Section 208 — Tax on income from units purchased in foreign currency or capital gains arising from their transfer. Successor to s.115AB of the 1961 Act.
Section 208 is in Chapter XIII — Determination of Tax in Special Cases, which runs from section 190 to section 235.
Sub-section (1) sets special rates for an overseas financial organisation, called an Offshore Fund, through a three-row Table: income received in respect of units purchased in foreign currency is taxed at 10%; long-term capital gains on transfer of such units at 12.5%; and the rest of the total income at the rates in force. Sub-section (2) handles deductions — where the Offshore Fund's gross total income consists only of unit income, long-term capital gains on units, or both, no deduction is allowed under sections 28 to 58, 60 and 61, section 93(1)(a) or (e), or Chapter VIII; and where the gross total income merely includes such income, that income is taken out of gross total income first and Chapter VIII deductions are then computed as if the reduced figure were the gross total income. Sub-section (3) defines the terms: an overseas financial organisation must be a fund, institution, association or body established under the laws of a country outside India which has an investment arrangement in India with a public sector bank, a public financial institution or a mutual fund specified at serial number 20 or 21 of the Table in Schedule VII, and that arrangement must be approved by the Securities and Exchange Board of India; "public financial institution" takes its meaning from the Companies Act, 2013; and "unit" is confined to units of those Schedule VII mutual funds or of the Unit Trust of India.
The section gives a foreign fund investing in Indian units through a sebi-approved arrangement a fixed, predictable rate on its unit income and on gains from those units, instead of ordinary rates. The deduction bar in sub-section (2) is the price of that concessional rate — the fund cannot take the low rate and reduce the same income by deductions as well.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Rate on income received in respect of units | 10% | Only where the units were purchased in foreign currency | 208(1), Table Sl. No. 1 |
| Rate on capital gains from transfer of units | 12.5% | Only long-term capital gains, and only on units purchased in foreign currency | 208(1), Table Sl. No. 2 |
| Rate on the balance of total income | Rates in force | Total income as reduced by the income in rows 1 and 2 — so anything not within those two rows, including short-term gains on the units, falls here | 208(1), Table Sl. No. 3 |
Split the fund's income into the three Table rows before anything else, because the deduction consequences follow the split: a fund whose gross total income is nothing but unit income and long-term gains on units gets no deduction at all under sections 28 to 58, 60 and 61, section 93(1)(a) or (e), or Chapter VIII. A fund with other income as well takes that income out of gross total income and claims Chapter VIII deductions only against what remains. Eligibility is not automatic on being a foreign fund — there must be an investment arrangement with a public sector bank, a public financial institution or a mutual fund at Sl. No. 20 or 21 of the Schedule VII Table, and sebi must have approved that arrangement. The foreign currency purchase is a condition of rows 1 and 2, so the currency in which the units were bought has to be evidenced.
An offshore fund whose India investment arrangement has been approved by the Securities and Exchange Board of India receives Rs 40 lakh on units bought in foreign currency, taxed at 10% under row 1 of the Table, and makes a long-term capital gain of Rs 1 crore on transferring some of those units, taxed at 12.5% under row 2. A short-term gain of Rs 30 lakh on the very same units gets neither rate: it is outside rows 1 and 2, so it falls into row 3 and is charged at the rates in force, which this section does not state. Because the fund's gross total income here includes income beyond rows 1 and 2, sub-section (2)(b) applies rather than the outright bar in (2)(a) — the unit income and long-term gains come out first, and Chapter VIII deductions are then computed as if the reduced figure were the gross total income.
It is applied in the tax computation on the offshore fund's own return and in the resulting intimation or assessment order, where the Table rates replace the ordinary computation. The section names the Securities and Exchange Board of India as the authority whose approval of the investment arrangement is what makes a foreign body an "overseas financial organisation" at all.
Long-term capital gains arising from the transfer of units purchased in foreign currency. 12.5%
See the full 1961 to 2025 concordance.
