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Section 115AD of Income tax act – Tax on Income of Foreign Institutional Investors

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June 5, 2021

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7 mins read

Section 115AD of Income tax act – Tax on Income of Foreign Institutional Investors

Who are ‘Foreign Institutional Investor’?

A Foreign Institutional investor (FII) , is an investor or an investment fund , which is registered   outside India and invests in Indian financial markets . They can include hedge funds, insurance companies, pension funds and mutual funds.

Special Rate of Tax

In order to promote investments into Indian markets, the income of a Foreign Institutional Investor (‘FII’) is subjected to tax rates at concessional rate which are given as under : –

Income Rate of Tax
Income [excluding dividend referred to in Section 115 – O)] received in respect of securities (other than units of UTI  or mutual funds referred in Section 115AB)

Note: Interest referred to in Section 194LD is taxable at 5%

20%
Short-term capital gains arising from transfer of such securities.

Note: Short term capital gains on listed securities are taxable at 15% under Section 111A

30%
Income from long-term capital gains arising from transfer of such securities* 10%
Other income of FII Taxable at normal rate of tax

*Long term capital gains arising from transfer of long term capital asset being  equity shares of a company or a unit of equity oriented fund or a unit of business trusts, was exempt from income-tax under clause (38) of section 10 of the Act in the hands of the FII. After the withdrawal of exemption of long-term capital gains on equity shares, units, etc. u/s 10(38),   such long-term capital gain on equity shares or equity oriented mutual funds will become taxable in the hands of FIIs as well u/s 112A, provided such gains exceed one lakh rupees and other conditions of Section 112A are satisfied .

Section 115AD of Income tax act – Example 1

Foreign Institutional investor has earned long-term capital gains of Rs 1,50,000 during the PY 2017-18 on income arising from transfer of listed equity shares. In this case, exemption would be available u/s 10(38) as amended provision of Section 115AD of Income tax act is applicable from AY 2019-20.

Section 115AD of Income tax act – Example 2

FII has earned long-term capital gains of Rs 90,000 during the PY 2018-19 on income arising from transfer of listed equity shares. In this case, exemption u/s 10(38) would not be available. However, FII is not liable to pay tax on long-term capital gains up to Rs 1,00,000.

International Taxation Services

Section 115AD of Income tax act – Example 3

FII has earned long-term capital gains of Rs 2,00,000 during the PY 2018-19 on income arising from transfer of listed equity shares. In this case, exemption u/s 10(38) would not be available. FII is liable to pay tax on long-term capital gains above Rs 1,00,000. Tax on such long-term capital gain comes out to be Rs  10,400 [(2,00,000-1,00,000)*10.4%].

Certain other provisions, relating to an FII who derived income by way of dividend and interest preferred above relating to the tax rates, obligation to file return of income and others are discussed as under : –

a) If the gross total income of the FII consists only of dividend and interest referred above

Where the gross total income of the FII  consists only of the aforesaid dividend or interest income, no deduction shall be allowed to him under section 28 to 44C (relating to computation of taxable income under the head ” profits and gains of Business and profession”) or section 57(i) or 57(iii) (relating to computation of taxable income under the head ”  income from other sources”) or under Chapter VIA.

b) If the gross total income of the FII consists income other than dividend and interest referred above

Where the gross total income of the FII  consists of other incomes, then, the deduction under Chapter VI-A will be available in respect of other incomes

c) Benefit of first and second proviso to Section 48

The benefit of : –

  • indexation ; and
  • computation of capital gains in foreign currency,

shall not apply for the computation of long-term capital gains arising out of the transfer of long term bonds or long term GDRs.

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Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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