Section 115AB applies to an overseas financial organisation, called an Offshore Fund. This is a fund, institution, association or body established under the laws of a country outside India that has an arrangement, approved by the Securities and Exchange Board of India, for investment in India with a public sector bank, a public financial institution or a mutual fund specified under s. 10(23D).
Income from units purchased in foreign currency is taxed at ten per cent. Long-term capital gains on transfer of such units are taxed at ten per cent for a transfer before the 23rd day of July, 2024 and twelve and one-half per cent for a transfer on or after that date, as "Sub. by Act No. 15 of 2024, w.r.e.f. 23-7-2024". The rest of the total income is taxed as if it were the total income.
Operative consequences
If gross total income consists only of unit income or long-term gains on units, no deduction is allowed under ss. 28 to 44C, s. 57(i) or (iii), or Chapter VI-A.
In that case the second proviso to s. 48 does not apply to the long-term gains on units.
If gross total income also includes other income, Chapter VI-A deductions are allowed only against gross total income as reduced by the unit income.
Status
Section 115AB is operative for AY 2026-27. The Finance Act, 2026 does not amend it.
s. 208 reproduces the regime, with unit income at 10% and long-term gains at 12.5%.
The 1961 Act governs AY 2026-27 and earlier assessment years; the Income-tax Act, 2025 governs tax year 2026-27 onwards. For this subject the 2025 Act provision is s. 208.
Case Laws & Commentary
SECTION 115AB — TAX ON INCOME FROM UNITS PURCHASED IN FOREIGN CURRENCY OR CAPITAL GAINS ARISING FROM THEIR TRANSFER
Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)
A. SECTION COMMENTARY
A.1 Structural position & legislative purpose
Section 115AB is a special-rate code for Offshore Funds. Where the total income of an assessee, being an 'overseas financial organisation' (a fund or institution established under the laws of a foreign country which has entered into an arrangement for investment in India with a public sector bank, public financial institution or a SEBI-authorised mutual fund), includes income in respect of units purchased in foreign currency, or long-term capital gains arising from the transfer of such units, the tax is charged at the flat rates fixed by the section - ten per cent on the income from units and, on the long-term capital gains, ten per cent for transfers before 23 July 2024 and twelve and one-half per cent for transfers on or after that date - with the tax on the balance income computed separately.
The provision channels foreign-currency investment into Indian mutual-fund units through an offshore vehicle, offering rate certainty. As with the other section 115A-family provisions, the specified income is taxed on a gross basis (no Chapter VI-A deduction; the benefit of indexation under the second proviso to section 48 is not available against the unit gains), and the treaty-override under section 90(2) remains available where a DTAA prescribes a lower rate.
A.2 Sub-section / clause taxonomy
Sub-section (1): the charge - income from units in foreign currency and LTCG on their transfer, each at the prescribed flat rate, plus tax on the balance income. Sub-section (2): no Chapter VI-A deduction against the specified income and no benefit of the second proviso to section 48 for the unit gains. Explanation: defines 'overseas financial organisation', 'unit' and 'foreign currency'.
A.3 Core doctrinal themes
Theme (1) - Eligibility is gateway: only an 'overseas financial organisation' within the Explanation, investing under the prescribed arrangement, qualifies; ordinary non-resident unit-holders are outside section 115AB.
Theme (2) - Gross-basis flat rate: the concessional rate is paired with the denial of deductions and of the section 48 indexation computation (second proviso).
Theme (3) - Treaty interaction: where a DTAA gives a lower rate on the relevant income, section 90(2) permits its adoption.
Section 115AB was inserted to give Offshore Funds a defined rate regime and has remained substantially stable, with rate and cross-reference adjustments tracking the wider capital-gains and IFSC reforms. Its practical significance has been partly overtaken by the FPI/FII regime (section 115AD) and the IFSC/specified-fund concessions, but it continues to govern qualifying overseas-financial-organisation unit investments.
