Chapter XIII - Determination of Tax in Special Cases
Section 208
Section 208: tax on Offshore Fund income from units purchased in foreign currency
Section 208 sets special flat rates for an "Offshore Fund" - an overseas financial organisation with a SEBI-approved investment arrangement - on income and long-term capital gains from units of specified mutual funds or the Unit Trust of India purchased in foreign currency.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) The income-tax payable on the total income of an assessee, being an overseas financial organisation (herein referred to as Offshore Fund), which includes income specified in column B of the Table below, shall be the aggregate of income-tax computed at the rate specified in the column C applied on the corresponding income specified in column B.
| Sl. No. | Income | Rate of income-tax payable |
|---|---|---|
| 1 | Income received in respect of units purchased in foreign currency. | 10 % |
| 2 | Long-term capital gains arising from the transfer of units purchased in foreign currency. | 12.5% |
| 3 | Total income as reduced by income referred against serial numbers 1 and 2. | Rates in force. |
(2) Where the gross total income of the Offshore Fund—
(a) consists only of income from units or income by way of long-term capital gains arising from the transfer of units, or both, no deduction shall be allowed to the assessee under sections 28 to 58, 60 and 61 or section 93(1)(a) or (e) or under Chapter VIII;
(b) includes any income referred to in clause (a),––
(i) the gross total income shall be reduced by such income; and
(ii) the deduction under Chapter VIII shall be allowed as if the gross total income so reduced were the gross total income of the assessee.
(3) For the purposes of this section,––
(a) “overseas financial organisation” means any fund, institution, association or body, whether incorporated or not, established under the laws of a country outside India,––
(i) which has entered into an arrangement for investment in India with any public sector bank or public financial institution or a mutual fund specified in Schedule VII (Table: Sl. No. 20 or 21); and
(ii) such arrangement is approved by the Securities and Exchange Board of India, established under the Securities and Exchange Board of India Act, 1992, for this purpose;
(b) “public financial institution” shall have the same meaning as assigned to it in section 2(72) of the Companies Act, 2013;
(c) “unit” means unit of,––
(i) a mutual fund specified in Schedule VII (Table: Sl. No. 20 or 21); or
(ii) the Unit Trust of India.
Introduction
The Offshore Fund rule applies only when the fund and foreign-currency-purchased units meet the definitions in this section. Income from the units and gain on their transfer occupy separate rate rows.
The deduction restriction follows the covered income, while income outside these rows is computed under the applicable general provisions.
Key takeaways
Offshore-fund unit income
Specified income and transfer gains from foreign-currency-purchased units are taxed at the rates in this section’s table.
Deductions are separated
Covered income cannot generally absorb the listed expenditure or Chapter VIII deductions; deductions on other income are computed after excluding covered income.
The rates
Where an Offshore Fund's total income includes the income below, tax is computed at these flat rates on that income, with the rest of the total income taxed at the rates otherwise in force:
| Income | Rate of income-tax payable |
|---|---|
| Income received in respect of units purchased in foreign currency | 10% |
| Long-term capital gains from transfer of units purchased in foreign currency | 12.5% |
| Total income as reduced by the above two categories | Rates in force |
Deduction restrictions
If the Offshore Fund's gross total income consists only of income from units and/or long-term capital gains from transfer of units, no deduction is allowed under sections 28 to 58, 60 and 61, section 93(1)(a) or (e), or Chapter VIII.
If the gross total income includes such income among other income, the gross total income is first reduced by that unit-related income, and Chapter VIII deductions are then allowed as if the reduced amount were the gross total income.
Key definitions
| Term | Meaning |
|---|---|
| "Overseas financial organisation" (Offshore Fund) | A fund, institution, association or body established under the laws of a country outside India, which has entered into a SEBI-approved arrangement for investment in India with a public sector bank, public financial institution, or a mutual fund specified in Schedule VII (Sl. No. 20 or 21) |
| "Public financial institution" | As defined in section 2(72) of the Companies Act, 2013 |
| "Unit" | A unit of a mutual fund specified in Schedule VII (Sl. No. 20 or 21), or of the Unit Trust of India |
Step-by-step flow for applying Section 208
- 1
Is the assessee an overseas financial organisation (Offshore Fund)?
A fund, institution, association or body established under the laws of a country outside India, with an investment arrangement with a public sector bank, public financial institution or a Schedule VII mutual fund, approved by SEBI.
- No: Section 208 does not apply.
- Yes: Go to the next step.
- 2
Is the income from units of a Schedule VII (Sl. No. 20 or 21) mutual fund or of UTI purchased in foreign currency?
- No: Tax that income at the rates in force.
- Yes: Go to the next step.
- 3
Apply the rates
Income from such units: 10%. Long-term capital gains on transfer of such units: 12.5%. Remaining total income: rates in force.
- 4
Restrict deductions
If gross total income consists only of such income, no deduction under Sections 28 to 58, 60, 61, 93(1)(a) or (e) or Chapter VIII is allowed. If it includes such income, Chapter VIII deductions are allowed only from the balance (Section 208(2)).
Practical checklist
Do
- Confirm Offshore Fund status and the foreign-currency purchase of the relevant units.
- Separate unit income, long-term gains and remaining income for rate computation.
Avoid
- Assume every overseas fund holding Indian assets falls under section 208.
Illustrative example
Worked example: an Offshore Fund with unit income and gains
Hypothetical facts (illustration only, not a real taxpayer): J Fund, established abroad, has a SEBI-approved arrangement with an Indian mutual fund. During the tax year it earns ₹50,00,000 of income on units purchased in foreign currency and a long-term capital gain of ₹30,00,000 on transfer of such units. It has no other Indian income.
Unit income at 10%
₹50,00,000 x 10% = ₹5,00,000.
Long-term capital gains at 12.5%
₹30,00,000 x 12.5% = ₹3,75,000.
Deductions
Because gross total income consists only of these items, no deduction under Sections 28 to 58, 60, 61, 93(1)(a) or (e) or Chapter VIII is allowed.
Total
₹5,00,000 + ₹3,75,000 = ₹8,75,000.
Outcome
- Tax under Section 208 is ₹8,75,000.
- Surcharge and cess, if applicable, are outside this illustration.
Glossary
- Offshore Fund
- An overseas financial organisation as defined in Section 208(3)(a).
- Unit
- A unit of a mutual fund specified in Schedule VII (Sl. No. 20 or 21) or of the Unit Trust of India (Section 208(3)(c)).
- Public financial institution
- As defined in section 2(72) of the Companies Act, 2013.
Frequently asked questions
Who counts as an "Offshore Fund" for Section 208?
An overseas financial organisation established under a foreign country's laws that has a SEBI-approved investment arrangement with a public sector bank, public financial institution, or a specified mutual fund.
What rate applies to income from these units?
10% on income received in respect of the units, and 12.5% on long-term capital gains from transferring the units.
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