Section 196B – TDS on Income from Offshore Funds to Non-Residents

Introduction to Section 196B

Section 196B of the Income Tax Act, 1961, is a specific provision dealing with the deduction of Tax Deducted at Source (TDS) on income distributed by an Offshore Fund to its unit holders who are non-residents. This section aims to bring such income under the purview of Indian taxation at the source itself, especially considering the nature of these investment vehicles.

Key Provisions of Section 196B

1. Applicability:

Section 196B applies to any income payable to a non-resident in respect of units of an Offshore Fund.

• An "Offshore Fund" typically refers to a fund established outside India, which invests in Indian securities or assets.

2. Who is the Deductor?

The person responsible for paying such income (i.e., the Offshore Fund itself, or its designated paying agent in India) is liable to deduct TDS.

3. Who is the Deductee?

A non-resident recipient of income from units of an Offshore Fund.

4. Income Covered:

The section specifically covers "income in respect of units of an Offshore Fund." This primarily includes distributions like dividends or any other income arising from these units to non-resident unit holders.

5. TDS Rate:

The TDS rate under Section 196B is **10%**.

• Similar to Section 196A, this rate applies **before** considering surcharge and cess at the TDS stage. The final tax liability will be determined at the time of assessment.
• This rate is also **subject to any beneficial provisions of a Double Taxation Avoidance Agreement (DTAA)**. If a non-resident can claim a lower rate as per the applicable DTAA, they should provide the necessary documents (e.g., Tax Residency Certificate - TRC) to the deductor.

6. When TDS is Deducted:

TDS must be deducted at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.

7. No Surcharge or Cess for TDS Calculation on Non-Resident Payments:

For the purpose of TDS on income covered under Section 196B, the prescribed rate of **10%** is a flat rate. Surcharge and cess are generally **not added** at the TDS stage. The final tax liability for the non-resident will be computed when they file their income tax return, taking into account their overall income and applicable tax rates, surcharge, and cess.

8. No Threshold Limit:

Similar to Section 196A, Section 196B does not specify any threshold limit. TDS is deductible on all payments covered, regardless of the amount.

9. Exemption if PAN Not Furnished:

If the non-resident recipient does not furnish their Permanent Account Number (PAN), TDS would be deductible at a higher rate as per Section 206AA, which typically defaults to 20% or the rate specified in the Act, whichever is higher.

Importance for Foreign Investors

Section 196B is crucial for foreign investors deriving income from Indian assets through Offshore Funds. It ensures that the Indian tax authority has a mechanism to tax such income at the source. For non-resident investors, understanding this section is vital to correctly estimate their post-tax returns and to comply with Indian tax laws, especially when considering the interplay with DTAAs.