Sections 196A and 196B: TDS on Unit Income of Non-Residents
Sections 196A and 196B of the Income-tax Act, 1961 governed deduction of tax at source on specified unit income paid to non-residents and Offshore Funds. From 1 April 2026, the corresponding TDS provisions are consolidated in Section 393 of the Income Tax Act, 2025.
Section 196A: Income in respect of units of non-residents
Section 196A required a person responsible for paying specified unit income to a non-resident, other than a company, or to a foreign company to deduct income-tax at the earlier of credit of the income to the payee's account or payment by any mode.
The provision covered income in respect of units of a Mutual Fund specified under Section 10(23D) and income from the specified company referred to in the relevant provision of the 1961 Act.
TDS rate under the 1961 Act
The statutory rate under Section 196A was 20%. Where an applicable agreement under Section 90 or Section 90A applied and the prescribed treaty documentation was furnished, deduction could be made at 20% or the rate provided by the applicable agreement for that income, whichever was lower, subject to the statutory conditions.
Special exemption for certain Unit Trust of India units
Section 196A also contained a specific no-deduction rule for income payable in respect of units of the Unit Trust of India to a non-resident Indian or a non-resident Hindu undivided family where the units had been acquired from qualifying foreign funds, including through a Non-resident (External) Account or remittance in foreign currency, in accordance with the applicable foreign exchange law and prescribed conditions.
Important definitions under Section 196A
- Foreign currency: had the meaning assigned under the Foreign Exchange Management Act, 1999.
- Non-resident Indian: had the meaning assigned by the relevant special provision of the Income-tax Act, 1961.
- Unit Trust of India: referred to the Unit Trust of India established under the Unit Trust of India Act, 1963 for purposes of the historical provision.
- Suspense account: credit of covered income to a suspense account or another account in the payer's books was treated as credit to the payee for applying the TDS rule.
Section 196B: Income from units payable to an Offshore Fund
Section 196B applied where specified income in respect of units referred to in Section 115AB, or long-term capital gains arising from transfer of those units, was payable to an Offshore Fund. The payer was required to deduct tax at the earlier of credit or payment.
Rates applicable under the later 1961 Act framework
| Income covered | TDS rate |
|---|---|
| Income in respect of units referred to in Section 115AB | 10% |
| Long-term capital gains from transfer of covered units before 23 July 2024 | 10% |
| Long-term capital gains from transfer of covered units on or after 23 July 2024 | 12.5% |
Income Tax Act, 2025: corresponding Section 393 rules
The Income Tax Act, 2025 reorganises the non-salary TDS provisions into Section 393. The corresponding rules for the subjects historically covered by Sections 196A and 196B appear in the table under Section 393(2).
| Historical provision | Income Tax Act, 2025 | Current treatment |
|---|---|---|
| Section 196A | Section 393(2), Table Sl. No. 10 | Income in respect of units of a Mutual Fund or specified company payable to a non-resident. The rate is determined in accordance with the applicable note to the Section 393 table, including treaty treatment where the statutory requirements are satisfied. |
| Section 196B - unit income | Section 393(2), Table Sl. No. 11 | Income in respect of units referred to in Section 208: 10%. |
| Section 196B - long-term capital gains | Section 393(2), Table Sl. No. 12 | Long-term capital gains on transfer of units referred to in Section 208: 12.5%. |
Section 208: Offshore Fund income under the 2025 Act
Section 208 of the Income Tax Act, 2025 deals with an overseas financial organisation referred to as an Offshore Fund. It provides a special tax framework for income received in respect of units purchased in foreign currency and long-term capital gains arising from transfer of such units.
For this purpose, Section 208 prescribes 10% for income received in respect of units purchased in foreign currency and 12.5% for long-term capital gains arising from transfer of units purchased in foreign currency, subject to the full statutory conditions and the other provisions of the Act.
No-deduction rule for specified UTI unit income
The current Section 393 framework retains a specific no-deduction category for income in respect of units of non-residents where income is payable in respect of qualifying Unit Trust of India units to a non-resident Indian or non-resident Hindu undivided family and the prescribed conditions are satisfied.
DTAA and non-resident payments
For a non-resident, an applicable Double Taxation Avoidance Agreement may affect the rate of tax deduction where the statutory treaty-relief requirements are met. The payer should therefore examine the recipient's residential status, nature of income, applicable treaty, Tax Residency Certificate and other prescribed documents before applying a treaty rate.
Practical compliance points
- Determine whether the recipient is a non-resident, foreign company or qualifying Offshore Fund.
- Identify whether the payment is unit income, long-term capital gains or another category of income.
- For historical transactions, apply the provision and rate in force on the relevant date under the Income-tax Act, 1961.
- For transactions governed by the Income Tax Act, 2025, refer to Section 393 and, for Offshore Funds, Section 208.
- Check whether the special no-deduction rule for qualifying Unit Trust of India income applies.
- Where treaty relief is claimed, verify the applicable DTAA and required tax-residency documentation.
Official references
- Income Tax Department - Income Tax Act, 2025 and Rules, 2026
- Income Tax Department - Section 393
- Income Tax e-Filing Portal
- Securities and Exchange Board of India
This article provides general tax information. The applicable Act, tax year, recipient status, character of income, treaty, rate, surcharge, cess, rules and notifications should be verified for the particular transaction.