The Central Board of Direct Taxes (CBDT) has clarified that the income received by a non- resident investor from off-shore investments routed through the Category I or Category II AIF is not taxable in India as per provisions of Section 5(2) of the Income Tax Act, 1961.
The Board has issued a clarification regarding taxability of income earned by a non-resident investor from off-shore investments routed through an Alternate Investment Fund in the context of Alternate Investment Funds (AIFs).
Chapter XII-FB contains special provisions relating to tax on the income of investment funds and income received from such funds. Under Chapter XII-FB, section U5UB 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 funds & their investors. In this context, investment fund is defined in Explanation 1 of Chapter XII-FB to mean any fund 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).
“Thus, provisions of section USUB apply only to Category I or Category II AIFs, as defined in SEBIs regulations,” the circular said.
“The matter has been considered by the Board. As section l1SUB(I) of the Act provides that the investments made by Category I or Category II AIFs are deemed to have been made by the investor directly, it is hereby clarified that any income in the hands of the non-resident investor from off-shore investments routed through the Category I or Category II AIF, being a deemed direct investment outside India by the non-resident investor is not taxable in India under section 5(2) of the Act,” it said.
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