CBDT Clarification on taxability of income of non-resident investor earned from off-shore investments in investment fund routed through an Alternative Investment Fund

The Central Board of Direct Taxes(CBDT) has issued clarification regarding the taxability of income earned by a non-resident investor from off-shore investments in investment fund routed through an Alternative Investment Fund as defined in Explanation 1 (a) to Chapter X11-FB of the Income-tax Act, 1961 (the Act) via issuing Circular.

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.

The definition of ‘investment fund’ under the Income-tax Act, 1961 was revised by Finance Act, 2023 to incorporate a reference to the International Financial Services Centres Authority (Fund Management) Regulations, 2022 under the International Financial Services Centres Authority (IFSCA) Act, 2019.

In light of the aforementioned amendment in the definition of “investment fund,” paragraph 3 of Circular No.14/2019 dated 03.07.2019 should be read as follows.

“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 fund & their investors. In this context investment fund is defined in Explanation I of Chapter XII-FB to mean any find 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 I 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).”

The remaining contents of the Circular dated 03.07.2019 remain unchanged. It may be extensively distributed for the benefit of all stakeholders and Departmental officers.

For Official Circular Download PDF Given Below: