Section 196D under Income Tax Act

Foreign investments are highly essential to boost the viability of any economy and India being a developing economy has become the destination to invest for prospective investors across the globe. The fast-growing equity markets are one main reason that attracts foreign investors. The Government has introduced Section 196D under Income Tax Act to provide lower tax rates for the income earned by foreign institutional investors. However, this section does not lay down the law relating to the income derived from government securities or rupee-denominated bonds which are mentioned in

Section 194LD. Section 196D states that all incomes earned by the foreign institutional investors on securities (as per Section 115AD) are taxable at 20% except for the income received from the interest of securities. The present article briefly explains the provisions of Section 196D.

Tax Deduction under Section 196D

Under section 196D, any person who pays any amount referred to in Section 115AD to another person is responsible for deducting tax at source. Tax is deducted either at the time of payment in cash, cheque, demand draft or another mode; or, tax os deducted during the time of credit to the account of the payee, whichever is earlier.

Computation of Tax Deduction

Under Section 196D, the tax is deducted for a Foreign Institutional Investor if the income is in respect of securities referred to Section 115AD. The tax deduction is made at the rate of 20%. The deducted tax will be collected to account of the person who is responsible for the tax deduction. Every person who deducts or collects tax will be given an account number for this purpose. The collected tax has to be deposited to the credit of the central government by making the payment in any one of the following modes:

Branch of Reserve Bank of India
Any branch of State bank of India
Any branch of the notified public sector banks where income tax offices are situated

e-Payment of Tax

All assessees who are subjected to compulsory audit under the

Income Tax Act will have to make electronic payment of tax through internet banking facility offered by the authorised banks. Taxpayers can also pay the tax by way of internet banking facilities.

Time of Deposit

When Government deducts tax

When tax is deducted by or on behalf of the Government, the tax should be deposited within the time limit given below. 1. If the tax is to be deposited by the production of any income-tax challan - Tax should be deposited on the same day on which tax is deducted 2. If the tax is accompanied by an income-tax challan - Tax should be deposited by the end of the month in which the tax is deducted or before seven days

When any other person deducts tax

In any other case, the tax should be deposited within one week from the last date of the month in which tax is deducted. However, tax deducted in March can be deposited on or before April 30 after the end of the financial year.

TDS Certificate

Every person deducting tax at source as per the Section 196D is required to issue a quarterly certificate in

Form No.16A.

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Frequently Asked Questions

Common questions about Section 196D Income Tax Deduction for Foreign Investors.

Section 196D of the Income Tax Act deals with the deduction of tax at source on income earned by Foreign Institutional Investors (FIIs) from investments in securities in India. It requires any person making payment to an FII to deduct tax at the rate of 20% on such income, except for interest income.

Any person who pays any amount referred to in Section 115AD (pertaining to tax on income of FIIs) to a Foreign Institutional Investor is responsible for deducting tax at source under Section 196D.

The tax should be deducted at the time of payment in cash, cheque, demand draft or any other mode, or at the time of crediting the amount to the account of the payee, whichever is earlier.

The tax is deducted at a flat rate of 20% on the income earned by Foreign Institutional Investors from securities, except for interest income.

The deducted tax should be deposited to the credit of the central government through a branch of the Reserve Bank of India, State Bank of India, or any notified public sector bank where income tax offices are situated. Assessees subjected to compulsory audit under the Income Tax Act must make electronic payment through internet banking.

Yes, there are specific time limits for depositing the deducted tax. If the tax is deducted by or on behalf of the government, it should be deposited on the same day or by the end of the month, depending on the method of payment. In other cases, the tax should be deposited within one week from the last date of the month in which it is deducted.

The purpose of Section 196D is to provide a lower tax rate of 20% for Foreign Institutional Investors on their income from investments in securities in India, except for interest income. This is intended to attract foreign investment and boost the viability of the Indian economy.

Yes, every person deducting tax at source under Section 196D is required to issue a quarterly certificate in Form No. 16A to the Foreign Institutional Investor.

No, Section 196D does not cover income derived from government securities or rupee-denominated bonds. The provisions related to such income are covered under Section 194LD of the Income Tax Act.

Foreign Institutional Investors are highly significant for the Indian economy as they bring in foreign investment and contribute to the growth of equity markets. The government has introduced provisions like Section 196D to attract and facilitate such foreign investment, which is essential for a developing economy like India.