Section 115AD: Special Provision for Taxation of Income of Foreign Institutional Investors (FIIs)
Understanding the tax regime for Foreign Portfolio Investors (FPIs) in Indian securities
Introduction to Section 115AD
Section 115AD of the Income Tax Act, 1961, is a pivotal provision designed to provide a simplified and concessional tax regime for income earned by **Foreign Institutional Investors (FIIs)** from specified securities in India. With regulatory changes, FIIs are largely now referred to as **Foreign Portfolio Investors (FPIs)** under SEBI regulations, but the Income Tax Act continues to use the term FIIs for the purpose of this section. The primary objective is to encourage foreign investment in the Indian capital markets by offering predictable tax rates.
Applicability of Section 115AD
This section applies to an assessee, being a Foreign Institutional Investor (FII), whose total income includes income by way of:
- Interest from securities.
- Dividends from securities.
- Short-term capital gains arising from the transfer of such securities.
- Long-term capital gains arising from the transfer of such securities.
For the purpose of this section, "securities" generally refers to shares, debentures, warrants, or any other instruments as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956, and also includes units of a Mutual Fund.
Concessional Tax Rates under Section 115AD
The income tax payable by an FII on the specified income is calculated at the following special concessional rates:
| Type of Income | Tax Rate |
|---|---|
| Income by way of interest from securities | 20% |
| Income by way of dividends from securities | 20% |
| Income by way of Short-term Capital Gains (STCG) from transfer of securities referred to in Section 111A (i.e., equity shares or units of equity-oriented funds where Securities Transaction Tax (STT) is paid) | 15% |
| Income by way of Long-term Capital Gains (LTCG) from transfer of securities referred to in Section 112A (i.e., equity shares or units of equity-oriented funds where STT is paid, exceeding ₹1 lakh) | 10% |
| Income by way of Long-term Capital Gains (LTCG) from transfer of other securities (not covered by Section 112A) | 10% |
It is important to note that these rates are applied on a gross basis, before any deductions, and are generally subject to applicable surcharge and health and education cess.
Key Features and Exemptions/Limitations
- No Chapter VI-A Deductions: If the gross total income of the FII consists only of the specified income taxable under Section 115AD, no deductions under Chapter VI-A (e.g., related to investments, insurance, etc.) are allowed.
- No Expenses Deductible: No deduction of any expenditure or allowance is allowed against the income taxable under Section 115AD, with the exception of costs related to the acquisition and transfer of securities for capital gains calculation.
- No Indexation Benefit: For the computation of long-term capital gains, the benefit of indexation provided under the first and second provisos to Section 48 is generally not available, unless specifically allowed by other relevant sections like Section 112A.
- Exemption from Filing Return: An FII 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 115AD (interest, dividends, and capital gains from specified securities), and
- The tax deductible at source (TDS) under Chapter XVII-B has been deducted from such income.
Distinction from Other Sections
While Section 115AD deals comprehensively with income of FIIs from securities, it is distinct from other special provisions. For instance, Section 115AC applies to income from specific bonds and Global Depository Receipts (GDRs) acquired in foreign currency, for both NRIs and FIIs. Section 115AD is broader for FIIs, covering various forms of securities income, not just bonds and GDRs acquired in foreign currency. Other sections might cover general capital gains or non-resident taxation, but 115AD offers a streamlined approach specifically for FIIs.
"Section 115AD provides tax certainty and a favorable environment, playing a crucial role in attracting and retaining foreign capital in India's dynamic financial markets."
Importance for Foreign Investors
Section 115AD is a cornerstone for foreign investment in India. By offering a straightforward and concessional tax framework, it significantly reduces the compliance burden and tax uncertainty for FIIs/FPIs, making India an attractive destination for portfolio investments. This clarity helps in boosting foreign capital inflows and strengthening the Indian economy.
Crucial Reminder (as of July 27, 2025):
Tax laws are subject to frequent amendments and interpretations. It is highly recommended that FIIs/FPIs 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 115AD. For a deeper understanding of Indian tax structure, refer to our article on the Structure of the Income Tax Act. For general information on taxpayer categories, see Individual Taxpayer and for capital gains concepts, please visit Capital Gains.
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