Income Tax (1st Amendment) Rules, 2022

The Central Board of Direct Taxes (CBDT) on January 14th, 2022 has issued the Income Tax (1st Amendment), Rules, 2022 to further amend the Income-Tax Rules,1962. Through this amendment, CBDT notifies new Rule 21AJA, Rule 21AJAA & Form No. 10-IK The rule shall come into force on April 1, 2022. The present article briefs the provisions introduced vide the Income Tax (1st Amendment) Rules, 2022.

Synopsis of Income Tax (1st Amendment) Rules, 2022

In Rule 21 AJ of Income Tax Rules, the following Rules have been inserted via Income Tax (1st Amendment) Rules, 2022 New Rule 21AJA specifies that “Computation of exempt

income

of the specified fund, attributable to the investment division of an offshore banking unit, for clause (4D) of section 10 of the Income Tax Act” New Rule 21A specifies the “Determination of income of a specified fund attributable to the investment division of an offshore banking unit under sub-section (1B) of section 115AD of the Income Tax Act”

Rule 21 AJ of Income-Tax Rules,1962

Rule 21 AJ which specify “Determination of income of a specified fund attributable to units held by non-residents under sub-section (1A) of section 115AD.

Section 115AD of Income Tax Act

Section 115AD of the income tax act provides tax on the income of Foreign Institutional Investors from securities or capital gains that arise from their transfer. According to subsection (1) of Section 115AD, the provision of section 115AD of the Income Tax Act applies only to the extent of income which is attributable to units held by non-residents, calculated in the set manner.

New Rule 21AJA of Income-tax Rules

As mentioned above, Rule 21AJA specify “Computation of exempt income of the specified fund, attributable to the investment division of an offshore banking unit, for clause (4D) of section 10 of the Act”

Exempt Income

Non-taxable income is called exempt income. Any income that an individual acquires or earns during a financial year that is deemed to be nontaxable is referred to as ‘Exempt Income Exempted income specified under Section 10(4) is as follows: Under Section 10, different sub-sections define what kind of income is exempt from tax

Section 10(4)(i)	Any interest that has been paid to a person who is not a resident Indian
Section 10(4)(ii)	Any interest that has been paid to the account of a person who is not a resident Indian
Section 10(4B)	Any interest that has been paid to a person who is not a resident Indian, but of Indian origin

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The amendment provides that the income of specified fund attributable to the investment division of an offshore banking unit shall be the total of the following-

Any income received by the eligible investment division as a result of the transfer of a capital asset referred to in clause (viiab) of section 47 of the Income Tax Act held by it, on a recognized stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in convertible foreign exchange
Any income received by the eligible investment division as a result of the transfer of securities held by it (other than shares in a company resident in India);
Any income received by the eligible investment division from securities held by it and issued by a non-resident (not being a permanent establishment of a non-resident in India) and where such income otherwise does not accrue or arise in India;
Any income received by the eligible investment division from a securitization trust which is chargeable under the head “profits and gains of business or profession.

Form No. 10-IK - Annual Statement of Exempt Income

The eligible investment division needs to furnish an annual statement of exempt income in Form No. 10-IK electronically under the digital signature on or before the due date, which is duly verified in the manner indicated therein. The new FORM NO. 10-IK is attached here for reference:

Conditions for the investment division

According to the Income Tax (1st Amendment) Rules, 2022, an investment division of an offshore banking unit should fulfill the following conditions for Section 10(4D): The investment division should maintain separate accounts for the registered investment division reflecting the true and fair accounts of all transactions relating to the investment division and which shall ensure that direct and indirect expenses relating to the incomes referred to in sub-rule (1) and other incomes are properly recorded, accounted for, and apportioned to these activities; Investment division shall get the accounts, audited by an accountant before the specified date and such accountant shall furnish by that date the report of such audit in Form No. 10-IL electronically under digital signature The investment division should maintain proper documentation in respect of the following

Inbound remittance for buying and selling the investments
The use of inward remittance made to India
The investment division should maintain bank statement of all accounts of the registered investment division,
The investment division should maintain contract notes relating to the purchase and sale of securities by the registered investment division; and
The investment division should maintain a statement of securities issued by the custodian.

