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Section 115AD – Income Tax for Foreign Investors

Section 115AD – Income Tax for Foreign Investors

Section 115AD of the Income Tax Act, 1961, deals with the Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer.  The amended provision of Section 115AD has been effective from the financial year 2021-22, which will be relevant to the assessment year 2022-23. There are also several provisions applicable under Section 115AD of the Income Tax Act.  The present article briefs the different provisions of Section 115AD of the Income Tax Act

Section 115AD of Income Tax Act

As mentioned above, Section 115AD provides tax on the income of Foreign Institutional Investors from securities or capital gains that arise from their transfer. This section is not applicable for the dividend income that is exempt under Section 10(34) and income from units of mutual fund exempt under Section 10(35).

Amended Provision of Section 115AD

• The word “Investment Division of an offshore banking unit”  has been inserted in section 115AD & Section 115AD (2)   with effect from 4th January 2022 by the Finance Act, 2021.
• The new Section 115AD (1) has been introduced with effect from 4th January 2022 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020
• Subsection 1B of section 115AD has been newly inserted with effect from 4th January 2022 by the Finance Act, 2021.
• The explanation to the Investment Division of an offshore banking unit has been inserted with effect from 4th January 2022 by the Finance Act, 2021.
• The explanation to securities, permanent establishment, and the specified fund has been substituted with effect from 4th January 2022 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020

Section 115AD (1) of the Income Tax Act

The total income of the foreign institutional investors consists of income from the securities and the income of the long-term or the short-term capital gains from the transfer of the securities.

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

a). The income received in respect of securities which is other than Section 115AB referred units, or

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

1. 1. 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
   2. 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%.
   3. 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.
   4. 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 the case of a specified fund, the provision Section 115AD(1A) of the Income Tax Act will not apply to the extent of income that is accountable to units held by the NRI(not being a permanent establishment of a non-resident in India) calculated in the prescribed manner.

Section 115AD(1B) of Income Tax Act

The provisions of Section 115AD(1B) of the Income Tax Act apply to the extent of accountable income to the investment division of an offshore banking unit, despite anything that consists in subsection (1) of Section 115AD of the Income Tax Act,

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 the Income Tax Act

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

1. If the total income of an investment sector of an offshore banking entity or foreign institutional investor Consists only of the income in respect of security that is referred to in clause (a) of subsection (1) of Section 115AD, 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. If the total income of an investment sector of an offshore banking entity or foreign institutional investor Includes any income that is referred to in clause (a) or clause (b) of subsection (1) of Section 115AD. 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 the Income Tax Act

The first and second provisos to Section 48 shall not apply 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.

Section 115AD(3) of the Income Tax Act

Section 115AD(3) of the Income Tax Act explains Foreign Institutional Investor, the investment division of offshore banking unit’ securities and specified fund.

• Foreign Institutional Investor means the investors as the central government may specify on this behalf by notification in the Official Gazette
• 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
• The permanent establishment should have its meaning in clause (iiia) of Section 92F
• Securities should have the meaning assigned to them in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956
• The specified fund should have a similar meaning in clause (c) of clause (4D)’s explanation of Section 10

Taxes Applicable to Foreign Institutional Investors in INDIA

As we went through Section 115AD of the 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 recognized 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.