Income Tax / Tax Deducted at Source / Non-residents

Section 196D of Income Tax Act: TDS on Foreign Institutional Investors' Securities Income

Section 196D governs tax deduction at source (TDS) on specified securities income payable to Foreign Institutional Investors (FIIs). This guide explains the statutory rate, treaty relief, specified funds, the capital gains exception, and the corresponding law from 1 April 2026.

Law in force from 1 April 2026: Section 393(2), Table serial numbers 15 and 16, of the Income-tax Act, 2025 deals with the corresponding TDS categories. Section 210 deals with taxation of FII and specified-fund securities income. The old Section 196D remains relevant for historical periods and transitional matters.

Meaning and scope of Section 196D

Under the Income-tax Act, 1961, Section 196D(1) required a person paying an FII income in respect of securities covered by Section 115AD(1)(a) to deduct tax at the earlier of credit or payment. Interest covered by the special rule in Section 194LD was excluded from this particular deduction provision.

Foreign Institutional Investor (FII): an investor within the meaning specified by the relevant Central Government notification for the special securities-tax provisions. The regulatory term Foreign Portfolio Investor (FPI) is commonly used in securities markets; eligibility for the tax provision must be tested against its statutory definition.

Securities: generally have the meaning assigned under Section 2(h) of the Securities Contracts (Regulation) Act, 1956, subject to the relevant income-tax provision. Specified fund: a fund meeting the statutory conditions under Section 10(4D) of the 1961 Act or the corresponding provisions of the 2025 Act.

TDS rates and exceptions

Payment or income	Applicable base TDS treatment	Legal basis
Qualifying securities income paid to an FII, other than Section 194LD interest and capital gains	20%, or a lower applicable treaty rate subject to the statutory requirements	1961 Act: Section 196D(1); 2025 Act: Section 393(2), Table serial 15 and Note 2
Qualifying securities income paid to a specified fund	10%, except income qualifying for the applicable statutory exemption	1961 Act: Section 196D(1A); 2025 Act: Section 393(2), Table serial 16
Capital gains arising on transfer of securities covered by the special FII provisions	No TDS under this specific FII securities-income provision; the gains may still be taxable	1961 Act: Section 196D(2); 2025 Act: Section 393 non-deduction provisions
Interest specifically covered by Section 194LD	Apply the separate special interest TDS provision, where its conditions are met	Section 194LD (1961 Act), corresponding provisions under the 2025 Act

Rates shown are statutory base rates. Surcharge, cess, applicable exemptions, treaty conditions and other requirements must be examined where relevant. No TDS under Section 196D(2) does not mean that capital gains are exempt from income tax.

Double Taxation Avoidance Agreement relief

The proviso to Section 196D(1) permits the lower of 20% and the applicable treaty rate when the agreement under Section 90(1) or 90A(1) applies and the payee furnishes the prescribed tax residency certificate under Section 90(4) or 90A(4). Other treaty documentation and eligibility conditions may also apply. The corresponding 2025 Act rules must be consulted for current payments.

Why capital gains are treated differently

Section 196D(2) expressly excluded capital gains from deduction under that section when they arose from transfers of securities referred to in Section 115AD and were payable to an FII. Such gains are instead evaluated under the substantive capital gains provisions, including the special tax rules of Section 115AD. Under the 2025 Act, Section 210 provides the corresponding special taxation framework.

Historical amendments and original provision

Section 196D was inserted by the Finance Act, 1993, effective 1 June 1993. The original article described the 20% deduction rule and the capital gains exclusion. Subsequent amendments added the treaty-rate proviso and the 10% specified-fund rule. Its older proviso concerning dividends referred to in Section 115-O reflected the former dividend distribution tax regime and should not be presented as a current general exemption.

Illustrative calculations

Example 1: If qualifying securities income of Rs. 5,00,000 is payable to an FII and no lower treaty rate applies, base TDS at 20% is Rs. 1,00,000, before any other applicable statutory adjustments.

Example 2: If a specified fund receives Rs. 5,00,000 of income subject to the 10% rule and no exemption applies, base TDS is Rs. 50,000.

Example 3: A qualifying FII capital gain of Rs. 5,00,000 is not subject to TDS under the specific capital gains exclusion, but the tax liability must still be determined under the relevant capital gains rules.

Compliance checklist for deductors

Verify whether the payee qualifies as an FII or specified fund under the applicable law.
Classify the income as securities income, special-rate interest, dividend or capital gain.
Determine whether a treaty rate applies and obtain supporting residency and other required documents.
Deduct at the earlier of credit or payment where required, and complete the applicable deposit, return and certificate formalities.
For payments from 1 April 2026, apply the Income-tax Act, 2025 and relevant rules, including transitional provisions where applicable.

Frequently asked questions

Is TDS on FII securities income always 20%?

No. A lower treaty rate may apply when statutory conditions are satisfied. A different 10% rule applies to qualifying specified funds, and certain income categories have separate treatment.

Is TDS required on FII capital gains under Section 196D?

No, Section 196D(2) excludes qualifying capital gains from deduction under that section. The gains can nevertheless be taxable.

Which provision applies from 1 April 2026?

Refer to Section 393(2), Table serial numbers 15 and 16, and the related notes and non-deduction provisions of the Income-tax Act, 2025, together with Section 210 for special tax rates.

Official statutory references

Updated: 27 October 2026. This article provides general legal information; the relevant tax year, notifications and treaty provisions should be checked for individual transactions.