Section 196D of Income Tax Act, 1961: All you need to know

Introduction

The Income Tax Act, 1961, was amended in 2012 to include Section 196D, which deals with the TDS (Tax Deduction at Source) for foreign institutional investors (FIIs) from securities. This provision was introduced to regulate the tax liabilities of FIIs investing in the Indian securities market. In this blog, we will discuss about Section 196D of the Income Tax Act, 1961.

What is TDS?

It is a mechanism of tax collection, where tax is deducted at the source of income. It is a method of collecting tax on income, dividends, and interest earned by an individual or an entity. The Tax Deduction at Source is deducted by the person making the payment, and the deducted amount is remitted to the government.

Who are Foreign Institutional Investors?

They are entities that invest in the securities market of a foreign country. In India, they are registered with the Securities and Exchange Board of India (SEBI) and invest in various securities like equity, debt, and derivatives. They can be mutual funds, hedge funds, pension funds, or any other entity registered with SEBI.

What is the Income of Foreign Institutional Investors (FIIs) from Securities?

FIIs earn income from securities in the form of capital gains, dividends, and interest. Capital gains are earned when they sell a security at a higher price than its purchase price. Dividends are paid by companies to their shareholders, and they earn dividends when they invest in the stocks of Indian companies. Interest is earned on debt securities like bonds, debentures, and government securities.

TDS rate under Section 196D of Income Tax Act, 1961

According to the section, any person responsible for making payments to FIIs for income from securities must deduct TDS at the rate of 20%. The TDS is to be deducted at the time of payment or credit of income, whichever is earlier. The TDS deducted is then remitted to the government within a specified time period.

It is important to note that the TDS under this section is a final tax, which means that no further tax liability arises on the FIIs. They are not required to file a tax return in India if the TDS has been deducted and remitted correctly.

Exemptions from TDS under Section 196D of the Income Tax Act, 1961

Section 196D provides certain exemptions from TDS for FIIs. They are as follows:

1. One such exemption is for income from securities received by FIIs in respect of transactions in which securities transaction tax (STT) has been paid. STT is a tax levied on securities transactions in India, and its payment exempts the FIIs from TDS under Section 196D.
2. Another exemption is for income from securities received by FII that is a resident of a country with which India has a Double Taxation Avoidance Agreement (DTAA). DTAA is an agreement between two countries to avoid double taxation on the same income. If the FII is a resident of a country with which India has a DTAA, they may be eligible for a lower tax rate or an exemption from tax in India.

Conclusion

In conclusion, Section 196D of the Income Tax Act, 1961, regulates the TDS for foreign institutional investors (FIIs) from securities in India. FIIs earning income from securities are subject to a 20% TDS rate, but certain exemptions are available, such as transactions with securities transaction tax (STT) or residents of countries with a Double Taxation Avoidance Agreement (DTAA). It is important for FIIs to be aware of these provisions and exemptions to ensure compliance with Indian tax laws.