Section 115AD: Tax on Income of Foreign Institutional Investors and Specified Funds
Section 115AD prescribes special rates of income-tax for specified securities income and capital gains of a Foreign Institutional Investor and a specified fund. The section also restricts specified deductions and contains a special rule for computing capital gains.
Updated: 28 September 2026. This article reflects the capital-gains rate changes made by the Finance (No. 2) Act, 2024 and the Finance Act, 2025.
What does Section 115AD cover?
Section 115AD applies where the total income of a Foreign Institutional Investor (FII) or a specified fund includes income received in respect of securities, other than units referred to in Section 115AB, or short-term or long-term capital gains arising from the transfer of such securities.
The statutory expression remains "Foreign Institutional Investor" in Section 115AD. In current regulatory practice, foreign portfolio investment is governed by the SEBI framework for Foreign Portfolio Investors (FPIs). For applying Section 115AD in a particular case, the statutory definition, relevant notifications, SEBI registration status and any applicable tax treaty should be checked together.
Tax rates under Section 115AD
| Nature of income | Rate | Key condition or date |
|---|---|---|
| Securities income of an FII under Section 115AD(1)(a) | 20% | Special rate under Section 115AD, subject to specific exceptions and treaty provisions where applicable. |
| Securities income of a specified fund under Section 115AD(1)(a) | 10% | Applies to the specified fund category covered by the section. |
| Interest referred to in Section 194LD | 5% | The proviso to Section 115AD refers to a 5% rate. Section 194LD itself must be checked for the eligible interest and statutory period. |
| Short-term capital gain referred to in Section 111A | 20% | For transfers on or after 23 July 2024. The earlier rate was 15% for transfers before that date. |
| Other short-term capital gains covered by Section 115AD | 30% | Where the concessional Section 111A proviso does not apply. |
| Long-term capital gains covered by Section 115AD | 12.5% | Finance Act, 2025 substituted 12.5% for the residual 10% rate with effect from 1 April 2026, applicable from AY 2026-27. |
| Long-term capital gains referred to in Section 112A | 12.5% | For transfers on or after 23 July 2024, on gains exceeding the statutory threshold of Rs. 1,25,000 in aggregate as provided by the section. |
The rates above are base rates under the special provisions. Applicable surcharge, health and education cess, treaty relief, exemptions and other statutory conditions must be considered separately.
How Section 115AD applies to a specified fund
Section 115AD also covers a "specified fund" as defined by reference to Section 10(4D). Under subsection (1A), the section applies to a specified fund only to the extent of income attributable to units held by a non-resident, other than a permanent establishment of a non-resident in India, calculated in the prescribed manner.
This attribution rule is important because the special rate is not automatically applied to every rupee of a specified fund's income merely because the entity falls within the statutory category.
Restriction on deductions under Section 115AD(2)
Section 115AD(2) limits deductions against the special-rate income. Where the gross total income consists only of securities income referred to in Section 115AD(1)(a), deductions under Sections 28 to 44C, specified clauses of Section 57 and Chapter VI-A are not allowed against that income.
Where the gross total income also contains other income, the income covered by Section 115AD(1)(a) and (b) is first excluded for the purpose of determining the gross total income against which Chapter VI-A deductions may be considered. In practical terms, the special-rate income is ring-fenced from those deductions.
Capital gains computation under Section 115AD(3)
Subsection (3) provides that the first and second provisos to Section 48 do not apply when computing capital gains arising from the transfer of securities covered by Section 115AD(1)(b). This is a specific computation rule and should be read with the current capital-gains provisions applicable to the relevant security and transfer date.
Important definitions
Foreign Institutional Investor
For Section 115AD, "Foreign Institutional Investor" has the meaning assigned by the Explanation to the section and the relevant Central Government notification. The Income-tax Act continues to use this statutory expression even though the securities-market regulatory framework now generally uses the term Foreign Portfolio Investor.
Securities
"Securities" takes its meaning from Section 2(h) of the Securities Contracts (Regulation) Act, 1956. This cross-reference is important because Section 115AD does not create an independent general definition of securities.
Permanent establishment
For the specified-fund provisions, "permanent establishment" has the meaning assigned in Section 92F(iiia) of the Income-tax Act.
Specified fund
"Specified fund" is linked to the definition in the Explanation to Section 10(4D). Eligibility therefore depends on satisfying the statutory conditions applicable to that category, rather than merely being an offshore or investment fund.
TDS on FII securities income under Section 196D
Section 196D contains the tax-deduction rule for specified securities income payable to a Foreign Institutional Investor. Broadly, where income in respect of securities referred to in Section 115AD(1)(a), other than interest referred to in Section 194LD, is payable to an FII, tax is deducted at 20%. Where an applicable agreement under Section 90 or 90A provides a lower rate and the statutory treaty-document conditions are satisfied, the treaty rate may be relevant.
Capital gains require separate consideration under the Act and the applicable withholding provisions; Section 196D should not be read as a complete statement of the final tax liability under Section 115AD.
Practical points before applying Section 115AD
Identify the investor category, nature of the security, character of the income, transfer date, whether Section 111A or Section 112A applies, and whether the income belongs to a specified fund subject to subsection (1A). Then check any applicable DTAA, surcharge and cess, withholding requirements and the law applicable to the relevant assessment year.
For transactions straddling 23 July 2024, the transfer date is particularly important because the Finance (No. 2) Act, 2024 changed key capital-gains rates from that date. For assessment year 2026-27 onward, the Finance Act, 2025 change to the residual long-term capital-gain rate under Section 115AD must also be applied.