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.
The amendment provisions under Sec 115AD of Income Tax Act were effective from FY2021-22, i.e., assessment year 2022-23. The relevant amendments are as follows:
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 are 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:
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.
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.
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:
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:
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 dividend 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|
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 Income Tax Act. Make sure you know the applicable tax charges to know your overall tax liabilities.
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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