Section 115AD — Section 115AD — Tax on Income of FII

STATUTORY ARCHITECTURE — 18-ROW MAP

Statutory text — Income-tax Act, 1961

115AD. (1) Where the total income of a specified fund or Foreign Institutional Investor includes—

(a) income received in respect of securities (other than units referred to in section 115AB); or

(b) income by way of short-term or long-term capital gains arising from the transfer of such securities,

the income-tax payable shall be the aggregate of—

(i) the amount of income-tax calculated on the income in respect of securities referred to in clause (a),

if any, included in the total income,—

(A) at the rate of twenty per cent in case of Foreign Institutional Investor;

(B) at the rate of ten per cent in case of specified fund:

Provided that the amount of income-tax calculated on the income by way of interest referred to in

section 194LD shall be at the rate of five per cent;

(ii) the amount of income-tax calculated on the income by way of short-term capital gains referred to

in clause (b), if any, included in the total income, at the rate of thirty per cent :

Provided that the amount of income-tax calculated on the income by way of short-term capital

gains referred to in section 111A shall be at the rate of—

(A) fifteen per cent for any transfer which takes place before the 23rd day of July, 2024; and

(B) twenty per cent for any transfer which takes place on or after the 23rd day of July, 2024;

(iii) the amount of income-tax calculated on the income by way of long-term capital gains referred to in

clause (b), if any, included in the total income, at the rate of ten per cent:

Provided that in case of income arising from the transfer of a long-term capital asset referred to

in section 112A which exceeds one lakh and twenty-five thousand rupees, income-tax shall be

calculated at the rate of—

(A) ten per cent where transfer of such asset takes place before the 23rd day of July, 2024; and

(B) twelve and one-half per cent where transfer of such asset takes place on or after the 23rd

day of July, 2024:

Provided further that the limit of one lakh twenty-five thousand rupees mentioned in the first

proviso shall apply on aggregate of the long-term capital gains referred to in clauses (A) and (B);

and

(iv) the amount of income-tax with which the specified fund or Foreign Institutional Investor would

have been chargeable had its total income been reduced by the amount of income referred to in

clause (a) and clause (b).

Function in the statutory architecture

Section 115AD taxes a Foreign Institutional Investor notified by the Central Government, and a specified fund as defined in the Explanation to s. 10(4D). Income from securities (other than units referred to in s. 115AB) is taxed at twenty per cent for a Foreign Institutional Investor and ten per cent for a specified fund. Interest referred to in s. 194LD is taxed at five per cent.

Short-term capital gains are taxed at thirty per cent. Gains referred to in s. 111A are taxed at fifteen per cent before the 23rd day of July, 2024 and twenty per cent on or after it. Long-term gains are taxed under clause (iii) at the rate shown as "ten". For that word the note reads: "'twelve and one-half' shall be Sub. for 'ten' by Act No. 7 of 2025, w.e.f. 1-4-2026". Long-term gains referred to in s. 112A exceeding one lakh and twenty-five thousand rupees are taxed at ten per cent before 23 July 2024 and twelve and one-half per cent on or after it. The limit applies to the aggregate.

Operative consequences

For a specified fund, the section applies only to income attributable to units held by non-residents (other than a permanent establishment in India), calculated in the prescribed manner (s. 115AD(1A)).
If gross total income consists only of income from securities, no deduction is allowed under ss. 28 to 44C, s. 57(i) or (iii), or Chapter VI-A (s. 115AD(2)(a)).
Capital gains on the securities are computed without the first and second provisos to s. 48 (s. 115AD(3)).

Status

Section 115AD is operative for AY 2026-27, with the clause (iii) rate read as twelve and one-half per cent from 1 April 2026 under Act No. 7 of 2025. The Finance Act, 2026 does not amend the section; its First Schedule refers to the section only for surcharge.

s. 210 re-enacts the section. Its table does not reproduce the separate five per cent rate for s. 194LD interest.

The 1961 Act governs AY 2026-27 and earlier assessment years; the Income-tax Act, 2025 governs tax year 2026-27 onwards. For this subject the 2025 Act provision is s. 210.

