Section 208 · Special cases
Section 208 of the Income-tax Act, 2025 — Tax on Income from Units Purchased in Foreign Currency and Capital Gains Arising from Their Transfer (Offshore Funds)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter XIII
📜 What the law says — Section 208, Income-tax Act 2025
208. (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 corre-
sponding income specified in column B.
TABLE
Sl. Income Rate of income-
No. tax payable
A B C
1. Income received in respect of units purchased in 10%
foreign currency.
2. Long-term capital gains arising from the transfer of 12.5%
units purchased in foreign currency.
3. Total income as reduced by income referred against Rates in force.
serial numbers 1 and 2.
(2) Where the gross total income of the Offshore Fund—
(a) consists only of income from units or income by way of long-term cap-
ital 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 (15 of 1992), for this purpose;
(b) “public financial institution” shall have the same meaning as assigned
to it in section 2(72) of the Compan
In plain language
Section 208 of the Income-tax Act, 2025 (in force from 1 April 2026) lays down a special, concessional tax regime for "Offshore Funds" — technically called overseas financial organisations — that invest in units of Indian mutual funds or the Unit Trust of India (UTI) using foreign currency. It is the direct successor of Section 115AB of the Income-tax Act, 1961, carried into the new Act with simplified drafting and updated regulatory references. A common point of confusion: despite its number, Section 208 has nothing to do with advance tax (which Section 208 of the old 1961 Act dealt with) or with lottery winnings — under the 2025 Act it is purely an offshore-fund taxation provision.
What Section 208 actually says
Two flat rates replace the normal slab/corporate rates for the specified income streams of an eligible offshore fund:
- 10% on income received in respect of units purchased in foreign currency (essentially income distributions on those units);
- 12.5% on long-term capital gains arising from the transfer of such units (this reflects the rate increase made by the Finance (No. 2) Act, 2024, which raised the old 115AB LTCG rate from 10% to 12.5%);
- Normal rates in force on the balance of the fund's total income, if any.
Applicable surcharge and the 4% Health and Education Cess apply on top of these rates.
Who qualifies as an "overseas financial organisation"
- Established outside India: a fund, institution, association or body — incorporated or not — set up under the laws of a country outside India.
- Approved investment arrangement: it must have entered into an arrangement for investment in India with a public sector bank, a public financial institution (as defined in the Companies Act, 2013) or a mutual fund, and that arrangement must be approved by SEBI.
- Foreign-currency purchase: the concessional rates apply only to units of specified mutual funds (Schedule VII of the 2025 Act) or UTI that were purchased in foreign currency.
Individual NRIs are not covered here — they have their own concessional regime in the neighbouring sections of the 2025 Act (the successor to Chapter XII-A of the 1961 Act, e.g. the Section 115E equivalent).
Key conditions and restrictions
- No expense deductions: where the fund's gross total income consists only of unit income and/or these capital gains, no deduction is allowed under the computation provisions (sections 28 to 58, 60 and 61 of the 2025 Act) or under Chapter VIII (the successor to the Chapter VI-A / 80C-to-80U style deductions).
- Mixed income: if the fund also has other income, Chapter VIII deductions are allowed only against that other (non-concessional) portion.
- No indexation: the cost-inflation-indexation benefit is not available while computing the long-term capital gains taxed at 12.5%.
- Gross-basis taxation: the 10%/12.5% rates apply on the gross income — a trade-off for the concessional flat rate.
How it fits with related provisions
Section 208 sits in a cluster of special non-resident rate provisions of the 2025 Act: Section 207 (dividends, interest, royalty, fees for technical services of non-residents — old 115A), Section 209 (foreign-currency bonds and GDRs — old 115AC) and Section 210 (Foreign Institutional Investors/FPIs — old 115AD). Tax is generally collected upfront through TDS on payments to the offshore fund under the consolidated deduction provisions of the 2025 Act (successor to Section 196B of the 1961 Act).
Practical implications
- Certainty for foreign capital: a flat, treaty-friendly rate card makes Indian mutual fund units predictable for global pension funds, endowments and offshore pooled vehicles.
- Treaty override still available: if a Double Taxation Avoidance Agreement offers a lower rate, the fund can opt for the more beneficial treatment, subject to TRC and other conditions.
- Effective date: the regime applies from tax year 2026-27 (the 2025 Act replaces "previous year/assessment year" with the single "tax year" concept from 1 April 2026).
