Section 115AD of Income Tax Act: Taxation On Foreign Institutional Investors
Section 115AD of Income Tax Act specifies the taxation of income of Foreign Institutional Investors. Such income can be in the form of capital gains. However, this Section does not apply to income from mutual fund units and dividend income, which are exempt under Section 10(35) and 10(34), respectively.
Are you a Foreign Institutional Investor?
Consider going through the following sections to know your tax liabilities.
Amendment in Section 115AD of Income Tax Act
The amendment provisions under Sec 115AD of Income Tax Act were effective from FY2021-22, i.e., the assessment year 2022-23. The relevant amendments are as follows:
- ‘Investment division of an offshore banking unit’ is included in Section 115AD and 115AD(2). This was effective from January 4 2022 as per the Finance Act 2021.
- A new section, namely Section 115AD(1) is introduced, effective from January 4 2022.
- Section 115AD subsection 1B is inserted w.e.f. January 4 2022 as per the Finance Act 2021.
- Investment division of an offshore banking unit’s explanation is inserted w.e.f. January 4 2022.
- Explanation to permanent establishments, securities and the specified fund was substituted w.e.f. January 4 2022.
About Section 115AD(1) of Income Tax Act
Section 115AD(1) of the Income Tax Act describes the provisions of income tax on capital gains and securities of Foreign Institutional Investors (FIIs). Clause (i) of Section 115AD states that the income from the transfer of securities, short-term capital gains (STCG) and long-term capital gains (LTCG) will be taxable at a 20% rate.
The provisions of this Section exclude the income from dividends as per Section 115-O. Income from mutual fund units referred to in Section 115AB is also excluded. Section 115AB refers to the income earned by offshore funds from units purchased in any foreign currency or LTCG from the transfer of such units.
The Finance Act 2013 has some additional clauses to subsection (1) of Section 115AD of the Income Tax Act. These are as follows:
- Clause (ii): This states that if income tax calculated on interest income u/s 194LD is 5%, STCG taxes would be applicable at a 30% rate u/s 115AD.
- Clause (iii): The next clause stipulates a 10% tax on LTCG as per Section 115AD provided that income tax on STCG u/s 111A is taxed at 15%.
- Clause (iv): This clause is applicable if income tax on STCG is calculated at a 15% rate as per the provisions of Section 111A. The income tax chargeable for FIIs is calculated after deduction of income under clause (a) and clause (b) u/s 115AD. Here, the income reduced includes gains from securities, including STCG and LTCG.
About Section 115AD(1A) of Income Tax Act
For any specified fund other than subsection 1 of this Section, the provisions apply to the maximum income attributable to units that a Non-Resident Indian owns. Furthermore, this needs to be calculated in a specific manner.
About Section 115AD(1B) of Income Tax Act
The provisions under this Section apply to the investment division of an offshore banking unit. However, this must exclude the clauses mentioned in subsection 1 of Section 115AD of Income Tax Act.
Also Read: Section 80G Of Income Tax Act: Tax Deduction On Donations To Charity & Fund
About Section 115AD(2) of Income Tax Act
The provisions under this Section will be applicable in the following situations:
In the case of income of an investment division of an offshore banking unit or FII:
- If only securities as in clause a of subsection 1 are included, then no income tax deductions will be applicable.
- If the earnings include income as in clauses a and b of subsection 1, the gross total income will be subtracted by the amount of such an income and Chapter VI-A deductions will be allowed.
About Section 115AD(3) of Income Tax Act
The 1st and 2nd provisions of Section 48 will not be applicable while computing capital gains from transfer of securities as under clause b of subsection 1 of the Income Tax Act. This Act defines FIIs and the investment sector of offshore banking unit as:
- FII refers to investors as the Central Government specifies by notifying the Official Gazette.
- Offshore banking units’ investment division must include the meaning, as assigned in clause (aa) of the explanation regarding clause (4D) Section 10.
- Permanent establishment must have its meaning under clause (iiia) of Section 92F.
- Securities must have their meaning as assigned under Section 2 clause (h).
- The specific fund must have a meaning in clause (c) of Section 10.
Applicable Taxes for Foreign Institutional Investors in India
To know the applicable taxes under Section 115AD of Income Tax Act, refer to the table below:
| Income | Company where aggregate income is more than Rs. 1 crore (2% surcharge) | Company where aggregate income is less than Rs. 1 crore (no surcharge) | Non-company |
| Income other than dividends and earnings from mutual fund units | 21.012% | 20.60% | 20.60% |
| Capital gains where STT is applicable —Short term capital gains with a holding period of not more than 12 months | 15.759% | 15.45% | 15.45% |
| Capital gains where STT is not chargeable applicable | |||
| Short term (holding period is less than 12 months) | 31.518% | 30.90% | 30.90% |
| Long term (holding period is more than over 12 months) | 10.506% | 10.30% | 10.30% |
| Business income (No DTAA, DTAA – extent of PE) | 42.024% | 41.20% | 30.90% |
| Business income (No DTAA, no PE) | NIL | NIL | NIL |
Also Read: Section 111A Of The Income Tax Act: Overview Exceptions And Deductions
Final Word
As a Foreign Institutional Investor, you must know that income from dividends and mutual fund units are tax-exempt and do not fall under the provisions of Section 115AD of the Income Tax Act. Make sure you know the applicable tax charges to know your overall tax liabilities.
FAQs on Section 115AD of Income Tax
Ans: DTAA or Double Tax Avoidance Agreement is a tax treaty that two or more countries sign to help taxpayers avoid double tax payments on their income. This becomes applicable when an individual is a citizen of a country but earns his/her income from a foreign nation.
Ans: Securities Transaction Tax or STT refers to a direct tax that is levied on the sale and purchase of securities listed on the recognised stock exchanges of India (BSE, NSE). It is a type of financial transaction tax and works a lot like TCS (Tax Collected at Source).
Ans: No, you will not have to pay income tax in India if you work and earn in a foreign country. However, the interest earned in an NRO account is taxable for Non-Resident Indians.
Ans: Short term capital gains arising from the sale of equity shares, units of equity-oriented funds or business trust units feature taxation at the rate of 15%. Meanwhile, STCGs arising from the transfer of any other security will be subject to a tax rate of 30%.
Ans: According to the IT Act, specified funds refer to a fund featuring an establishment in India in the form of a limited liability company, trust or a company. The establishment must have a registration certificate as a Category III Alternative Investment Fund. It must also be located at an International Financial Services Centre, and non-residents must hold the units of the said fund.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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