Understanding Tax Implications for Foreign Investors Under Section 115AD

The Finance (No. 2) Act, 2024 changed Section 115AD with effect from 23rd July 2024. The changes are important because they raised the special capital gains rates and aligned them with the newer capital gains structure. 

• Short-term Capital Gains Tax

Short-term capital gains under section 111A now attract 20% tax instead of 15% when the transfer takes place on or after 23 July 2024. This is the key change for listed equity-style transactions covered by the concessional route.

• Long-term Capital Gains Tax

Long-term capital gains now attract 12.5% tax instead of 10% for transfers on or after 23 July 2024. The higher threshold of ₹1,25,000 also applies to the relevant long-term gain slab after that date.

• Surcharge Treatment

Surcharge treatment was also tightened. Where the total income includes dividend income or income chargeable under section 115AD(1)(b), the surcharge on that part of income cannot exceed 15%. For a specified fund, income chargeable under section 115AD(1)(a) is not increased by surcharge. 

Section 115AD is built as a special regime. It applies to a specified fund or a Foreign Institutional Investor. In the current official framework, the term ‘Foreign Institutional Investor’ is tied to the definition notified by the Central Government. Similarly, the term ‘securities”’takes its meaning from the Securities Contracts (Regulation) Act, 1956.

1. Section 115AD (1)

• This is the charging provision. It taxes certain income of a specified fund or FII at special rates, instead of pushing everything into the normal slab structure.

• The section covers income from securities and transfer-related gains. In practice, this includes dividend income in certain FPI cases, income from specified securities, and capital gains on transfer of securities.

• The short-term and long-term capital gain rates under this section changed from 23rd July 2024, so the transfer date must be checked first.

2. Section 115AD (1A)

• This sub-section is for a specified fund whose income is attributable to units held by a non-resident, other than a non-resident with a permanent establishment in India. The current official form guidance says such income can qualify for concessional taxation, subject to the prescribed filing condition.

• The fund must file the prescribed annual statement. The official form guidance identifies this as Form 69 in the current system, which is mandatory for claiming the concessional benefit.

3. Section 115AD (1B)

• This sub-section covers a specified fund for income attributable to the investment division of an offshore banking unit. The official form guidance treats this income separately and links it to exemption or concessional taxation, subject to the prescribed statement.

• The required statement is Form 70. It is mandatory for claiming the relevant exemption or concessional treatment under the current framework.

4. Section 115AD (2)

• If the gross total income of an FII consists only of the special-rate income covered by section 115AD(1), deductions under sections 28 to 44C, clause (i) or clause (iii) of section 57, and Chapter VI-A are not available.

• If the FII has both special-rate income and other income, the special-rate income is first reduced from gross total income. Chapter VI-A deductions are then allowed on the reduced amount. That is the practical relief mechanism in this sub-section.

5. Section 115AD (3)

• For capital gains from securities covered by clause (b) of sub-section (1), the first and second provisos to section 48 do not apply. In simple terms, the gains are computed under the special rule set, not under the normal non-resident capital gains adjustment route.

The rates below are the practical tax buckets most foreign investors look at first. The final tax cost can still change because of surcharge, health and education cess, DTAA relief, and the exact nature of the security or transfer. 

1. Income from Dividends

 

2. Income from Units

 

3. Income from Other Securities

 

4. Income from Short-term Capital Gains (Holding period < 12 months)

1. Where Securities Transaction Tax is applicable

 

1. Where Securities Transaction Tax is not applicable

 

5. Income from Long-term Capital Gains (Holding period > 12 months)

 

6. Income from Transfer of Such Securities

 

 

Notes:

1. STT is still relevant where the concessional capital gains route depends on it.
2. No deduction is allowed for Securities Transaction Tax while calculating capital gains from the sale of securities.
3. Surcharge and cess can change the final outgo, and treaty relief may apply where available.

Disclaimer

These values can change through law, notification, or tax treaty treatment. The Securities Transaction Tax is applicable where the concessional route depends on it. Surcharge and health and education cess may also affect the final tax payable.

Section 115AD is a special taxation framework for foreign investors in India, especially FIIs and specified funds, where income from securities and transfer gains is taxed differently from ordinary income. The section has become even more important after the 2024 changes, because the capital gains rates and thresholds now depend more sharply on the date of transfer and the nature of the security. For foreign investors, the key is to identify the income head correctly, check the surcharge position, and apply the relevant post-23 July 2024 rate where needed.