Section 115AD of Income Tax Act – Tax on Foreign Institutional Investors (FIIs)

Key Highlights

1. Section 115AD offers concessional, fixed tax rates for FIIs/FPIs on capital gains and interest earned in India.
    
2. FIIs cannot use regular deductions (Chapter VI-A, etc.) and capital gains must be calculated differently..
    
3. You must submit correct TDS, Form 10-IH/10-IK filings and FX/IFSC evidence on time. If it fails to do so, the compliance can remove exemptions. 

Section 115AD of the Income Tax Act is about the taxation of income earned by Foreign Institutional Investors (FIIs) in India. It sets specific tax rates for FIIs on capital gains and interest earned by investors. 

For example, Surbhi, a foreign investor, earned from short-term gains, long-term gains, and interest on securities. She calculated tax as per Section 115AD, which included surcharge, since her income exceeded ₹5,00,00,000. This helped her stay compliant with Indian tax laws.

The table below gives a detailed overview of the taxes involved in the above example.
 

Surbhi paid over ₹50,00,000 in taxes after applying surcharge under Section 115AD. She knew about the surcharge involvement and other details of Section 115(ad) of the Income Tax Act, but do you know about it? Don’t worry, in this blog, we are going to cover exactly what you want to know and a little more..

115 (ad) Introduction of the Income Tax Act

Section 115AD of the Income Tax Act deals specifically with the taxation of Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) in India. It lays out how their income from securities and capital gains is taxed. 

As per the section, interest income is taxed at 20%, short-term capital gains on listed shares (under section 111A) at 15%, and long-term capital gains above ₹1,00,000 at 10%. For example, if an FPI earns ₹10,00,000 as long-term capital gain, tax would apply only on ₹9,00,000, resulting in a tax of ₹90,000.

Importance of Section 115 (ad) of the Income Tax Act

Section 115AD is important because it creates a clear and uniform tax framework for foreign investors in India. There is no middleman who could manipulate the tax amount as per his interest. It also gains inventors’ trust, and because of that, more foreign capital flows into Indian markets.

The table below shows the benefits associated with this section.

Section 115AD gives foreign investors clear, concessional tax rates on income from securities and capital gains. This clarity helps attract foreign funds, supports market growth, and makes tax planning easier.

Objectives of Section 115 (ad) of the Income Tax Act

Section 115AD of the Income Tax Act is important for encouraging foreign investment in India. It offers concessional tax rates to Foreign Institutional Investors (FIIs) and specified funds. The table shows the tax rates applied to different income types.
 

Do you know, for LTCG, tax is levied only on gains exceeding ₹1,00,000? That means, if you earn a profit of ₹90,000, you pay no tax, and if you earn ₹2,00,000, you give only ₹20,000 as tax.

TDS Rate Under Section 115 (ad) of the Income Tax Act

TDS is deducted at the same rate as the applicable income type (capital gains, interest, or securities income), unless reduced by a DTAA or an AO certificate.

The table gives a quick summary of TDS rates.
 

TDS may be withheld under Section 195 (for non-resident payments) or a specific section like 194LD. 

Do you know that DTAA relief, lower withholding certificates, or nil-deduction orders can reduce or remove TDS?.

For example, an FII earns ₹50,00,000 as interest from rupee-denominated bonds. Section 194LD (concessional TDS on certain interest) is applied. TDS rate is 5%. So, tax will be:

• TDS @ 5% = ₹2,50,000

• Net payout to FII = ₹47,50,000

If no concession applied (normal 20%),  TDS = ₹10,00,000. If tax is saved due to Section 194LD, then tax = ₹7,50,000.

Exemption Under 115 (ad) of the Income Tax Act

Section 115AD of the Income Tax Act provides specific exemptions for Foreign Institutional Investors (FIIs) and specified funds, ensuring a streamlined tax framework. These exemptions are made to promote foreign investment in Indian securities by offering clarity and predictability in taxation.

Key Exemptions Under Section 115AD:
 

• Deductions Under Chapter VI-A: FIIs and specified funds are not eligible for deductions under sections 28 to 44C or under Chapter VI-A of the Income Tax Act. This means they cannot claim deductions for expenses related to business or profession, income from other sources, or under sections like 80C to 80U.
   
• Capital Gains Computation: For computing capital gains, the first and second provisos to section 48 do not apply. This exemption affects the manner in which capital gains are calculated, particularly concerning the indexation benefits and currency fluctuations.
   
• Tax on Interest Income: Interest income received by FIIs and specified funds is subject to a concessional tax rate of 20%, as per section 115AD. However, if the interest income is referred to in section 194LD, the tax rate is reduced to 5%. This reduced rate applies to interest income from specified bonds or Government securities.

Example:
 

This setup ensures FIIs and specified funds pay tax at concessional rates but cannot claim usual deductions, simplifying the tax process and encouraging foreign investment in India.

Due Date and Compliance Requirements of the Income Tax Act
 

Example:

Suppose a specified fund (AIF) receives ₹1 crore income from securities during FY 2024–25. It must:

• By 31 October 2025: File Form 10‑IH electronically (with digital signature), reporting that income to claim concessional tax under Sec 115AD
   
• At payment/credit time: Deduct TDS, say 20% - ₹20,00,000-and deposit it, filing the TDS return by 31 July if the quarter ended June 30.

This dual compliance, statement filing by October 31 and timely TDS deduction & return filing quarterly ensures the fund correctly avails concessional rates and avoids interest or penalties.

Conclusions

Section 115AD gives FIIs clarity on taxes applicable to capital gains and interest earned. This act helped build investors’ trust and, hence, more capital inflow. To claim the benefits under this section, proper TDS, form filings and FX/IFSC need to be submitted by foreign investors. Try your best to avoid penalties by following the rules under the Indian Tax Act.

Frequently Asked Questions

How are participatory notes (P-notes) taxed?
P-notes issued by registered FIIs are taxed like the underlying investor category; treaty benefits and KYC rules apply separately.

Do foreign individuals (non-FII) get 115AD rates?
No. Individual non-residents are taxed under other provisions; 115AD targets registered FIIs/FPIs and specified funds.

Can FIIs claim foreign tax credit in their home country?
Often yes, subject to home-jurisdiction rules and DTAA; FIIs should obtain tax certificates to claim credit abroad.

How are derivatives (futures/options) used by FIIs taxed?
Derivatives follow separate capital-gains rules or business income treatment depending on holding and trading patterns; consult treaty/IT rules.

What about dividend withholding for FIIs?
Dividends are taxed per domestic law and treaty; recent amendments affect rates and whether the dividend distribution tax applies.

What penalties apply for wrong TDS under 115AD?
Late deposit or incorrect TDS can attract interest, penalty and disallowance of concessional treatment until corrected.

How to document DTAA relief at source?
Typically, supply FIRC/FX evidence, tax residency certificate, declaration and AO/lower-withholding order to the payer at the time of payment.

 

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