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Section 115ab of Income tax act

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June 5, 2021

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6 mins read

Section 115ab of Income tax act – Taxation of income from units/or Capital gains of such units of offshore fund

Income from certain units, or capital gains arising from transfer of such units, by non-resident/foreign company from the following shall be chargeable to tax @ 10% : –

  • Income received by Overseas financial institution (“OFI”) in respect of Units of Mutual Funds or UTI , which are purchased in foreign currency
  • Long-term capital gains to Overseas financial institution from transfer of Units of Mutual Funds or UTI , which are purchased in foreign currency

For the purpose of this Section, Overseas financial institution means

Any fund, institution, association or body, whether incorporated or not, established under the laws of a country outside India, which has entered into an arrangement (Such arrangement should be approved by the SEBI for investment in India) with any public sector bank or public financial institution or a mutual fund specified under section 10(23D).

The following points should be noted in this regard :-

  1. The benefit of first proviso to section 48 for currency fluctuation , and the second proviso to section 48 for indexation, is not available for computation of such long-term capital gains
  2. No deduction shall be allowed under sections 28 to 44C or section 57(i)/(iii) or under Chapter VI-A in computing the above income . Chapter VI provisions relating to set-off, carry forward and set off of losses are applicable .
  3. Other income of OFI shall be taxable as per normal provisions of the Income-tax Act,196, and entitled to deduction under Chapter VI- A.
  4. The long-term capital gains on units of equity oriented funds were exempt under section 10(38) on satisfaction of conditions specified therein . However, the Finance Act, 2018 has inserted a fourth proviso to Section 10(38) , to provide that exemption u/s 10(38) shall not apply on long-term capital gains exceeding Rs. 1 lakh, arising on or after April 1, 2018 from transfer of equity shares or units of equity-oriented funds or units of business trust. Such gains would now be liable to tax at the rate of 10 per cent u/s 112A without any indexation benefit for resident transferor, and without foreign currency fluctuation benefit for non-resident transferor.  Other conditions given under Section 112A should also be satisfied in order to avail benefit of concessional rate of tax under this provision
  5. Short term capital gains on units of equity oriented fund are taxable @15% under section 111A provided securities transaction tax has been paid on the sale of such units.

International Taxation Services

Section 115ab of Income tax act – Example 1

Ronhson Inc. (USA) purchased 10,000 listed equity shares of an Indian company for Rs 10 lakhs as on April 1, 2016. On May 10, 2018, it sold all such shares of an Indian company and paid STT on such shares. Such transfer would not be exempt from income-tax u/s 10(38).

Section 115ab of Income tax act – Example 2

Hojo Inc. (USA) purchased 1,00,000 listed equity shares of an Indian company for Rs 1 crores as on November 1, 2014. It had paid STT on such purchases. On Feb 10, 2018, it sold all such shares of an Indian company and paid STT on such shares. Such transfer would be exempt from income-tax u/s 10(38) as transfer is made before April 1, 2018.

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Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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