Section 115AC: Tax on Foreign Currency Bonds and Global Depository Receipts

Section 115AC of the Income-tax Act, 1961 provided a special tax regime for certain income earned by non-residents from eligible foreign currency bonds and Global Depository Receipts (GDRs). For tax years beginning on or after 1 April 2026, the corresponding provision is Section 209 of the Income-tax Act, 2025.

1. What income is covered by Section 115AC?

Section 115AC(1) applied where the total income of a non-resident included one or more of the following qualifying categories:

Section 115AC(1)(a): Interest on eligible bonds

Interest on bonds of an Indian company issued under a Central Government-notified scheme, or bonds of a public sector company sold by the Government, where the non-resident purchased the bonds in foreign currency.

Section 115AC(1)(b): Dividends on qualifying GDRs

Dividends on GDRs purchased in foreign currency through an approved intermediary and issued against qualifying shares of an Indian company or public sector company, including specified initial issues and eligible issues or reissues against existing shares under the notified scheme.

Section 115AC(1)(c): Long-term capital gains

Long-term capital gains from the transfer of bonds or GDRs satisfying the conditions in clauses (a) and (b). Other income of the non-resident is taxed under the otherwise applicable provisions.

2. Section 115AC tax rates

The change in the capital gains rate was made by the Finance (No. 2) Act, 2024. These are statutory base rates; surcharge and health and education cess may increase the effective liability. Tax treaty relief may apply subject to eligibility, documentation and applicable domestic law.

3. Deductions and computation restrictions

Section 115AC(2): Where the gross total income consisted only of specified interest or dividend income, deductions under sections 28 to 44C, section 57(i) or 57(iii), and Chapter VI-A were not allowable against that income. Where qualifying income was included alongside other income, Chapter VI-A deductions were determined by reducing gross total income by the specified Section 115AC income.

Section 115AC(3): The first and second provisos to section 48 did not apply to the computation of long-term capital gains on the covered bonds or GDRs. Accordingly, the special foreign currency computation and indexation adjustments under those provisos were not available for these gains.

4. Return filing, withholding tax and TDS

Section 115AC(4): The non-resident was not required to furnish a return under section 139(1) where the entire taxable income consisted only of qualifying bond interest and GDR dividends under clauses (a) and (b) and the tax deductible under Chapter XVII-B had been deducted. This exemption did not extend to cases with qualifying capital gains under clause (c).

Section 196C: Tax was deducted at source on specified bond and GDR income at 10%, and on qualifying long-term gains at 10% for transfers before 23 July 2024 or 12.5% for transfers on or after that date, subject to the relevant statutory rules. For the Income-tax Act, 2025, the corresponding withholding provisions are addressed in Section 393.

5. Bonds and GDRs received in amalgamation or demerger

Under Section 115AC(5), the special treatment continued for qualifying GDRs or bonds received in an amalgamated or resulting company because of an eligible holding in the amalgamating or demerged company, subject to the statutory conditions.

6. Important legal definitions

Approved intermediary: An intermediary approved in accordance with a scheme notified by the Central Government in the Official Gazette, as specified in the Explanation to Section 115AC.

Global Depository Receipts (GDRs): Depository receipts or certificates of the kind defined in the Explanation to Section 115ACA, including eligible instruments issued through an overseas depository bank against qualifying underlying shares or foreign currency convertible bonds, subject to the applicable statutory definition.

Non-resident: A person who does not satisfy the applicable Indian tax residence conditions under the governing income-tax law. Eligibility under Section 115AC depends on the status of the assessee and the particular securities and income.

7. Position from 1 April 2026: Section 209 of the Income-tax Act, 2025

The Income-tax Act, 2025 applies from 1 April 2026. Section 209 carries forward the special regime for qualifying foreign currency bonds and GDRs, including a 10% rate on covered interest or dividends and 12.5% on covered long-term capital gains. The 1961 Act remains relevant to earlier tax periods, subject to transitional and savings provisions.

The new law's TDS schedule is contained in Section 393, which identifies the 10% rate for covered interest or dividends and 12.5% for covered long-term capital gains. The specific statutory provisions and treaty position should be checked for the relevant tax year.

8. Illustrative tax calculation

Suppose a non-resident earns qualifying bond interest of Rs. 2,00,000 and qualifying long-term capital gains of Rs. 4,00,000 on a transfer after 23 July 2024. The special-rate tax before surcharge, cess or treaty adjustments is Rs. 20,000 on interest (10%) plus Rs. 50,000 on gains (12.5%), totalling Rs. 70,000. This example assumes the income is fully chargeable in India and meets all conditions.

9. Official legislation and guidance

• Income Tax Department - Section 115AC (as amended)
• Income Tax Department - Section 115ACA and GDR definition
• Income Tax Department - Section 393, Income-tax Act, 2025 (TDS)
• Income Tax Department - Special tax provisions under the 2025 Act
• Finance (No. 2) Act, 2024 - official amendment
• Income Tax Department - 1961 to 2025 section navigator

This article is general legal and tax information. Check the law applicable to the relevant tax year, notifications, double taxation avoidance agreement and facts of each transaction before acting.