New Rule 21AJAA of Income-tax Rules

As mentioned above, Rule 21AJAA which specify “Determination of income of a specified fund attributable to the investment division of an offshore banking unit under sub-section (1B) of section 115AD of the Income Tax Act: The amendment provides that the income of specified fund attributable to the investment division of an offshore banking unit shall be the total of the following-

Income by way of 1 referred to section 115AD(1b) received by the eligible investment division, as a result of the transfer of security referred in section 112A of the Act and held by such investment division;
Income by way of long term capital gain referred to in section 115AD(1b), received by the eligible investment division as a result of the transfer of a security, other than that referred to in section 112A of the Act, and held by such investment division
Income by way of short term capital gain referred to in section 115AD(1b), received by the eligible investment division as a result of the transfer of security referred to in section 111A of the Act and held by such investment division
Income by way of short term capital gain referred to in clause section 115AD(1b) received by the eligible investment division as a result of the transfer of a security, other than that referred to in section 111A of the Act, and held by such investment division
Income from securities referred to in section 115AD(1b) of the Act, being like interest referred to in section 194LD of the Act, held by the eligible investment division
Income from securities, held by the eligible investment division, as referred to in section 115AD(1b)of the Act and not included above.

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Frequently Asked Questions

Common questions about Income Tax Amendment 2022: Rules and Provisions Explained.

The Income Tax (1st Amendment) Rules, 2022 introduce new Rules 21AJA and 21AJAA, along with Form No. 10-IK. These provisions aim to define the computation of exempt income and determination of income attributable to the investment division of an offshore banking unit for specified funds, as per Sections 10(4D) and 115AD(1B) of the Income Tax Act.

Rule 21AJA specifies the method for computing the exempt income of a specified fund attributable to the investment division of an offshore banking unit, as per Section 10(4D) of the Income Tax Act. It outlines the types of income that qualify as exempt, such as income from transfer of certain capital assets, securities, and securitization trusts.

Form No. 10-IK is the annual statement of exempt income that the eligible investment division of an offshore banking unit must furnish electronically under digital signature on or before the due date. This form aims to provide a comprehensive declaration of the exempt income as per Rule 21AJA.

As per the amendment, the investment division must maintain separate accounts, get its accounts audited by an accountant, maintain proper documentation for transactions, bank statements, contract notes, and custodian statements related to investments. These conditions ensure transparency and compliance with the exempt income provisions.

Rule 21AJAA specifies the determination of income attributable to the investment division of an offshore banking unit under Section 115AD(1B) of the Income Tax Act. It covers long-term and short-term capital gains from transfer of securities, interest income from certain securities, and other income from securities held by the investment division.

The Income Tax (1st Amendment) Rules, 2022 will come into force on April 1, 2022, as stated in the notification issued by the Central Board of Direct Taxes (CBDT).

The provisions introduced by the Income Tax (1st Amendment) Rules, 2022 are specifically applicable to specified funds with an investment division in an offshore banking unit. These funds must comply with the rules for computing exempt income and determining income attributable to the investment division.

The amendment provides clarity on the taxation of income derived by the investment division of an offshore banking unit. It outlines the specific types of income that are exempt or taxable, as well as the methods for computing and reporting such income, ensuring compliance with the relevant sections of the Income Tax Act.

Maintaining separate accounts for the investment division is crucial to accurately reflect the transactions, income, and expenses related to the investment activities of the offshore banking unit. This segregation ensures proper accounting and apportionment of direct and indirect expenses, enabling accurate computation of exempt and taxable income.

The introduction of Form No. 10-IK is aimed at facilitating the reporting and verification of exempt income by the eligible investment division of an offshore banking unit. This form provides a standardized format for declaring the exempt income as per Rule 21AJA, ensuring consistency and transparency in compliance with the Income Tax Act.