Section 115AC: Tax on Income from Bonds/Shares acquired in Foreign Currency by FIIs/NRIs
Understanding the special provisions for non-residents and foreign institutional investors
Introduction to Section 115AC
Section 115AC of the Income Tax Act, 1961, is a crucial provision that offers a concessional tax regime for certain incomes earned by Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs). The primary objective of this section is to incentivize foreign investment in India by providing simplified and lower tax rates on specific financial instruments acquired in foreign currency. It forms part of Chapter XII-A of the Act, which deals with special provisions relating to certain incomes of non-residents.
Applicability of Section 115AC
This section applies to an assessee, being a non-resident, whose total income includes income by way of:
- Interest on bonds of an Indian company issued in accordance with a scheme notified by the Central Government, or on bonds of a public sector company sold by the Government, provided these were purchased in foreign currency.
- Dividends (other than dividends referred to in Section 115-O, if applicable, considering current dividend taxation rules) from Global Depository Receipts (GDRs). These GDRs must be:
- Issued against the initial issue of shares of an Indian company and purchased in foreign currency through an approved intermediary.
- Issued against the shares of a public sector company sold by the Government and purchased in foreign currency through an approved intermediary.
- Issued or re-issued against the existing shares of an Indian company and purchased in foreign currency through an approved intermediary.
- Long-term capital gains arising from the transfer of such bonds or GDRs as mentioned above.
The key condition for applicability is the acquisition of these specified securities in foreign currency.
Concessional Tax Rates under Section 115AC
The income tax payable under this section is calculated at special concessional rates:
| Type of Income | Tax Rate |
|---|---|
| Income by way of interest on specified bonds | 10% |
| Income by way of dividends on specified GDRs | 10% |
| Income by way of long-term capital gains from transfer of specified bonds/GDRs | 10% |
It's important to note that these rates are flat rates and are generally lower than the normal slab rates applicable to residents or general provisions for non-residents.
Key Features and Exemptions/Limitations
- No Chapter VI-A Deductions: If the gross total income of the non-resident consists only of the specified interest or dividend income, no deductions under Chapter VI-A (e.g., Section 80C, 80D, etc.) are allowed. However, if there are other incomes, the Chapter VI-A deductions are allowed only against those other incomes.
- No Indexation Benefit: For the computation of long-term capital gains arising from the transfer of these bonds or GDRs, the benefit of indexation under the first and second provisos to Section 48 is not available.
- No Expenses Deductible: No deduction of any expenditure or allowance (e.g., interest paid on borrowed capital for acquiring these assets) is allowed against the income taxable under Section 115AC.
- Exemption from Filing Return: A non-resident is generally not required to furnish a return of income under Section 139(1) if:
- Their total income in India consists only of income referred to in Section 115AC (interest and dividends on specified securities), and
- The tax deductible at source (TDS) under Chapter XVII-B has been deducted from such income.
- Acquisition through Amalgamation/Demerger: The provisions of Section 115AC also apply if the assessee acquired GDRs or bonds in an amalgamated or resulting company by virtue of holding GDRs or bonds in the amalgamating or demerged company, provided the original acquisition met the conditions of Section 115AC(1).
Distinction from Other Sections
While Section 115AC provides for specific instruments, other sections like Section 115AD (for FIIs) or Section 115E (for NRIs' investment income) also offer special tax treatments for non-residents. However, the scope and conditions vary significantly. Section 115AC specifically targets income from bonds and GDRs acquired in foreign currency.
"Understanding the nuances of Section 115AC is vital for NRIs and FIIs investing in specified Indian securities, as it significantly impacts their tax liability and compliance requirements."
Importance for Foreign Investors
Section 115AC offers a predictable and simplified tax regime for foreign investors, removing complexities and providing certainty regarding their tax obligations on specific investments. This encourages foreign capital inflow into the Indian economy.
Crucial Reminder (as of July 27, 2025):
Tax laws are subject to frequent amendments. It is highly recommended to consult with a qualified tax advisor or refer to the latest notifications from the Income Tax Department or the Central Board of Direct Taxes (CBDT) for the most current provisions and interpretations of Section 115AC. For a deeper understanding of Indian tax structure, refer to our article on the Structure of the Income Tax Act and for specific taxpayer categories, see Individual Taxpayer and HUF Income Tax. For capital gains related concepts, please visit Capital Gains.
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