Finance Act 2026: no amendment. The Offshore Fund rate regime continues unchanged for AY 2026-27 onward.
A.5 CA practitioner pointers
(1) Verify that the investor meets the 'overseas financial organisation' definition and invests under the prescribed arrangement before applying section 115AB. (2) Apply the flat rate on a gross basis - no deductions, no section 48 indexation on the unit gains. (3) Check the relevant DTAA for a lower rate and the documentation (TRC/Form 10F) to support a section 90(2) claim.
B. FINANCE ACT, 2026 - IMPACT NOTE
Section 115AB is NOT amended by the Finance Act, 2026. The Offshore Fund special-rate scheme continues for AY 2026-27, with long-term capital gains on units taxed at twelve and one-half per cent for transfers on or after 23 July 2024 (Act No. 15 of 2024).
C. CASE LAW - CLUSTERED BY ISSUE
Cluster C-1 : Gross-basis charge and treaty interaction (cross-references)
Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) (cross-reference - treaty override).
Held: Where a DTAA is more beneficial than the Act, it prevails under section 90(2); the taxpayer may adopt the lower treaty rate.
Relevance: Governs the rate to be applied where a treaty prescribes a lower charge than section 115AB on the relevant income.
Candid note on the case-law field: Section 115AB has generated very little dedicated reported litigation; the Offshore Fund route is narrow and its disputes (eligibility, characterisation, treaty rate) are resolved on the general principles applicable to the section 115A family. The position is stated candidly; no decision has been invented or stretched to manufacture a case list under this section. The cross-reference above is identified as such.
D. PRACTITIONER'S NOTE
Treat section 115AB as a narrow, eligibility-gated concession: confirm overseas-financial-organisation status and the prescribed investment arrangement, apply the flat rate on a gross basis without section 48 reliefs, and optimise against the applicable DTAA under section 90(2) with proper residency documentation.
E. SOURCES & CITATIONS
Caveat: Treatise-style commentary for practitioners and academic use; not legal opinion. Verify the current statutory text, the relevant DTAA and the latest CBDT/appellate position before relying on any proposition.
Function in the statutory architecture
Section 115AB applies to an overseas financial organisation, called an Offshore Fund. This is a fund, institution, association or body established under the laws of a country outside India that has an arrangement, approved by the Securities and Exchange Board of India, for investment in India with a public sector bank, a public financial institution or a mutual fund specified under s. 10(23D).
Income from units purchased in foreign currency is taxed at ten per cent. Long-term capital gains on transfer of such units are taxed at ten per cent for a transfer before the 23rd day of July, 2024 and twelve and one-half per cent for a transfer on or after that date, as "Sub. by Act No. 15 of 2024, w.r.e.f. 23-7-2024". The rest of the total income is taxed as if it were the total income.
Operative consequences
Status
Section 115AB is operative for AY 2026-27. The Finance Act, 2026 does not amend it.
s. 208 reproduces the regime, with unit income at 10% and long-term gains at 12.5%.
The 1961 Act governs AY 2026-27 and earlier assessment years; the Income-tax Act, 2025 governs tax year 2026-27 onwards. For this subject the 2025 Act provision is s. 208.
Case Laws & Commentary
SECTION 115AB — TAX ON INCOME FROM UNITS PURCHASED IN FOREIGN CURRENCY OR CAPITAL GAINS ARISING FROM THEIR TRANSFER
Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)
A. SECTION COMMENTARY
A.1 Structural position & legislative purpose
Section 115AB is a special-rate code for Offshore Funds. Where the total income of an assessee, being an 'overseas financial organisation' (a fund or institution established under the laws of a foreign country which has entered into an arrangement for investment in India with a public sector bank, public financial institution or a SEBI-authorised mutual fund), includes income in respect of units purchased in foreign currency, or long-term capital gains arising from the transfer of such units, the tax is charged at the flat rates fixed by the section - ten per cent on the income from units and, on the long-term capital gains, ten per cent for transfers before 23 July 2024 and twelve and one-half per cent for transfers on or after that date - with the tax on the balance income computed separately.
