Mechanism: The payer of section 115AD securities income to an FII deducts 20% (or the lower treaty rate on a TRC); FII capital gains are excluded from the deduction.
Litigation profile: Limited. The live questions are the treaty rate and the income/capital-gains line — the candour rule applies.
A. SECTION COMMENTARY
Section 196D requires any person responsible for paying to a Foreign Institutional Investor any income in respect of securities referred to in section 115AD(1)(a) to deduct income-tax at twenty per cent. It is the withholding counterpart of section 115AD, the special regime for the taxation of FII income from securities and the capital gains thereon. By its terms the deduction is confined to the income in respect of securities; capital gains arising to the FII are excluded from section 196D (a deliberate carve-out, leaving FII capital gains outside the at-source deduction).
Treaty rate now available at source
Following the insertion (by the Finance Act, 2021) of a proviso, the deduction under section 196D is to be at twenty per cent or the rate provided in the applicable Double Taxation Avoidance Agreement, whichever is lower, where the FII furnishes a tax residency certificate and the other prescribed particulars. This allows the treaty rate to be applied at the deduction stage rather than being claimed by refund, easing the cash-flow position of treaty-resident FIIs.
Why authority is limited — candour
The provision is specialised and largely compliance-oriented; the live questions are the availability of the treaty rate and the scope of the securities-income/capital-gains line. In candour, there is no developed body of section 196D merits authority; the cognate treaty-at-source and chargeability principles govern.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
196D. (1) Where any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD, not being income by way of interest referred to in section 194LD, is payable to a Foreign Institutional Investor, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent:
Provided that where an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A applies to the payee and if the payee has furnished a certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A, as the case may be, then, income-tax thereon shall be deducted at the rate of twenty per cent or at the rate or rates of income-tax provided in such agreement for such income, whichever is lower.
(1A) Where any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD, not being income by way of interest referred to in section 194LD, is payable to a specified fund referred to in clause (c) of the Explanation to clause (4D) of section 10, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee, or at the time of payment thereof by any mode, whichever is earlier, deduct the income-tax thereon at the rate of ten per cent:
Provided that no deduction shall be made in respect of an income exempt under clause (4D) of section 10.
(2) No deduction of tax shall be made from any income, by way of capital gains arising from the transfer of securities referred to in section 115AD, payable to a Foreign Institutional Investor.
C. AUTHORITIES
Candour rule observed: section 196D is a specialised FII provision with limited authority. The statutory scheme (with section 115AD and the treaty-rate proviso) is offered.
Statutory backdrop and cognate principles
Securities income only; capital gains excluded; treaty rate at source
Principle: Section 196D withholds at 20% (or the lower treaty rate, on furnishing a TRC) on FII income in respect of securities under section 115AD(1)(a); FII capital gains are outside the section 196D deduction.
Use: Fixes the base, the rate and the treaty interaction for FII securities income.
GE India Technology Centre (P) Ltd. v. CIT (2010) 327 ITR 456 (SC) — cognate
Principle: Withholding attaches only to sums chargeable to tax under the Act, read with the treaty.
Use: Frames the chargeability enquiry underlying the section 196D deduction.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.
CHAPTER XVII — COLLECTION AND RECOVERY OF TAX · B.—DEDUCTION AT SOURCE
Section 196D — Income of Foreign Institutional Investors from Securities (Tax Deducted at Source)
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Status: Live. Specialised FII provision; lightly litigated.
Finance Act, 2026: No amendment.
Mechanism: The payer of section 115AD securities income to an FII deducts 20% (or the lower treaty rate on a TRC); FII capital gains are excluded from the deduction.
Litigation profile: Limited. The live questions are the treaty rate and the income/capital-gains line — the candour rule applies.
A. SECTION COMMENTARY
Section 196D requires any person responsible for paying to a Foreign Institutional Investor any income in respect of securities referred to in section 115AD(1)(a) to deduct income-tax at twenty per cent. It is the withholding counterpart of section 115AD, the special regime for the taxation of FII income from securities and the capital gains thereon. By its terms the deduction is confined to the income in respect of securities; capital gains arising to the FII are excluded from section 196D (a deliberate carve-out, leaving FII capital gains outside the at-source deduction).
Treaty rate now available at source
Following the insertion (by the Finance Act, 2021) of a proviso, the deduction under section 196D is to be at twenty per cent or the rate provided in the applicable Double Taxation Avoidance Agreement, whichever is lower, where the FII furnishes a tax residency certificate and the other prescribed particulars. This allows the treaty rate to be applied at the deduction stage rather than being claimed by refund, easing the cash-flow position of treaty-resident FIIs.
Why authority is limited — candour
The provision is specialised and largely compliance-oriented; the live questions are the availability of the treaty rate and the scope of the securities-income/capital-gains line. In candour, there is no developed body of section 196D merits authority; the cognate treaty-at-source and chargeability principles govern.
B. STATUTORY POSITION (verbatim text)
Reproduced from the Income-tax Act, 1961 as amended up to the Finance Act, 2025 (the Finance Act, 2026 makes no amendment to this section). Editorial markers “***” denote text omitted by the Legislature.
196D. (1) Where any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD, not being income by way of interest referred to in section 194LD, is payable to a Foreign Institutional Investor, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof by any mode, whichever is earlier, deduct income-tax thereon at the rate of twenty per cent:
Provided that where an agreement referred to in sub-section (1) of section 90 or sub-section (1) of section 90A applies to the payee and if the payee has furnished a certificate referred to in sub-section (4) of section 90 or sub-section (4) of section 90A, as the case may be, then, income-tax thereon shall be deducted at the rate of twenty per cent or at the rate or rates of income-tax provided in such agreement for such income, whichever is lower.
(1A) Where any income in respect of securities referred to in clause (a) of sub-section (1) of section 115AD, not being income by way of interest referred to in section 194LD, is payable to a specified fund referred to in clause (c) of the Explanation to clause (4D) of section 10, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee, or at the time of payment thereof by any mode, whichever is earlier, deduct the income-tax thereon at the rate of ten per cent:
Provided that no deduction shall be made in respect of an income exempt under clause (4D) of section 10.
(2) No deduction of tax shall be made from any income, by way of capital gains arising from the transfer of securities referred to in section 115AD, payable to a Foreign Institutional Investor.
C. AUTHORITIES
Candour rule observed: section 196D is a specialised FII provision with limited authority. The statutory scheme (with section 115AD and the treaty-rate proviso) is offered.
Statutory backdrop and cognate principles
Securities income only; capital gains excluded; treaty rate at source
Principle: Section 196D withholds at 20% (or the lower treaty rate, on furnishing a TRC) on FII income in respect of securities under section 115AD(1)(a); FII capital gains are outside the section 196D deduction.
Use: Fixes the base, the rate and the treaty interaction for FII securities income.
GE India Technology Centre (P) Ltd. v. CIT (2010) 327 ITR 456 (SC) — cognate
Principle: Withholding attaches only to sums chargeable to tax under the Act, read with the treaty.
Use: Frames the chargeability enquiry underlying the section 196D deduction.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced verbatim from the bare Act; case-law citations have been web-verified. Where a section is new, narrow or substantially unlitigated, the candour rule is observed — the absence of direct authority is stated and only genuinely cognate authority is offered. This digest is for professional reference and is not a substitute for the official report of any judgment.