Case Laws & Commentary

SECTION 115AD — TAX ON INCOME OF FOREIGN INSTITUTIONAL INVESTORS FROM SECURITIES OR CAPITAL GAINS ARISING FROM THEIR TRANSFER

Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)

A. SECTION COMMENTARY

A.1 Structural position & legislative purpose

Section 115AD is the special-rate code for Foreign Institutional Investors (FIIs)/Foreign Portfolio Investors (FPIs) and 'specified funds'. Where the total income of such an assessee includes income in respect of securities (other than units referred to in section 115AB) or capital gains, short-term or long-term, arising from the transfer of such securities, the tax is charged at the flat rates fixed by the section, with the tax on the balance income computed separately. The income from securities is taxed at a flat rate; short-term capital gains on STT-suffered securities are taxed at the section 111A rate, other short-term gains at a higher flat rate, and long-term gains at a flat rate (with the section 112A threshold mechanics applying to the eligible equity LTCG).

The provision rests on a settled characterisation: gains made by FIIs/FPIs on Indian securities are treated as capital gains, not business income. This was clarified administratively (CBDT Circular No. 4/2007 on the trader-versus-investor distinction) and put beyond doubt by the Finance (No. 2) Act, 2014, which amended section 2(14) to provide that any security held by an FII which has invested in accordance with SEBI regulations is a capital asset, so that the resulting gains are necessarily capital gains taxed under section 115AD. The specified income is taxed on a gross basis, with no benefit of the section 48 indexation/forex provisos and no Chapter VI-A deduction; the treaty-override under section 90(2) remains available.

A.2 Sub-section / clause taxonomy

Sub-section (1): the charge and rates - income from securities at a flat rate; STCG (section 111A category) at the section 111A rate and other STCG at a higher flat rate; LTCG at a flat rate, with the section 112A threshold mechanics for eligible equity LTCG. Sub-section (1A)/Explanation: special rules for a 'specified fund' (IFSC-based fund), apportioning the concession to the units held by non-resident investors. Sub-section (2): no Chapter VI-A deduction and no section 48 provisos against the specified income/gains. Sub-section (3): consequential rules.

A.3 Core doctrinal themes

Theme (1) - Capital-gains characterisation settled by statute: section 2(14) (FA 2014) deems SEBI-compliant FII securities to be capital assets, foreclosing the recurring 'business income vs capital gains' dispute for FIIs/FPIs.

Theme (2) - Flat-rate, gross-basis charge: the FII/FPI income and gains bear flat rates without indexation/forex or Chapter VI-A relief; STT-suffered short-term gains track section 111A.

Theme (3) - Specified-fund (IFSC) overlay: section 115AD, read with the IFSC concessions, apportions the benefit to the non-resident unit-holders of a specified fund, integrating the FPI regime with the GIFT-City framework.

Theme (4) - Treaty interaction: a lower DTAA rate may be adopted under section 90(2), subject to residency documentation and beneficial ownership.

A.4 Legislative evolution / Finance Act amendment trail

Section 115AD was inserted to give FIIs a defined rate regime. The Finance (No. 2) Act, 2014 amended section 2(14) to characterise SEBI-compliant FII securities as capital assets, ending the trader-versus-investor controversy. The 'specified fund' overlay was added to integrate the IFSC/GIFT-City regime, and the rates were aligned to the section 111A/112/112A framework, including the post-23-July-2024 recalibration of capital-gains rates.

Finance Act 2026: no amendment to section 115AD. The FII/FPI and specified-fund special-rate scheme continues unchanged for AY 2026-27 onward.

A.5 CA practitioner pointers

(1) Treat SEBI-compliant FII/FPI securities gains as capital gains (section 2(14), FA 2014) - the business-income argument is foreclosed. (2) Apply the correct flat rate by class of income/gain, tracking section 111A for STT-suffered STCG and the section 112A mechanics for eligible equity LTCG. (3) Do not give section 48 indexation/forex or Chapter VI-A deductions. (4) For a specified fund, apportion the concession to non-resident unit-holders and integrate the IFSC rules. (5) Check the DTAA for a lower rate and support any section 90(2) claim with a TRC.

