Section 115AD: Tax on FII and FPI Securities Income and Capital Gains
Section 115AD of the Income-tax Act, 1961 provides a special tax framework for qualifying Foreign Institutional Investors (FIIs), including relevant foreign portfolio investors, and specified funds receiving income from Indian securities or capital gains on their transfer. From 1 April 2026, the corresponding provisions are contained in section 210 of the Income-tax Act, 2025. The applicable rate depends on the nature of income, the security, the transfer date and the investor category.
1. Who is covered?
The 1961 Act defines a Foreign Institutional Investor for section 115AD by reference to investors notified by the Central Government. In practice, eligible SEBI-registered foreign portfolio investors must also consider the applicable notifications and regulatory framework. A specified fund has the meaning assigned under section 10(4D) of the 1961 Act and its conditions; this is not a blanket description of every overseas investment fund.
Securities has the meaning in section 2(h) of the Securities Contracts (Regulation) Act, 1956. Units covered by section 115AB are excluded from the section 115AD securities-income category. The 2025 Act contains corresponding definitions and conditions in section 210.
2. Tax rates under section 115AD
| Income category | Relevant rate | Important qualification |
|---|---|---|
| Income from securities - FII | 20% | Special qualifying interest may be taxed at 5% under section 194LD, subject to its conditions. |
| Income from securities - specified fund | 10% | Subject to specified-fund eligibility and other statutory conditions. |
| Short-term capital gains outside section 111A | 30% | Applies to the relevant securities transfers. |
| Short-term capital gains covered by section 111A | 15% before 23 July 2024; 20% from 23 July 2024 | Subject to the qualifying security and securities transaction tax conditions. |
| Long-term capital gains covered by section 112A | 10% before 23 July 2024; 12.5% from 23 July 2024 | Threshold of Rs. 1 lakh before the change and Rs. 1.25 lakh thereafter, subject to section 112A conditions. |
| Other long-term capital gains under section 115AD | 10% under the earlier 1961 Act rule; 12.5% from 1 April 2026 | Finance Act, 2025 amended this category from 1 April 2026. Do not automatically apply 12.5% to these gains in FY 2024-25. |
These are basic statutory rates before applicable surcharge and health and education cess. A tax treaty may affect the final liability if eligibility and documentation requirements are satisfied. See the official section 115AD text, official tax-rate summary and Budget 2025 FAQs.
3. How the tax is calculated
Section 115AD(1) separates qualifying securities income and securities capital gains from other taxable income. Tax is calculated on each special-rate category at the relevant rate, plus tax on the remaining total income under otherwise applicable provisions. For example, Rs. 10 lakh of qualifying short-term capital gains under section 111A arising on a transfer after 23 July 2024 gives basic tax of Rs. 2 lakh at 20%, before cess, surcharge or treaty considerations.
4. Restrictions on deductions and capital-gains adjustments
Under section 115AD(2), where gross total income consists only of the qualifying securities income described in section 115AD(1)(a), deductions under sections 28 to 44C, specified clauses of section 57 and Chapter VI-A are restricted. Where other income is present, the special-rate income is excluded when computing the income base for applicable Chapter VI-A deductions. Section 115AD(3) disapplies the first and second provisos to section 48 in computing gains on the covered securities. The 2025 Act carries corresponding restrictions in section 210(4) and (5).
5. Specified funds and offshore banking units
Amendments expanded section 115AD to specified funds, with a 10% securities-income rate in the applicable circumstances. Definitions concerning an investment division of an offshore banking unit, permanent establishment and specified fund are incorporated into the statutory explanation. Eligibility must be verified against section 10(4D), relevant rules and applicable notifications; merely operating from an international financial services centre does not automatically confer every benefit.
6. Withholding tax, treaty relief and compliance
Withholding obligations depend on the payment category and applicable provisions, including section 196D for certain FII securities income and section 194LD for qualifying interest. Treaty relief is subject to the relevant double taxation avoidance agreement, residence documentation and other applicable requirements. Capital gains reporting, return-filing obligations and treaty positions should be assessed independently rather than assuming that tax deduction at source always eliminates the need to file.
7. Section 210 of the Income-tax Act, 2025
Section 210 provides the successor special-rate regime for securities income and capital gains of FIIs and specified funds. It includes a rate table, computation rules, deduction restrictions and definitions. For income taxable under the new Act, read section 210 together with the corresponding provisions for short-term and long-term gains and the applicable tax-year rules. The official Income-tax Act, 2025 (PDF) contains the enacted text.
8. Key statutory definitions
- Foreign Institutional Investor (FII)
- An investor notified for the purposes of the special taxation provision; relevant FPI registration and notifications should also be examined.
- Specified fund
- A fund satisfying the statutory definition and conditions under section 10(4D) of the 1961 Act, or corresponding provisions of the 2025 Act.
- Securities
- Securities as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956.
- Permanent establishment
- For the 1961 Act, the meaning assigned in section 92F(iiia); for the 2025 Act, see the cross-reference in section 210.
9. Official legislation and guidance
- Section 115AD - Income-tax Act, 1961 (official text)
- Income-tax Act, 2025 - section 210 (official PDF)
- Finance Act, 2025 - amendment of section 115AD
- Income Tax Department - tax rates and computation
- Budget 2025 FAQs - FII long-term capital gains
Updated 26 October 2026. This article is general legal information; the applicable tax-year statute, treaty, notifications and facts govern individual cases.