Section 115A: Tax on Dividends, Interest, Royalty and Technical Service Fees of Non-Residents

Section 115A of the Income-tax Act, 1961 prescribed special tax treatment for specified Indian-source income of non-residents and foreign companies. This guide explains the scope, rates, definitions, deductions, return-filing relief and treaty considerations, together with the transition to the Income-tax Act, 2025.

1. Who was covered by Section 115A?

Section 115A(1)(a) applied to a non-resident other than a company or a foreign company receiving specified dividends, interest or income from units purchased in foreign currency. Section 115A(1)(b) dealt with qualifying royalty and fees for technical services received from the Government or an Indian concern, subject to statutory conditions and exclusions.

Royalty or technical service income effectively connected with a permanent establishment or fixed place of profession may instead fall within Section 44DA. The nature of the agreement, recipient, source of income and relevant assessment year are therefore material.

2. Tax rates under Section 115A of the 1961 Act

The following are principal statutory rates reflected in the later amended version of Section 115A. These are base rates, before applicable surcharge and health and education cess; special conditions and treaty relief can change the outcome.

Rates and concessions are period-sensitive. Verify the exact statutory text and Finance Act for the year in question. For current tax years, use the Income-tax Act, 2025 rather than applying this historical section mechanically.

3. Important legal definitions

Royalty: Section 9(1)(vi)

Explanation 2 to Section 9(1)(vi) broadly includes consideration for transferring or permitting the use of specified intellectual property, know-how, patents, trademarks, secret processes, copyright and specified information, subject to the statutory inclusions and exclusions. The precise characterisation may be affected by judicial decisions and an applicable tax treaty.

Fees for technical services: Section 9(1)(vii)

Explanation 2 to Section 9(1)(vii) broadly defines fees for technical services as consideration for rendering managerial, technical or consultancy services, including provision of technical or other personnel. It excludes consideration for construction, assembly, mining or like projects undertaken by the recipient and income chargeable under the head "Salaries".

Foreign currency and foreign company

Section 115A used the definition of foreign currency linked to Section 10(15)(iv), while the classification of a foreign company depended on the definitions in the Act. Residence and treaty status must be examined separately.

4. Conditions for royalty and technical service fees

Section 115A(1)(b) covered specified royalty or technical service fees under agreements with the Government or Indian concerns after 31 March 1976, subject to required Government approval or conformity with applicable industrial policy. Section 115A(1A) contained a special rule for certain copyright in books and computer software, subject to historical import-policy conditions. Section 115A(2) preserved special treatment for certain agreements deemed to predate 1 April 1976.

5. Deductions under Sections 115A(3) and 115A(4)

Section 115A(3): Expenditure and allowances under Sections 28 to 44C and Section 57 were generally not deductible in computing the specified income taxed under Section 115A(1), subject to the wording and exceptions applicable for the relevant year.

Section 115A(4): Chapter VI-A deductions were restricted in relation to specified income. Where other income existed, the computation of eligible deductions was generally based on gross total income after excluding the relevant specially taxed income, subject to statutory exceptions.

6. Return filing and withholding tax

Section 115A(5) provided a limited exemption from furnishing a return under Section 139(1) where the non-resident's assessable income consisted solely of the specified qualifying income and the tax required to be deducted at source had been deducted, subject to the version of the provision applicable to the year. It was not a blanket exemption for all foreign companies or all royalty payments.

For payments or credits from 1 April 2026, withholding is governed by the Income-tax Act, 2025, including the applicable entries under Section 393. For earlier payments, consult the relevant 1961 Act withholding provisions and the year-specific Finance Act.

7. Double Taxation Avoidance Agreements (DTAAs)

Under the treaty-benefit principle historically provided by Section 90(2), a qualifying non-resident could generally rely on the more beneficial provisions of an applicable DTAA, subject to treaty eligibility, documentation, anti-abuse rules and other statutory requirements. The treaty may define royalty or technical services differently from domestic law and may provide a lower withholding rate.

Check tax residency documentation, beneficial ownership where relevant, the permanent-establishment position and the particular treaty before determining the final rate.

8. Practical example

Suppose a foreign company earned qualifying royalty of INR 10,00,000 during a year governed by the later version of Section 115A of the 1961 Act. At the 20% base rate, tax would be INR 2,00,000 before applicable surcharge and cess. A valid treaty benefit, different characterisation or Section 44DA treatment could change this result. The example is illustrative and should not be used for a 2026-27 payment without checking the 2025 Act.

9. Official legislation and guidance

• Income Tax Department: Section 115A statutory text (PDF)
• Income Tax Department: taxation in special cases
• Income Tax Department: tax rates and computation
• Income Tax e-Filing Portal: transition and withholding guidance
• Income Tax e-Filing Portal and current legislation

This article is a general legal information guide. Verify amendments, applicable dates, treaty terms and binding law for the specific transaction.