Income Tax for Foreign Investors
Income Tax
Section 115AD of the Income Tax Act, 1961, deals with Tax on income of Foreign Institutional Investors from securities [excluding income from units of mutual fund which are taxed u/s 115AB] or capital gains arising from the transfer of such securities. The section provides that the word "securities" shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956.
The section further defines the expression "Foreign Institutional Investor" - means such investor as the Central Government may, by notification in the Official Gazette, specify in this behalf.
The following notifications are issued by the Central Government in this regard:
- Notification No.SO 199(E), dated 22-1-2014;
- Notification No.SO 1057(E), dated 13-3-2020;
Taxes on income * applicable to FII's in INDIA, is depicted in the table:
|
Income |
Company Defined Under section 2(17) |
Non-Company |
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|
Where aggregate of income does not exceed one crore rupees (no surcharge applicable) |
Where aggregate of income is in range of Rs.1 crore-10 crores (surcharge @ 2% applicable) |
Where aggregate of income exceeds Rs.10 crore rupees (surcharge @ 5% applicable) |
Where aggregate of income is below Rs. 50 Lakh-(no surcharge applicable) |
Where aggregate of income is in range of Rs.50 lakhs -1 crore (surcharge @ 10% applicable) |
Where aggregate of income exceed Rs. 1 crore but not exceeding Rs. 2 Crores (surcharge @ 15% applicable) |
Where aggregate of income exceeds Rs. 2 crore but not exceeding Rs. 5 Crore (surcharge @ 25% applicable) |
Where aggregate of income exceeds Rs. 5 crores (surcharge @ 37% applicable) |
|
|
Dividends |
20.800% |
21.216% |
21.840% |
20.800% |
22.880% |
23.920% |
23.920% |
23.920% |
|
Income by way of Interest on certain bonds & Government securities as referred to in Sec.194LD1 |
5.200% |
5.304% |
5.460% |
5.200% |
5.720% |
5.980% |
6.500% |
7.124% |
|
Income (other than above) in respect of securities / units of a Mutual fund (other than units referred to in section 115AB)
|
20.800% |
21.216% |
21.840% |
20.800% |
22.88% |
23.920% |
26.000% |
28.496% |
|
Capital Gains - where Securities Transaction Tax (STT) is chargeable |
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|
Short Term – transfer take place before 23.07.2024 (where holding period is upto 12 months)2 |
15.600% |
15.912% |
16.380% |
15.600% |
17.160% |
17.940% |
17.940% (higher surcharge of 25% not applicable) |
17.940% (higher surcharge of 37% not applicable) |
|
Short Term – transfer take place on or after 23.07.2024 (where holding period is upto 12 months)2 |
20.800% |
21.216% |
21.840% |
20.800% |
22.880% |
23.920% |
23.920% |
23.920% |
|
Long Term Capital Gain – transfer take place before 23.07.2024 (without indexation benefit) (where holding period is beyond 12 months)2 |
10.400% |
10.608% |
10.920% |
10.400% |
11.440% |
11.960% |
11.960% (higher surcharge of 25% not applicable) |
11.960% (higher surcharge of 37% not applicable) |
|
Long Term Capital Gain – transfer takes place on or after 23.07.2024(without indexation benefit) (where holding period is beyond 12 months)2
|
13.000% |
13.260% |
13.650% |
13.000% |
14.300% |
14.950% |
14.950% |
14.950% |
|
Capital Gains - where Securities Transaction Tax (STT) is not chargeable |
||||||||
|
Short Term (where holding period is upto 12 months)2 |
31.200% |
31.824% |
32.760% |
31.200% |
34.320% |
35.880% |
35.880% (higher surcharge of 25% not applicable) |
35.880% (higher surcharge of 37% not applicable) |
|
Long Term – transfer takes place before 23.07.2024 (no benefit of indexation) (where holding period is beyond 12 months) 2 |
10.400% |
10.608% |
10.920% |
10.400% |
11.440% |
11.960% |
11.960% (higher surcharge of 25% not applicable) |
11.960% (higher surcharge of 37% not applicable)
|
|
Long Term – transfer takes place on or after 23.07.2024 (no benefit of indexation) (where holding period is beyond 12 months) 2 |
13.000% |
13.260% |
13.650% |
13.000% |
14.300% |
