Section 115AB of ITA, 1961 : Section 115Ab: Tax On Income From Units Purchased In Foreign Currency Or Capital Gains Arising From Their Transfer

Explanation using Example

Imagine an investment fund based in Singapore, known as "Global Growth Fund," which focuses on investing in emerging markets. This fund qualifies as an "overseas financial organisation" under Indian tax law because it is established under Singaporean law, has an arrangement with an Indian public sector bank for investments in India, and this arrangement is approved by the Securities and Exchange Board of India (SEBI).

Global Growth Fund invests in units of a mutual fund in India and after holding them for more than a year, it decides to sell some units at a profit. The profit from the sale qualifies as long-term capital gains. Since these units were purchased in US dollars, a foreign currency, the gains are subject to tax under Section 115AB of the Income-tax Act, 1961.

The fund's total income for the financial year includes:

• Dividend income received from the mutual fund units (purchased in foreign currency).
• Long-term capital gains from the sale of the mutual fund units (purchased in foreign currency).

According to Section 115AB, the tax payable by Global Growth Fund on its income in India will be calculated as follows:

1. The dividend income will be taxed at a flat rate of 10%.
2. The long-term capital gains will also be taxed at a flat rate of 10%.
3. No other deductions under sections 28 to 44C or Chapter VI-A will be allowed against this income, and certain provisions like the second proviso to section 48, which deals with indexation benefits, will not apply to the calculation of these capital gains.

This special tax regime under Section 115AB is designed to encourage foreign investment in Indian securities by providing a simplified and concessional tax treatment for overseas financial organisations.