Income Taxation for an Off-Shore Fund
By Himanshu Joshi, Accounts Associate, Dezan Shira & Associates
Apr. 16 – In India, the Income Tax Act, 1961, provides special treatment for the taxation of the income of an off-shore fund. An off-shore fund is classified as a fund, institution, association or body, whether incorporated or not, established under the laws of a country outside India, which has entered into an arrangement for investment in India with any public sector bank, public financial institution, or mutual fund in an arrangement approved by the Securities and Exchange Board of India (SEBI).
Special tax rates are applicable on the following kinds of income of an off-shore fund:
- Dividends or interest received in respect of units purchased in foreign currency
- Long term capital gain (LTCG) derived from the transfer of units purchased in foreign currency
In this case, units refer to the units of a mutual fund or of the Unit Trust of India. A unit is said to be long term capital when it is held for more than 12 months.
Income received in respect of units purchased in foreign currency and LTCG derived from the transfer of units purchased in foreign currency is taxed at a rate of 10 percent. Any other income of an off-shore fund are taxed as per the normal provisions of the income tax act.
The off-shore fund is not allowed any deduction of expense if its income consists of only the two sources of income mentioned above. If the off-shore fund has any other income, deductions shall only be allowed for the expenses which are incurred in respect to the other sources of income.
Income received from a mutual fund, however, is exempt from taxation as per section 10(35) of the Income Tax Act, 1961. Thus, off-shore funds will not incur any taxation on income received from mutual fund units. Section 10(38) exempts the tax on LTCG from the transfer of units of an equity oriented fund. An equity oriented fund is a mutual fund where more than 65 percent of its total investment are in equity shares of domestic Indian companies. Thus, if an off-shore fund transfers the units of an equity oriented fund the holder will not have to pay any capital gain tax if such units were held for more than 12 months.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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