The provision channels foreign-currency investment into Indian mutual-fund units through an offshore vehicle, offering rate certainty. As with the other section 115A-family provisions, the specified income is taxed on a gross basis (no Chapter VI-A deduction; the benefit of indexation under the second proviso to section 48 is not available against the unit gains), and the treaty-override under section 90(2) remains available where a DTAA prescribes a lower rate.
A.2 Sub-section / clause taxonomy
Sub-section (1): the charge - income from units in foreign currency and LTCG on their transfer, each at the prescribed flat rate, plus tax on the balance income. Sub-section (2): no Chapter VI-A deduction against the specified income and no benefit of the second proviso to section 48 for the unit gains. Explanation: defines 'overseas financial organisation', 'unit' and 'foreign currency'.
A.3 Core doctrinal themes
Theme (1) - Eligibility is gateway: only an 'overseas financial organisation' within the Explanation, investing under the prescribed arrangement, qualifies; ordinary non-resident unit-holders are outside section 115AB.
Theme (2) - Gross-basis flat rate: the concessional rate is paired with the denial of deductions and of the section 48 indexation computation (second proviso).
Theme (3) - Treaty interaction: where a DTAA gives a lower rate on the relevant income, section 90(2) permits its adoption.
A.4 Legislative evolution / Finance Act amendment trail
Section 115AB was inserted to give Offshore Funds a defined rate regime and has remained substantially stable, with rate and cross-reference adjustments tracking the wider capital-gains and IFSC reforms. Its practical significance has been partly overtaken by the FPI/FII regime (section 115AD) and the IFSC/specified-fund concessions, but it continues to govern qualifying overseas-financial-organisation unit investments.
Finance Act 2026: no amendment. The Offshore Fund rate regime continues unchanged for AY 2026-27 onward.
A.5 CA practitioner pointers
(1) Verify that the investor meets the 'overseas financial organisation' definition and invests under the prescribed arrangement before applying section 115AB. (2) Apply the flat rate on a gross basis - no deductions, no section 48 indexation on the unit gains. (3) Check the relevant DTAA for a lower rate and the documentation (TRC/Form 10F) to support a section 90(2) claim.
B. FINANCE ACT, 2026 - IMPACT NOTE
Section 115AB is NOT amended by the Finance Act, 2026. The Offshore Fund special-rate scheme continues for AY 2026-27, with long-term capital gains on units taxed at twelve and one-half per cent for transfers on or after 23 July 2024 (Act No. 15 of 2024).
C. CASE LAW - CLUSTERED BY ISSUE
Cluster C-1 : Gross-basis charge and treaty interaction (cross-references)
Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) (cross-reference - treaty override).
Held: Where a DTAA is more beneficial than the Act, it prevails under section 90(2); the taxpayer may adopt the lower treaty rate.
Relevance: Governs the rate to be applied where a treaty prescribes a lower charge than section 115AB on the relevant income.
Candid note on the case-law field: Section 115AB has generated very little dedicated reported litigation; the Offshore Fund route is narrow and its disputes (eligibility, characterisation, treaty rate) are resolved on the general principles applicable to the section 115A family. The position is stated candidly; no decision has been invented or stretched to manufacture a case list under this section. The cross-reference above is identified as such.
D. PRACTITIONER'S NOTE
Treat section 115AB as a narrow, eligibility-gated concession: confirm overseas-financial-organisation status and the prescribed investment arrangement, apply the flat rate on a gross basis without section 48 reliefs, and optimise against the applicable DTAA under section 90(2) with proper residency documentation.
E. SOURCES & CITATIONS
Caveat: Treatise-style commentary for practitioners and academic use; not legal opinion. Verify the current statutory text, the relevant DTAA and the latest CBDT/appellate position before relying on any proposition.