14.950% |
14.950% |
14.950% |
|
Income from transfer of such securities if chargeable under the head business income |
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|
Business Income (where no DTAA 3 exists / where DTAA 3 exists- to the extent attributable to PE/transactions on account of significant economic presences if beyond the threshold limit) |
36.400% |
37.128% |
38.220% |
Maximum tax rate-31.200% |
Maximum tax rate-34.320% |
Maximum tax rate-35.800% |
Maximum tax rate-39.000% |
Maximum tax rate-42.744% |
|
Business Income (where no DTAA 3 exists - in case of no PE/ No business connection (other than on account of significant economic presences)/ No business operation in India/Business connection on account of significant presence in India but does not exceed the threshold limit) |
NIL |
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*Taxes are inclusive of surcharge at applicable rates and education cess @ 4% on the tax amount
1. Notes: Section 194LD of the Income Tax Act, 1961 prescribes the rate of TDS @ 5% for any income by way of interest payable -
(a) on or after the 1st day of June, 2013 but before the 1st day of July, 2023 in respect of investment made by FII's in:
(i) rupee denominated bond of an Indian Company, if the rate of interest on such bonds does not exceed the rate as may be notified by Central Government in this behalf:
(ii) a Government Security:
The section provides that the word "Government Security" shall have the meaning assigned to it in clause(b) of Section 2 of the Securities Contract (Regulation) Act, 1956.
(b) on or after 1st day of April, 2020 but before the 1st day of July, 2023 in respect of the investments made by the FII's in Municipal Debt Securities.
2. Before 23rd July, 2024:-
12 months in case of shares held in a company or any other security listed in a recognised stock exchange in India or a unit of the UTI or a unit of a equity oriented Mutual Fund or a zero coupon bond. In case of unlisted shares- 24 months and in all other cases 36 months. Further, in case of long-term capital gains referred to in section 112A of the Income Tax Act, 1961 income tax @ 10% shall be calculated on such income.
On or after 23rd July, 2024:-
12 months in case of shares held in a company or any other security listed in a recognised stock exchange in India, in all other assets 24 months. Further, in case of long-term capital gains referred to in section 112A of the Income Tax Act, 1961 income tax @ 12.50% shall be calculated on such income.
3. DTAA denotes Double Taxation Avoidance Agreement signed by the Government of India with the contracting state.
Section 90(2) of the Income Tax Act, 1961 prescribes that “where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.” Accordingly the rates as per the Income Tax Act, 1961 or as prescribed under the relevant DTAA, whichever is more beneficial can be applied. To claim the benefit of DTAA, certificate of residency from the Government of other contracting state is mandatory.
Further section 196D of the Income Tax Act, 1961 prescribes the rate of tax deduction at source (TDS) for income referred to in section 115AD(1)(a), i.e. on income in respect of securities (other than income referred in Sec.194LD). It further states that there will be no TDS on capital gains arising under section 115AD(1)(b) of the Income Tax Act, 1961. Further, FII's can claim TDS (withholding tax) credits in the respective countries as per the provisions of DTAA or respective tax laws prevailing in that country.
Any 'non-residents' can approach "Advance Rulings Authority" under Chapter XIX-B of the Income Tax Act, 1961, to determine the tax implications in India for the transaction proposed to be entered.
The above information provided is for a general guidance only. However, in view of the specific nature of the transactions and its tax implications, FIIs are advised to consult their own tax advisors with respect to the specific tax implications arising out of India.
Updated on: 28/08/2024
