Section 115AD — FPI Taxation
Section 115AD of the Income Tax Act, 1961 prescribes the special tax rates applicable to income of Foreign Portfolio Investors (FPIs) from securities listed on Indian stock exchanges, including dividends, interest, and capital gains, while also allowing treaty rate benefits where applicable.
Section 115AD was originally enacted to govern the tax treatment of income earned by Foreign Institutional Investors (FIIs), and was later extended to cover Foreign Portfolio Investors after the FPI regime was introduced by SEBI in 2014. It provides a self-contained tax framework for FPI income from Indian securities.
Under Section 115AD, interest income from rupee-denominated bonds of Indian companies and interest on government securities is taxed at 20% (without indexation or the benefit of basic exemption). Income by way of dividends received from Indian companies is also taxable, though after the abolition of Dividend Distribution Tax in 2020, such dividends are taxed at the applicable treaty rate if a relevant Double Taxation Avoidance Agreement (DTAA) exists.
For capital gains arising from the transfer of securities, short-term capital gains are taxed at 15% under Section 111A for equity shares and equity-oriented mutual funds sold on a recognised exchange with STT paid. Long-term capital gains from such assets exceeding Rs 1.25 lakh in a financial year are taxed at 12.5% under Section 112A.
The special feature of Section 115AD is that FPIs are not allowed to take the benefit of cost indexation or the first and second provisos to Section 48 (which provide for indexation and computation in foreign currency). This simplifies the computation but also means FPIs do not benefit from inflation adjustment on their cost base.
FPIs domiciled in jurisdictions with favourable DTAA provisions historically benefited from lower withholding tax rates on dividends (Mauritius, Singapore, Netherlands). Post the 2016-17 amendments to the India-Mauritius and India-Singapore treaties, capital gain exemptions were removed for investments made after specified dates, aligning such jurisdictions closer to standard domestic tax treatment.
FPIs registered in Category I under SEBI regulations include sovereign wealth funds, foreign central banks, and pension funds. Some of these entities may claim treaty benefits through tax residency certificates, requiring careful compliance documentation.