💡 Example
Example 1 — Only concessional income. Pacific Growth Fund, an overseas financial organisation with a SEBI-approved arrangement with an Indian public sector bank, purchased Indian mutual fund units in US dollars. In tax year 2026-27 it earns ₹80,00,000 as income in respect of those units and ₹40,00,000 as long-term capital gains on redeeming some units. Tax under Section 208: 10% × ₹80,00,000 = ₹8,00,000, plus 12.5% × ₹40,00,000 = ₹5,00,000 — total ₹13,00,000 before surcharge and 4% cess. No indexation on the gains and no Chapter VIII deductions are allowed, because the entire gross total income consists of Section 208 income.
Example 2 — Mixed income. Suppose the same fund also earns ₹20,00,000 of other India-sourced income taxable at normal rates. The ₹80 lakh and ₹40 lakh continue to be taxed at 10% and 12.5% respectively on a gross basis, while the ₹20 lakh is taxed at the rates in force; any eligible Chapter VIII deduction can be claimed only against that ₹20 lakh slice, never against the concessional income.
A short story. Mei Lin manages the Asia desk of a Singapore retirement fund. Her board wanted India exposure but feared unpredictable taxation. Her Indian CA showed her Section 208: buy specified mutual fund units in foreign currency through a SEBI-approved arrangement, and the fund knows its Indian tax bill in advance — a flat 10% on unit income and 12.5% on long-term gains, withheld at source. The board approved the allocation the same week, precisely because the rate card was simple and locked in by statute.
| Income of the Offshore Fund | Rate under Section 208 | Key conditions / notes |
|---|
| Income in respect of units purchased in foreign currency (specified mutual funds / UTI) | 10% (+ surcharge & 4% cess) | Units must be bought in foreign currency under a SEBI-approved arrangement; taxed on gross basis, no expense deduction |
| Long-term capital gains on transfer of such units | 12.5% (+ surcharge & 4% cess) | No cost-inflation indexation; rate reflects the post-July-2024 LTCG rationalisation (earlier 10% under s.115AB) |
| Any other income of the fund | Normal rates in force | Chapter VIII deductions allowed only against this portion |
| Deductions (ss. 28–58, 60, 61; Chapter VIII) against Section 208 income | Not allowed | Applies when gross total income consists only of unit income and/or such LTCG |
| 1961 Act equivalent | Section 115AB | Regime carried forward into the 2025 Act, effective 1 April 2026 |
Related sections
Frequently asked questions
What does Section 208 of the Income-tax Act, 2025 deal with?
It taxes 'Offshore Funds' (overseas financial organisations) on income from Indian mutual fund/UTI units purchased in foreign currency at 10%, and long-term capital gains arising from the transfer of those units at 12.5%. It replaces Section 115AB of the Income-tax Act, 1961 from 1 April 2026.
Does Section 208 apply to individual NRIs?
No. It applies only to overseas financial organisations with a SEBI-approved investment arrangement. Individual NRIs are covered by the separate concessional regime for non-resident Indians in the 2025 Act (successor to Chapter XII-A, e.g. old Section 115E).
Why is the LTCG rate 12.5% and not 10% as under Section 115AB?
The Finance (No. 2) Act, 2024 rationalised long-term capital gains rates to 12.5% (without indexation) across most special regimes. The 2025 Act carries this 12.5% rate into Section 208.
Can the offshore fund claim indexation or Chapter VIII (80C-style) deductions?
No. Indexation is not available on the long-term capital gains, and where the fund's gross total income consists only of Section 208 income, no deductions under the computation provisions (ss. 28–58, 60, 61) or Chapter VIII are allowed.
Is tax deducted at source on payments to the offshore fund?
Yes. Income and long-term capital gains covered by this regime attract TDS under the consolidated withholding provisions of the 2025 Act (successor to Section 196B of the 1961 Act), broadly mirroring the 10%/12.5% rates plus applicable surcharge and cess.
What is an 'overseas financial organisation' under Section 208?
A fund, institution, association or body established outside India that has entered into an arrangement for investment in India with a public sector bank, a public financial institution or a mutual fund, with the arrangement approved by SEBI.
What if the fund also earns other income in India?
Only the unit income and the related long-term capital gains get the 10%/12.5% rates; all other income is taxed at the normal rates in force, and eligible deductions can be claimed only against that other income.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
💬 Discussion & questions
0 comments · Ask anything about this — a Chartered Accountant or the community will reply.
Have a doubt about this (Section 208)? Ask here 👇
Free · takes 20 seconds · our CA answers. No account needed.
No comments yet — be the first to ask. 👆
EaseValue