B. FINANCE ACT, 2026 - IMPACT NOTE

Section 115AD is NOT amended by the Finance Act, 2026. The FII/FPI and specified-fund special-rate scheme, and the capital-gains characterisation under section 2(14), continue unchanged for AY 2026-27 onward. Income-tax rates for TY 2026-27 are otherwise continued without change.

C. CASE LAW - CLUSTERED BY ISSUE

Cluster C-1 : Capital gains versus business income for FIIs/FPIs

CBDT Circular No. 4/2007 and the statutory settlement by section 2(14) (Finance (No. 2) Act, 2014).

Principle: The recurring dispute whether FII gains on Indian securities are business income or capital gains was guided administratively by CBDT Circular No. 4/2007 (factors distinguishing a trader from an investor) and then settled by the Finance (No. 2) Act, 2014, which amended section 2(14) to deem SEBI-compliant FII securities to be capital assets. The gains are therefore capital gains taxable under section 115AD, not business profits.

Relevance: Removes the characterisation risk for FIIs/FPIs and fixes section 115AD as the operative charge; the practitioner relies on the section 2(14) deeming provision rather than re-litigating trader-versus-investor.

Cluster C-2 : Treaty interaction (cross-reference)

Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) (cross-reference - treaty override).

Held: A more beneficial DTAA prevails under section 90(2); the taxpayer may adopt the lower treaty rate.

Relevance: Governs the rate where a treaty prescribes a lower charge than section 115AD on the FII/FPI income or gains, subject to residency and beneficial-ownership conditions.

Candid note on the case-law field: The principal section 115AD controversy (capital gains versus business income) was resolved by statute (section 2(14), FA 2014) rather than left to a single landmark ruling; remaining disputes are computational and treaty-related, resolved on the general principles above. The position is stated candidly; the cross-reference is identified as such, and no decision has been invented to enlarge the list.

D. PRACTITIONER'S NOTE

Section 115AD is now a stable, characterisation-settled regime: SEBI-compliant FII/FPI securities gains are capital gains (section 2(14)), taxed at the flat rates of the section (tracking sections 111A/112A for the equity classes) on a gross basis, with the specified-fund overlay for IFSC vehicles. Optimise against the applicable DTAA under section 90(2) with proper residency documentation, and do not give indexation/forex or Chapter VI-A relief.

E. SOURCES & CITATIONS

Statutory text verified against the Income-tax Act, 1961 (Bare Act, as amended by the Finance Act, 2025), Chapter XII section 115AD, read with section 2(14) (FII securities deemed capital assets, Finance (No. 2) Act, 2014) and sections 111A/112A; cross-checked for FA 2026 against the firm's amendment tracker (no change). Marginal heading reproduced verbatim: 'Tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer.' Administrative material: CBDT Circular No. 4/2007 (trader-versus-investor distinction). Cross-reference authority verified: Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC).

Caveat: Treatise-style commentary for practitioners and academic use; not legal opinion. FPI and IFSC/specified-fund rules and the post-23-July-2024 capital-gains rates are detailed and evolving; verify the current statutory text, SEBI regulations, the relevant DTAA and the latest CBDT/appellate position before relying on any proposition.

Case law on Section 115AD

ITAT, High Court and Supreme Court judgments applying this section, on BharatTax.net, our income tax case law search.

Section 115AD case laws

← All sections (940)Act 1961 hub

Income-tax Act, 1961	Income-tax Act, 2025
s. 115AD(1): income of a specified fund or Foreign Institutional Investor from securities, and short-term and long-term gains on their transfer	s. 210(1), Table Sl. Nos. 1 to 6
s. 115AD(1A) and (1B): specified fund limited to income attributable to non-resident unit holders; investment division of an offshore banking unit	s. 210(2) and (3)
s. 115AD(2): restriction of deductions	s. 210(4)
s. 115AD(3): first and second provisos to s. 48 not applied	s. 210(5)
Explanation: "Foreign Institutional Investor", "specified fund" and related terms	s. 210(6)

Section 115AD — Tax on Income of FII - FPI

Case Laws & Commentary

Case law on Section 115AD