Section 115AD of the Income Tax Act

Section 115AD of Income Tax Act provides guidance on how Foreign Institutional Investors’ (FII) income from the securities or capital gains is treated. This income does not include dividend income as dividend income is exempt under Section 10(34).  Income from mutual fund units and/or capital gains arising from transfer of the same is also exempt under Section 10(35). 

Section 115AD of the Income Tax Act offers a framework regarding the tax treatment of the income from the sale or transfer of securities and capital gains of Foreign Institutional Investors. Here, the word ‘securities’ will constitute assets as indicated in clause (h) of Section 2 of the Securities Contract (Regulation) Act, 1956. There are also several other 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. 

 

This section also defines the expression "Foreign Institutional Investor''  to ensure transparency. Here, the term "Foreign Institutional Investor'' means any investor that the Central Government may notify in the Official Gazette: 

Here are notifications that are issued by the Central Government:

1. Notifications No.SO 155(E), dated 7-2-1994;

2. Notification No.9527 [F.No 149/33/93 - TPL (Pt.)], dated, 30-3-1994;

3. Notification No. SO 112(E), dated 21-2-1995;

4. Notification No.SO 282(E), dated 31-3-1995;

Here are some amendments that have been made to Section 115AD: 

• The term “Investment division of an offshore banking unit” has been added to Sec 115AD & Sec 115AD (2) with effect from 4th January 2022 by the Finance Act, 2021. The term has also been clearly defined to avoid any discrepancies. 

• Subsection 1B of section 115AD has now been officially recognised, this will come into effect from 4th January 2022 by the Finance Act, 2021.

• Section 115AD (1) has also been introduced, with effect from 4th January 2022 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020. 

• The terms ‘securities’, ‘permanent establishment’, and ‘specified fund’ have been substituted, with effect from 4th January 2022 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.

If the aggregate income made from a investment branch or specified fund of a FII (Foreign Institutional Investor) or offshore banking unit includes:

1. Long-term or short-term capital gain income that arise from the transfer of applicable securities

2. The income received as securities which is other than Section 115AB referred units

When a specified fund is involved, the provision Section 115AD(1A) of the Income Tax Act will not be applicable to the extent of the aggregate income that is relevant to the units that are being held by an NRI that has been calculated in the recommended manner.

The provisions of Section 115AD(1B) will be applicable on the accountable income of the investment divisions of offshore banking units, including anything that falls within the subsection (1) of Section 115AD of the Income Tax Act. Section 115AD(1B) of Income Tax Act comes under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 under the SEBI Act, 1992.

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

• If the aggregate income  of an investment sector of an offshore banking entity or foreign institutional investor includes only the income with respect to the security that is mentioned in clause (a) of subsection (1) of Section 115AD, then the IT deductions will not be allowed to it as per Sections 28 to 44C or clause (i) or clause (iii) of Section 57 or those under Chapter VI-A. 

• If the aggregate income  of an investment sector of an offshore banking entity or foreign institutional investor consists of any income that is mentioned in clause (a) or clause (b) of subsection (1) of Sec 115AD of the Income Tax Act.

The First and Second Proviso to Section 48 will not be applicable during the capital gains calculation that are a result of securities transfer as mentioned in clause (b) of subsection (1) under Section 115AD of the Income Tax Act. 

Here are the taxes applicable to Foreign Institutional Investors (FII) in India: 

1. Income from Dividends

2. Income from Units 

3. Income from Other Securities

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

*Securities Transaction Tax is applicable.

*Securities Transaction Tax is not applicable

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

*Securities Transaction Tax is applicable

*Securities Transaction Tax is not applicable

6. Income from Transfer of Such Securities

*No DTAA exists to the extent of PE

*No DTAA & PE exists

• DTAA refers to the Double Taxation Avoidance Agreement that’s signed by the government of India with the contracting state.

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