CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 196A — Income of Non-Residents in Respect of Units of a Mutual Fund (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Non-resident counterpart of section 194K; narrow.
Finance Act, 2026: No amendment.
Mechanism: The payer of income in respect of units of a section 10(23D) Mutual Fund to a non-resident deducts tax at 20% or the lower treaty rate (on furnishing a TRC) at the earlier of credit or payment.
Litigation profile: Sparse. The live questions are the treaty rate and the income/capital-gains line — the candour rule applies.
A. SECTION COMMENTARY
Section 196A requires any person responsible for paying to a non-resident (not being a company) or to a foreign company any income in respect of units of a Mutual Fund specified under section 10(23D), or of the specified company referred to in the Unit Trust of India scheme, to deduct income-tax at twenty per cent at the time of credit or payment, whichever is earlier. It is the non-resident counterpart of section 194K (resident unit-holders), addressed to income distributed on units held by non-residents.
Treaty rate available at source
An important development is that the deduction under section 196A is now expressly subject to the more beneficial rate under an applicable tax treaty, where the non-resident furnishes a tax residency certificate (the statutory '20% or treaty rate, whichever is lower' position). This aligns the deduction with the substantive treaty entitlement and avoids the cash-flow burden of deducting at 20% and reclaiming the treaty relief by refund.
A narrow, non-resident-facing provision — candour
Section 196A is narrow and is rarely litigated on its own terms; the live questions are the availability of the treaty rate and the characterisation of the distribution (income on units versus capital gains, the latter being outside the section). In candour, there is no developed body of section 196A merits authority; the cognate treaty-at-source and chargeability principles govern.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
196A. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or from the specified company referred to in the Explanation to clause (35) of section 10 shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent: Provided that where an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A applies to the payee and if the payee has furnished a certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A, as the case may be, then, income-tax thereon shall be deducted at the rate of twenty per cent or at the rate or rates of income-tax provided in such agreement for such income, whichever is lower.
(2) Notwithstanding anything contained in sub-section (1), no deduction of tax shall be made from any 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 have been acquired from the Unit Trust of India out of the funds in a Non-resident (External) Account maintained with any bank in India or by remittance of funds in foreign currency, in accordance, in either case, with the provisions of the Foreign Exchange Management Act, 1999 (42 of 1999), and the rules made thereunder.
Explanation.—For the purposes of this section—
(a) "foreign currency" shall have the meaning assigned to it in the Foreign Exchange Management Act, 1999 (42 of 1999);
(b) "non-resident Indian" shall have the meaning assigned to it in clause (e) of section 115C;
(c) "Unit Trust of India" means the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);
(d) where any income as aforesaid is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
C. AUTHORITIES
Candour rule observed: section 196A is a narrow, non-resident-facing provision with no developed authority. The statutory scheme (with the treaty-rate option) and cognate principles are offered.
Statutory backdrop and cognate principles
Treaty rate at source
Principle: Deduction under section 196A is at 20% or the more beneficial rate under an applicable DTAA, whichever is lower, where the non-resident furnishes a tax residency certificate; the deduction is on income in respect of units, not on capital gains.
Use: Fixes the rate and the treaty interaction for non-resident unit income.
GE India Technology Centre (P) Ltd. v. CIT (2010) 327 ITR 456 (SC) — cognate
Principle: Withholding attaches only to sums chargeable to tax under the Act, read for non-residents with sections 5 and 9 and the treaty.
Use: Frames the chargeability enquiry underlying the section 196A deduction.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 196A — Income of Non-Residents in Respect of Units of a Mutual Fund (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Non-resident counterpart of section 194K; narrow.
Finance Act, 2026: No amendment.
Mechanism: The payer of income in respect of units of a section 10(23D) Mutual Fund to a non-resident deducts tax at 20% or the lower treaty rate (on furnishing a TRC) at the earlier of credit or payment.
Litigation profile: Sparse. The live questions are the treaty rate and the income/capital-gains line — the candour rule applies.
A. SECTION COMMENTARY
Section 196A requires any person responsible for paying to a non-resident (not being a company) or to a foreign company any income in respect of units of a Mutual Fund specified under section 10(23D), or of the specified company referred to in the Unit Trust of India scheme, to deduct income-tax at twenty per cent at the time of credit or payment, whichever is earlier. It is the non-resident counterpart of section 194K (resident unit-holders), addressed to income distributed on units held by non-residents.
Treaty rate available at source
An important development is that the deduction under section 196A is now expressly subject to the more beneficial rate under an applicable tax treaty, where the non-resident furnishes a tax residency certificate (the statutory '20% or treaty rate, whichever is lower' position). This aligns the deduction with the substantive treaty entitlement and avoids the cash-flow burden of deducting at 20% and reclaiming the treaty relief by refund.
A narrow, non-resident-facing provision — candour
Section 196A is narrow and is rarely litigated on its own terms; the live questions are the availability of the treaty rate and the characterisation of the distribution (income on units versus capital gains, the latter being outside the section). In candour, there is no developed body of section 196A merits authority; the cognate treaty-at-source and chargeability principles govern.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
196A. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any income in respect of units of a Mutual Fund specified under clause (23D) of section 10 or from the specified company referred to in the Explanation to clause (35) of section 10 shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent: Provided that where an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A applies to the payee and if the payee has furnished a certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A, as the case may be, then, income-tax thereon shall be deducted at the rate of twenty per cent or at the rate or rates of income-tax provided in such agreement for such income, whichever is lower.
(2) Notwithstanding anything contained in sub-section (1), no deduction of tax shall be made from any 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 have been acquired from the Unit Trust of India out of the funds in a Non-resident (External) Account maintained with any bank in India or by remittance of funds in foreign currency, in accordance, in either case, with the provisions of the Foreign Exchange Management Act, 1999 (42 of 1999), and the rules made thereunder.
Explanation.—For the purposes of this section—
(a) "foreign currency" shall have the meaning assigned to it in the Foreign Exchange Management Act, 1999 (42 of 1999);
(b) "non-resident Indian" shall have the meaning assigned to it in clause (e) of section 115C;
(c) "Unit Trust of India" means the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963);
(d) where any income as aforesaid is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
C. AUTHORITIES
Candour rule observed: section 196A is a narrow, non-resident-facing provision with no developed authority. The statutory scheme (with the treaty-rate option) and cognate principles are offered.
Statutory backdrop and cognate principles
Treaty rate at source
Principle: Deduction under section 196A is at 20% or the more beneficial rate under an applicable DTAA, whichever is lower, where the non-resident furnishes a tax residency certificate; the deduction is on income in respect of units, not on capital gains.
Use: Fixes the rate and the treaty interaction for non-resident unit income.
GE India Technology Centre (P) Ltd. v. CIT (2010) 327 ITR 456 (SC) — cognate
Principle: Withholding attaches only to sums chargeable to tax under the Act, read for non-residents with sections 5 and 9 and the treaty.
Use: Frames the chargeability enquiry underlying the section 196A deduction.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.