Rules 141 and 142 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rules 141 and 142 of the Income-tax Rules, 2026 compute an eligible investment division's exempt income as A+B+C+D with no ratio, and prescribe six record-keeping conditions with a Form No. 71 audit.
The computation in the first of rules 141 and 142
Exempt income of a specified fund attributable to the investment division of an offshore banking unit is A + B + C + D, where each term is income accrued or arisen to, or received by, the eligible investment division:
| Term | Income |
|---|---|
| A | Transfer of a capital asset referred to in section 70(1)(r) held by it, on a recognised stock exchange in an International Financial Services Centre, with consideration in convertible foreign exchange |
| B | Transfer of securities held by it, other than shares in a company resident in India |
| C | Securities held by it and issued by a non-resident (not a permanent establishment in India), where the income otherwise does not accrue or arise in India |
| D | Income from a securitisation trust, chargeable as profits and gains of business or profession |
The income heads in rules 141 and 142 mirror rule 139's A to D exactly. What is missing is the r1 to r4 apportionment. The reason is structural: rule 139 apportions a pooled fund's income between resident and non-resident unit holders, whereas here the whole investment division is the qualifying vehicle, so its income is taken in full. That is why rule 142's conditions are all about segregating the division's accounts — the ring-fence does the work the ratios do elsewhere.
The expenditure bar in rules 141 and 142
Sub-rule (2) of rule 141: any expenditure incurred in relation to income referred to in A or B or C or D shall not be allowed as deduction from any other income under any provision of the Act, irrespective of the fact that such expenditure has not been allowed as deduction against income referred to in the said A or B or C or D.
The words "irrespective of the fact that such expenditure has not been allowed" close the obvious argument. An expense related to exempt income is not deductible against that income, and the sub-rule makes clear it does not therefore become available against anything else. Rule 143(2) repeats the same bar for the concessionally taxed income.
The reporting condition under rules 141 and 142
Sub-rule (3): the eligible investment division shall furnish an annual statement of exempt income in Form No. 70 electronically under digital signature on or before the due date specified under section 263(1)(c) and duly verified in the manner indicated therein.
Sub-rule (4)(d) defines the "specified date" for the accounts of the registered investment division as a date one month prior to the section 263(1)(c) due date — a definition that matters for rule 142's audit, not for this statement.
The six rule 142 conditions
| # | Condition |
|---|---|
| (a) | Maintain separate accounts for the registered investment division, reflecting the true and fair accounts of all transactions relating to it, ensuring that direct and indirect expenses relating to the rule 141 incomes and other incomes are properly recorded, accounted for and apportioned |
| (b) | Get those accounts audited by an accountant before the specified date, the accountant furnishing by that date the report in Form No. 71, electronically under digital signature, duly verified |
| (c) | Maintain proper documentation of (i) inbound remittance for buying and selling the investments and (ii) the use of inward remittance made to India |
| (d) | Maintain bank statements of all accounts of the registered investment division |
| (e) | Maintain contract notes relating to purchase and sale of securities |
| (f) | Maintain a statement of securities issued by the custodian |
Condition (b) of rules 141 and 142 is timed off the specified date — one month prior to the section 263(1)(c) due date. Both the audit and the furnishing of Form No. 71 must be complete by then, while the Form No. 70 statement is due a month later. Planning the audit to the return deadline misses the requirement by a full month.
Sub-rule (2) of rule 142 states the consequence: the income of a specified fund attributable to an eligible investment division shall not be exempt under section 11(1) read with Schedule VI unless it complies with sub-rule (1)(b) and rule 141(3) — that is, unless both the Form No. 71 audit report and the Form No. 70 statement are filed.
Rule 143 — the counterpart to rules 141 and 142
Rule 143 does for section 210(3) what rule 141 does for the exemption. The formula is A + B + C + D + E:
- A — income from securities held by the eligible investment division, under section 210(1) ;
- B — short-term capital gain under Table Sl. No. 2, on transfer of a security other than one referred to in section 196;
- C — short-term capital gain under Table Sl. No. 3, on transfer of a security referred to in section 196;
- D — long-term capital gain under Table Sl. No. 4, on a security other than one referred to in section 198; and
- E — long-term capital gain under Table Sl. No. 5, on a security referred to in section 198.
The same expenditure bar applies, the statement is again in Form No. 70 by the section 263(1)(c) due date, and the income is not eligible for the section 210(1) rates unless that statement is filed. An "eligible investment division" for rule 143 is one fulfilling the conditions in Schedule VI .
Rules 140, 141 and 142 all define "securities" by reference to Schedule VI of the Act. Rule 143(5)(c), dealing with the same investment division, defines it instead as having "the same meaning as assigned to it in section 2(h) of the Securities Contracts (Regulation) Act, 1956". The two sources are not obviously coextensive. The discrepancy is reproduced here rather than reconciled; where the classification of an instrument is in doubt, both definitions should be checked against the gazette text.
Worked example
| Facts | Position under rules 141 and 142 |
|---|---|
| Investment division earns Rs 60 crore across the four streams | A + B + C + D = Rs 60 crore, no ratio applied |
| Rs 4 crore of related costs disallowed against that income | Not available against any other income either |
| Division's transactions recorded in the offshore banking unit's general ledger | Condition (a) fails — separate accounts required |
| Return due 31 October; audit completed 20 October | Late — the specified date is 30 September |
| Form No. 71 filed on paper | Fails — electronic filing under digital signature required |
| Custodian statement not obtained | Condition (f) fails |
| Form No. 70 filed but no Form No. 71 | Exemption unavailable — both are required |
Compliance checklist
- Confirm the division is a registered investment division meeting the rule 142 conditions.
- Keep separate accounts with direct and indirect expenses apportioned.
- Complete the audit and file Form No. 71 by the specified date — one month before the return due date.
- File both electronically under digital signature.
- Document inbound remittances and their use.
- Retain bank statements, contract notes and the custodian's securities statement.
- File Form No. 70 by the section 263(1)(c) due date, for the exemption and for the section 210(3) rates.
- Do not set related expenditure against any other income.
- Check both definitions of "securities" where an instrument's classification matters.
Common mistakes
- Applying a non-resident ratio to an investment division's income.
- Claiming disallowed expenditure against other income.
- Timing the audit to the return date rather than the specified date.
- Filing Form No. 70 alone, without the Form No. 71 audit report.
- Relying on the offshore banking unit's consolidated books.