Income Tax

Taxability of off shore investment through Alternate Investment Fund

Alternative Investment Fund:

An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash.

Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, lack of regulation and degree of risk.

Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities and derivatives contracts. Real estate is also often classified as an alternative investment.

Offshore Investment:

This is the keeping of money in a jurisdiction other than one’s country of residence. Offshore jurisdictions are a commonly accepted means of reducing the taxes levied in most countries to both large and small-scale investors alike.

The modern, well-regulated offshore centers allow legitimate investors to take advantage of higher rates of return or lower rates of tax on that return offered by operating via such domiciles.

The advantage to offshore investment is that such operations are both legal and less costly than those offered in the investor’s country – or “onshore”. Locations favored by investors for low rates of tax are known as offshore financial centers or (sometimes) tax havens.

Offshore centers are widely used and are accessible to anyone who can meet the minimum investment amount or pay the obligatory fees required to open such an entity. “More than half of the world’s assets and investments are held in offshore jurisdictions and many well-recognized companies have investment opportunities in offshore locales.”

Another reason why ‘offshore’ investment is considered superior to ‘onshore’ investment is that it is less regulated, and the behavior of the offshore investment provider, whether he be a banker, fund manager, trustee or stock-broker, is freer than it could be in a more regulated environment

Analysis of Taxability of Income in India

The incidence of tax arising from the off-shore investment made by a non-resident investor through the Alternate Investment Fund (AlF) would depend on the determination of the status of income of the non-resident investor.

Provisions of Income Tax Act, 1961

Section 5(2) of the Act:

As per the provisions of section 5(2) of the Income-tax Act, 1961 (Act), the income of a person who is non resident is liable to be taxed in India if it is received or is deemed to be received in India in such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise to him in India.

Chapter XII-FB of the Act:

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 115UB of the Act ( Tax on income of an investment fund and its unitholders) is the applicable provision to determine the income and tax-liability of investment funds and 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 LLP 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 SEBI (Alternative Investment Fund) Regulations, 2012.

Thus, provisions of section 115UB apply only to Category I or Category II AIFs, as defined in SEBIs regulations.

Section 115UB(1) of the Act:

By an overriding effect over other provisions of the Act, sub-section (1) of section 115UB of the Act provides that any income accruing or arising to, or received by, a person, being a unitholder of an investment fund, out of investments made in the investment fund,

shall be chargeable to income tax in the same manner as If it was the income accruing or arising to or received by such person had the investments made by the investment fund been made directly by him and not through the AIF.


The matter has been considered by the CBDT and clarified via circular number 14 dated 3rd July 2019.

As section 115UB(1) 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 is further clarified that loss arising from the off-shore investment relating to the non-resident investor, being an exempt loss, shall not be allowed to be set-off or carried forward and set off against the income of the Category I or Category II AIF.

Also Read: Slump Sale and Capital Gains on Liquidation of a Firm

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