Section 196D of the Income Tax Act, 1961 governs the Tax Deducted at Source (TDS) on income earned by Foreign Institutional Investors (FIIs) from securities in India. This provision ensures tax compliance for foreign investments in Indian capital markets by mandating TDS on interest and capital gains from securities.
Key Provisions of Section 196D
- Applicability
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- Payee: Foreign Institutional Investors (FIIs) or Foreign Portfolio Investors (FPIs)registered with SEBI.
- Income Covered:
- Interest incomefrom securities (e.g., bonds, debentures).
- Capital gains(short-term or long-term) from the transfer of securities.
- Exclusions:
- Dividends already covered under Section 115-O(exempt if Dividend Distribution Tax was paid).
- Capital gains where Securities Transaction Tax (STT)is paid (covered under Section 115AD).
- TDS Rates
| INCOME TYPE | TDS RATE | CONDITIONS |
| Interest Income | 5% | Flat rate, no surcharge/cess at deduction stage. |
| Short-Term Capital Gains (STCG) | 30% | If STT is not paid on equity shares/equity-oriented mutual funds. |
| Long-Term Capital Gains (LTCG) | 10% | If STT is not paid on equity shares/equity-oriented mutual funds. |
| Dividends (Post-2020) | 20% | Since DDT abolition, dividends are taxable under Section 194 or 195. |
Note:
- DTAA Benefit: Lower treaty rates apply if the FII submits a Tax Residency Certificate (TRC)and Form 10F.
- No Surcharge/Cess at TDS Stage: The specified rates are final for deduction purposes.
- Who Deducts TDS?
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- Deductor: The entity making the payment (e.g., Indian companies, brokers, mutual funds).
- Timing of Deduction
TDS is deducted at the earlier of:
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- Creditto the FII’s account (even if in a suspense account).
- Actual payment(cash, cheque, etc.).
- Compliance Requirements
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- PAN Mandatory: If absent, Section 206AAimposes a 20% TDS (unless exempt under Rule 37BC).
- Form 15CA/CB: Required for remittances exceeding ₹5 lakh.
- TDS Return: Filed quarterly in Form 27Q.
Exemptions & Special Cases
- STT-Paid Transactions: No TDS if STT is paid on equity trades.
- DTAA Relief: Lower rates apply if the FII’s home country has a tax treaty with India.
- Final Tax Liability: TDS under Section 196Dis treated as final tax unless the FII opts to file a return.
Recent Updates (2024–25)
- LTCG Rate Change: Post-23rd July 2024, LTCG on equity transfers attracts 5% TDS.
- Clarification on Dividends: Post-DDT abolition, dividends are now taxed at 20%unless exempt under treaty.
Penalties for Non-Compliance
- Late Deduction/Payment: 1%–1.5%interest per month .
- Non-Filing of Returns: Penalty up to ₹1 lakhunder Section 271H.
