Understanding Tax Implications for Foreign Investors Under Section 115AD

Section 115AD outlines the tax treatment of Foreign Institutional Investors’ (FIIs) income from the sale or transfer of securities. As per this section, the word ‘securities’ constitutes assets as indicated in clause (h) of Section 2 of the Securities Contract (Regulation) Act, 1956.

 

Note that it does not apply to income from mutual fund units or capital gains arising from the transfer of the same.

Enacted to streamline taxation for foreign investors, this section provides clarity and consistency in calculating tax liabilities. Here are some of the key aspects of Section 115AD of the Income Tax Act and when these subsections apply:

1. Section 115AD (1)

If the aggregate income made from an investment branch or specified fund of an FII or offshore banking unit includes:

• Long-term or short-term capital gain income that arises from the transfer of applicable securities

• The income received as securities other than those referred to in Section 115AB

2. Section 115AD (1A)

It does not apply to investment in specific funds if the aggregate income from the units held has been calculated in the recommended manner.

3. Section 115AD (1B) 

It applies to the accountable income of the investment divisions of offshore banking units, including anything that falls within subsection (1) of Section 115AD. 

4. Section 115AD (2) 

This section applies to the following scenarios:

• If the aggregate income is from securities mentioned in clause (a) of subsection (1) of Section 115AD, the deductions will not be allowed

• If the aggregate income consists of any income mentioned in clause (a) or clause (b) of subsection (1) of Sec. 115AD of the Income Tax Act

5. Section 115AD (3) 

The First and Second Proviso to Section 48 will not be applicable during the capital gains calculation for securities mentioned in clause (b) of subsection (1).