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Income Tax Act, 1961 has Chapter XII that consists of Sections 110 to 115BBG. These sections deal with various provisions related to the determination of tax in some special cases. Section 115AD of Income Tax Act talks about the tax on Foreign Institutional Investors’ (FII) income from the securities or capital gains coming from their transfer. Let’s understand what Section 115AD is of the Income Tax Act and its provisions.

What is Section 115AD of the Income Tax Act?

As mentioned above, Section 115AD of income tax act provides tax on the income of Foreign Institutional Investors from securities or capital gains that arise from their transfer. This is, however, excluding dividend income that is exempt under Section 10(34) and income from units of mutual fund exempt under Section 10(35).

As per this section, the word ‘securities’ shall have the meaning assigned to it in clause (h) of Section 2 of the Securities Contract (Regulation) Act, 1956. There are also several provisions applicable under Section 115AD of Income Tax Act. The latest amended provision to Section 115AD will be effective from the financial year 2021-22, which will be relevant to the assessment year 2022-23. As we now know what Sec 115AD of Income Tax Act is, let’s understand about the different provisions under it.

Section 115AD(1) of Income Tax Act

If the total income of a specified fund or investment branch of an offshore banking unit or Foreign Institutional Investor includes:

  1. The income received in respect of securities which is other than Section 115AB referred units; or

  2. The income coming by way of short term or long term capital gains that arise from the transfer of such securities,

Then the applicable income tax should be the aggregate of:

(i) The calculated income tax amount in respect of any securities that are referred to in clause (a), if any, included in the total income,

  • At a rate of 20% in the case of Foreign Institutional Investor

  • At a rate of 10% in the case of specified fund or investment branch of an offshore banking unit

(ii) The calculated income tax amount on the income by way of short term capital gains referred to in clause (b), if any, included in the total income at a rate of 30%, provided that the income tax amount on the income by way of short term capital gains referred to in Section 111A is at the rate of 15%.

(iii) The calculated income tax amount by way of long term capital gains referred to in clause (b), if any, included in the total income at the rate of 10% provided that in case of obtained income from the transfer of a long term capital asset referred to in Section 112A, 10% income tax shall be calculated where such income exceeds Rs. 1 Lakh.

(iv) the income tax amount with which the specified fund or FII would have been chargeable had its total income reduced by the amount of income that is referred to in clauses (a) and (b).

Section 115AD(1A) of Income Tax Act

In case of a specified fund, despite anything that consists in subsection (1) of Section 115AD of IT Act,1961, the provision of this section is applicable only to the extent of income which is attributable to units held by non-resident, calculated in the set manner.

Section 115AD(1B) of Income Tax Act

In the case of an investment division of an offshore banking unit, in spite of anything that consists in subsection (1) of Section 115AD of Income Tax Act, the provisions of this section are applicable to the extent of attributable income to the investment division of such banking units. The said banking units are ones that are referred to in sub-clause (ii) of clause (c) to the Explanation to clause (4D) of Section 10 as a category-III portfolio investor. This comes under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 that were made under the Securities and Exchange Board of India Act, 1992.

Section 115AD(2) of Income Tax Act

Section 115AD (2) of the Income Tax Act applies in the following scenarios:

When the total income of a particular fund or investment sector of an offshore banking entity or foreign institutional investor,

  1. Consists only the income in respect of security that is referred to in clause (a) of subsection (1), no income tax deduction will be allowed to it under Sections 28 to 44C or clause (i) or clause (iii) of Section 57 or those under Chapter VI-A

  2. Includes any income that is referred to in clause (a) or clause (b) of subsection (1). The gross total income should be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced, were the gross total income of specified fund or investment division of an offshore banking branch or Foreign Institutional Investor.

Section 115AD(3) of Income Tax Act

The first and second provisos to Section 48 shall not be applicable to the computation of capital gains coming out of the securities transfer that is referred to in clause (b) of subsection (1) of Section 115AD of the Income Tax Act.

For this section’s purpose,

  1. Foreign Institutional Investor signifies that investors like the central government may specify on this behalf by notification in the Official Gazette

  2. The term ‘investment division of offshore banking unit’ shall have the meaning assigned to it in clause (aa) of the Explanation to clause (4D) of Section 10

  3. The term ‘permanent establishment’ should have its meaning in clause (iiia) of Section 92F

  4. The word ‘securities’ should have the meaning assigned to it in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956

  5. The term ‘specified fund’ should have a similar meaning in clause (c) of clause (4D)’s explanation of Section 10

Taxes Applicable to FII in INDIA

As we went through Section 115AD of Income Tax Act, let’s now understand the taxes applicable to Foreign Institutional Investors (FII) in India with the help of a table.

Income

Company Defined Under section 2(17)

Non-Company

 

Where the aggregate of income exceeds Rs. 1 Crore (2% surcharge is applicable)

Where the aggregate of income is below Rs. 1 Crore (no surcharge applicable)

(no-surcharge applicable)

Dividends

Exempt under Section 10(34) of the IT Act, 1961

(provided Dividend Distribution Tax under Section 115O of the Income Tax Act 1961, is paid by the Indian Company that declares the dividend).

Income from Units

Exempt under section 10(35) of the IT Act, 1961

Income (other than above) in respect of securities

21.012%

20.60%

20.60%

Capital Gains - where Securities Transaction Tax (STT) is chargeable

Short Term (the holding period is up to 12 months)

15.759%

15.45%

15.45%

Long Term (holding period is beyond 12 months)

Exempt under section 10(38) of the IT Act, 1961

Capital Gains - where Securities Transaction Tax (STT) is not chargeable

Short Term (where holding period is up to 12 months)

31.518%

30.90%

30.90%

Long Term (no benefit of indexation) (where holding period is beyond 12 months)

10.506%

10.30%

10.30%

Income from transfer of such securities, if chargeable under the head business income

Business Income (where no DTAA/ where DTAA - to the extent of PE)

42.024%

41.20%

30.90%

Business Income (where no DTAA exists - in case of no PE)

NIL

NIL

NIL

  • DTAA stands for Double Taxation Avoidance Agreement signed by the government of India with the contracting state.

  • 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 mutual fund specified under Section 10(23D) or a zero-coupon bond. 36 months, in all other cases.

  • The taxes are inclusive of a 2% surcharge wherever applicable and a 3% education cess on the tax amount.

FAQs

  • ✔️What is Section 115AD?

    Section 115 AD provides tax on the income of Foreign Institutional Investors from securities or capital gains that arise from their transfer.

  • ✔️When was Section 115AD introduced?

     Section 115AD was introduced by the Finance Act, 1993 with effect from April 1, 1993.

  • ✔️Is Section 115AD applicable to a non-resident?

     Sections 115A to 115AD of the Income Tax Act prescribe tax rates for different types of income of different non-resident entities.

  • ✔️What is STT in Income Tax?

     STT stands for Securities Transaction Tax. It is a direct tax that is levied on every purchase and sale of securities listed on the recognised stock exchanges of India. STT is a kind of financial transaction tax that is similar to Tax Collected at Source (TCS).

  • ✔️Do I have to pay tax in India if I earn abroad?

     No, you will not have to pay tax in India if you earn abroad as this income is not taxable in India. However, interest earned on an NRO account is taxable for an NRI.

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