Circular No. 12/2023

Clarification regarding taxability of income earned by a non resident investor from off shore investments in investment fund routed through an alternative investment fund

What this is

Circular No. 12/2023 was issued by the Central Board of Direct Taxes on 12 July 2023. Its subject is Clarification regarding taxability of income earned by a non resident investor from off shore investments in investment fund routed through an alternative investment fund.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Updates Circular No. 14/2019 dated 3 July 2019, which had clarified the taxability of a non-resident investor's income from offshore investment routed through an investment fund. The Finance Act, 2023 widened the definition of investment fund in Explanation 1 to Chapter XII-FB to take in a fund regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the Act of 2019. Paragraph 3 of the earlier circular is therefore recast so that an investment fund means a fund established or incorporated in India as a trust, company, limited liability partnership or body corporate registered as a Category I or Category II Alternative Investment Fund and regulated either under the SEBI (Alternative Investment Funds) Regulations, 2012 or under the IFSCA Fund Management Regulations, 2022. Section 115UB accordingly applies only to Category I or Category II funds regulated by SEBI or by the Authority. All other contents of the 2019 circular stand.

Why it was issued

The definition of investment fund was amended by the Finance Act, 2023 to include funds regulated by the International Financial Services Centres Authority, and the earlier circular had to be read with that amendment.

Who it reaches

Non-resident investors in Category I and Category II Alternative Investment Funds
Fund managers operating from an International Financial Services Centre
Category I and II funds regulated by SEBI claiming pass through under section 115UB
Assessing Officers examining offshore income routed through such a fund

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.115UB	s.224

The instrument, as the Board published it

The department publishes this one only as a PDF, so the words below were read out of that PDF by machine. That reading can carry its own mistakes — a misread number, a broken line. Check the signed document before you rely on a figure in it.

F.No.22SI79/2019-IT A-II
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
Circular No. 12/2023
North-Block, New Delhi, dated the 12th July, 2023
Subject: Clarification regarding taxability of income earned by a non-resident investor from off-shore investments in investment fund routed through an Alternative Investment Fund -reg.

CBDT Circular NO.14/2019 dated 03.07.2019 was issued to clarify the taxability of income earned by a non-resident investor from outside India (off-shore investment) routed through investment fund as defined in Explanation 1 (a) to Chapter XII-FB of the Income-tax Act,1961(the Act). This Circular was made applicable to Category I or Category II Alternative Investment Funds (AIFs), regulated under Securities and Exchange Board of India (SEBI) regulations.

2. By Finance Act, 2023, the definition of 'investment fund' under the Income-tax Act, 1961 was amended to include reference to International Financial Services Centres Authority (Fund Management) Regulations, 2022 under International Financial Services Centres Authority (IFSCA) Act, 2019.

3. In view of the aforesaid amendment in the definition of 'investment fund', para 3 of the Circular NO.14/2019 dated 03.07.2019 is to be read as under:

"3. Chapter XII-FB contains special provisions relating to tax on income of investment funds and income received from such funds. Under Chapter XII-FB, section 115UB of the Act (Tax on income of investment fund and its unit holders,) is the applicable provision to determine the income and tax-liability of investment funds & their investors. In this context, 'investment fund' is defined in Explanation 1 of Chapter XII-FB to mean any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category 1 or Category II Alternative Investment Fund and is regulated under the Securities and Exchange Board of India (Alternative Investment Fund) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) or regulated under the International Financial Services Centres Authority (Fund Management) Regulations, 2022 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019). Thus, provisions of section 115UB apply only to Category I or Category II AIFs regulated by Securities and Exchange Board of India (SEBI) or International Financial Services Centres Authority (IFSCA)..."

4. All the other contents of the Circular dated 03.07.2019 remain same. It may be circulated widely for information of all stakeholders and Departmental officers.

5. Hindi version to follow.

Copy to:
i. PS to FM/PS to MoS(F)
ii. PS to Secretary (Revenue)
iii. Chairman, CBDT & All Members, CBDT
iv. All Pr.CCs/ITI Pr.DsGIT
v. All Joint Secretaries/CsIT, CBDT
vi. C&AG
vii. CIT (M&TP), CBDT
viii. Web Manager, with a request to place the Circular on official Income-tax website
ix. JDIT, Data Base Cell for placing it on the website irsofticersonline.gov.in
x. The Guard File

(Dr. Castro Jayaprakash, T)
Under Secretary (ITA.II), CBDT

(Dr. Castro Jayaprakash, T)
Under Secretary (ITA.II), CBDT

What to watch

Only Category I and Category II funds are covered; a Category III Alternative Investment Fund is outside section 115UB and outside this clarification.
The fund must be established or incorporated in India, so an offshore vehicle does not qualify merely by being managed from an International Financial Services Centre.
Everything else in Circular No. 14/2019 continues unchanged, so the substantive clarification on offshore income must be read from that circular.
This substitutes a paragraph in an earlier circular rather than standing alone; cite both.

Where you meet it

In an assessment of a non-resident investor, or of the fund itself, where the character and taxability of offshore income passed through an Alternative Investment Fund is in issue.

What it names

It mentions. Circular No. 12/2023, Circular No. 14/2019

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Notification No. 43/2017[F. No. 370142/09/2017-TPL] / SO 1789(E) — Ministry of Finance 5 June 2017
Notification No. 51/2015 [F. No. 275/11/2015-IT (B)] / SO 1703(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 25 June 2015

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.