Section 115ACA Income Tax: GDR Dividends and Capital Gains Rates
Section 115ACA of the Income-tax Act, 1961 provides a special tax regime for certain resident employees receiving dividends or long-term capital gains from Global Depository Receipts (GDRs) purchased in foreign currency under a notified employee stock option scheme. For tax years governed by the Income-tax Act, 2025, the corresponding provision is section 193.
1. Who qualifies under section 115ACA?
The taxpayer must be a resident individual employee of an Indian company engaged in a specified knowledge-based industry or service, or an employee of its qualifying subsidiary. The GDRs must be issued by the eligible Indian company under an employees' stock option scheme notified by the Central Government and purchased by the employee in foreign currency. Merely holding ordinary GDRs does not establish eligibility.
2. Applicable tax rates
| Qualifying income | Special tax rate |
|---|---|
| Dividends on eligible GDRs | 10% |
| Long-term capital gains on transfer before 23 July 2024 | 10% |
| Long-term capital gains on transfer on or after 23 July 2024 | 12.5% |
| Other taxable income | Applicable provisions and rates |
The total tax is calculated by applying the special rates to the eligible income and calculating tax separately on the remaining taxable income. The classification of the GDR holding as long-term must be established under the applicable holding-period rules. Short-term gains do not automatically qualify for the section 115ACA concession.
3. Statutory definitions and eligible industries
Specified knowledge-based industry or service
This includes information technology software, information technology services, entertainment services, pharmaceutical industry, biotechnology industry and other industries or services notified by the Central Government.
Global Depository Receipt (GDR)
A GDR is a depository receipt or certificate issued through an overseas depository bank against eligible shares or foreign currency convertible bonds. The precise statutory definition, including relevant International Financial Services Centre provisions under the 2025 Act, must be checked for the relevant tax year.
Information technology software and services
Information technology software generally encompasses machine-readable instructions, data, sound or images, including source and object code, capable of processing or interaction through qualifying technology products. Information technology services involve value addition through the use of such software over information technology systems.
Subsidiary and overseas depository bank
The subsidiary concept extends to eligible subsidiaries incorporated outside India. An overseas depository bank is a bank authorised by the issuing company to issue GDRs against the relevant shares or foreign currency convertible bonds. The Income-tax Act, 2025 references the subsidiary definition under section 2(87) of the Companies Act, 2013.
4. Restrictions on deductions and capital gains computation
Special-rate GDR income is subject to statutory restrictions on deductions. Where the taxpayer has other eligible income, deductions are computed with reference to the balance after excluding the specified GDR income, as directed by the section. The first and second provisos to section 48 of the 1961 Act do not apply to computing the qualifying long-term capital gains, so foreign-exchange adjustment and indexation benefits under those provisos are unavailable.
5. Illustrative tax computation
Suppose a qualifying resident employee receives GDR dividends of Rs. 1,00,000 and realises qualifying long-term capital gains of Rs. 4,00,000 on a transfer after 23 July 2024. The special-rate components are Rs. 10,000 on dividends and Rs. 50,000 on gains, making Rs. 60,000 before applicable surcharge and cess. Other taxable income, if any, is assessed separately. This example assumes all eligibility and gain-computation conditions are satisfied.
6. Income-tax Act, 2025: section 193
For the tax year beginning 1 April 2026, section 193 of the Income-tax Act, 2025 addresses the corresponding special taxation of qualifying GDR dividends and capital gains for resident employees. Earlier tax years and proceedings may continue to require application of the 1961 Act and its saving and transitional provisions. The statutory text applicable to the relevant tax year takes precedence over historical summaries.
7. Filing, documentation and practical compliance
Keep records of residential status, employment and subsidiary relationship, the notified ESOP scheme, foreign-currency purchase evidence, allotment and transfer dates, dividend statements, cost and sale consideration, and taxes deducted. Section 115ACA does not itself provide a blanket exemption from filing an income-tax return. Review advance-tax, withholding, foreign asset reporting and other applicable compliance requirements based on the employee's circumstances.
8. Official legislation and references
- Income Tax Department: Section 115ACA (1961 Act)
- Income Tax Department: Section 115ACA, 2025 version
- Income Tax Department: Special tax rates and computation
- Income Tax Department: Benefits available to residents
- Income-tax Act, 2025 (official PDF; see section 193)
Frequently asked questions
Is every employee GDR eligible for the 10% dividend rate?
No. The resident-employee, qualifying issuer, notified scheme and foreign-currency purchase conditions must be met.
What is the rate on eligible long-term GDR gains?
The rate is 12.5% for qualifying transfers on or after 23 July 2024, compared with the earlier 10% rate, plus applicable surcharge and cess.
Can an employee claim indexation on qualifying GDR gains?
No. The special regime excludes the relevant section 48 provisos governing indexation and foreign-currency computation.
This article is general legal and tax information. Specific results depend on the law applicable to the relevant tax year, the GDR structure and the employee's circumstances.