When foreign institutional investors (FIIs) invest in the Indian capital markets, one of the key tax provisions that governs their income is Section 115AD of the Income Tax Act. Introduced to regulate & simplify the tax on income of Foreign Institutional Investors, this section plays a vital role in how India handles cross-border capital inflows.
Let’s break it down in simple terms—how does Section 115AD work, what types of income are taxed, & at what rates? And most importantly, how does this affect FIIs & the Indian economy?
📌 What is Section 115AD?
Section 115AD of the Income Tax Act deals with the taxation of Foreign Institutional Investors on income earned from Indian securities. Whether the income is from dividends, interest, or capital gains, this section ensures that taxation is applied uniformly & efficiently.
It outlines the tax treatment of Foreign Institutional Investors' (FIIs) income and provides specific rates for different types of income. This clarity is crucial for foreign investors looking to park funds in India’s booming capital markets.”
💼 Applicability of Section 115AD
This section applies only to Foreign Institutional Investors (FIIs) & Specified Funds as defined under SEBI regulations. The key goal is to avoid ambiguity & ensure that all non-resident institutional players are taxed predictably and transparently.
Whether it’s an FII making money from listed equity shares, government securities, or mutual funds, this provision defines how much tax they owe—& more importantly, at what rates. “
💰 Income Types Covered
Here’s what Section 115AD includes:
- Interest Income
- Taxed at 20% for interest earned from securities (e.g., government bonds).
- However, if the interest is from specific notified securities, a lower rate of 5% may apply.
- Dividend Income
- Taxable at 20%, even though Indian companies pay Dividend Distribution Tax (DDT).
- Since the abolition of DDT in 2020, dividend income is taxed in the hands of the recipient, including FIIs.
- Capital Gains on Securities
- Short-term capital gains (STCG) on listed equity shares (where STT is paid) are taxed at 15%.
- Long-term capital gains (LTCG) on listed equity shares are taxed at 10% (above ₹1 lakh threshold, as per Section 112A).
- Other securities are taxed as per the normal slab (20% with indexation benefits or 10% without).
📉 Why is Section 115AD Important?
This section is more than just a tax rule—it’s a confidence booster for international investors. By providing tax on the income of Foreign Institutional Investors at predefined rates, it eliminates uncertainty & aligns with global standards of fair taxation.
Moreover, it encourages long-term capital inflows & reflects India’s commitment to transparency in its financial ecosystem.
🔍 Example for Better Clarity
Let’s say a Foreign Institutional Investor earns ₹15 lakhs in short-term capital gains from Indian equity shares.
Since STCG on listed shares (with STT) falls under 115AD, the applicable tax is 15%.
Tax = ₹15,00,000 × 15% = ₹2,25,000
Straightforward, right? No need to worry about regular slab rates or other complications.
📊 Summary of Tax Rates under Section 115AD
|
Type of Income |
Applicable Tax Rate |
|
Interest on securities |
20% (or 5% if notified) |
|
Dividend income |
20% |
|
Short-Term Capital Gains (STT paid) |
15% |
|
Long-Term Capital Gains (Listed shares, STT paid) |
10% (above ₹1 lakh) |
🔒 TDS & Withholding Requirements
Yes, the tax needs to be deducted at source (TDS). The deductor—usually a company or intermediary—is responsible for ensuring that tax is collected before making payment to the FII.
FIIs also need to file their income tax return (ITR) in India to declare income & claim any applicable treaty benefits, if eligible.
🌎 DTAA (Double Taxation Avoidance Agreement)
Section 115AD works in conjunction with DTAA provisions. If an FII is based in a country with which India has a DTAA (like Mauritius or Singapore), & if the treaty provides for a lower tax rate, the FII can claim those benefits, subject to TRC (Tax Residency Certificate) & other compliance.
🧾 Filing and Compliance Tips for FIIs
- Maintain detailed documentation for all investments & income.
- File Form 10F & obtain PAN in India.
- If claiming treaty benefits, submit Form 10F & TRC proactively.
- Consult professionals for ITR filing & DTAA claims—this is where experts like us come in!
🧠 Final Thoughts
Section 115AD of the Income Tax Act provides the tax rates applicable on the income of Foreign Institutional Investors & deals with the taxation of income earned by FIIs in India. It fosters an environment of fiscal discipline while attracting foreign investments with transparency & predictable tax obligations.
If you're an FII or managing portfolios for global investors, this section is your playbook.
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