From 23rd July 2024, LTCG on transfers is taxed at 5%.
- DTAA Benefit: Lower treaty rates apply if the payee submits a Tax Residency Certificate (TRC)and Form 10F.
3. Who Deducts TDS?
- The payer(e.g., Offshore Fund, its Indian agent, or fund manager).
4. Timing of Deduction
TDS is deducted at the earlier of:
- Creditto the payee’s account (even if in a suspense account).
- Actual payment(cash, cheque, etc.).
5. Compliance Requirements
- PAN Mandatory: If absent, TDS defaults to 20%under Section 206AA.
- Form 15CA/CB: Required for remittances exceeding ₹5 lakh.
- TDS Return: Filed quarterly in Form 27Q.
6. Exemptions & Special Cases
- No Threshold: TDS applies irrespective of the payment amount.
- Grossing Up: Permitted under Section 195Aif the contract is net of tax.
7. Recent Changes (2024–25)
- LTCG Rate Hike: Transfers post-23rd July 2024attract 5% TDS.
- Clause 393(2) of Income Tax Bill, 2025: Aligns with Section 196B but clarifies segregation of “income from units” and “LTCG”.
8. Penalties for Non-Compliance
- Late Deduction/Payment: Interest @ 1%–1.5%per month.
- Non-Filing of Returns: Penalty up to ₹1 lakhunder Section 271H
