Taxation of FPIs

With effect from 1 April 2020, under the provisions of the Act, dividends received are taxable in the hands of the shareholder at the tax rate of 20% (plus applicable surcharge and health and education cess).

Furthermore, dividends arising from units of a business trust shall be exempt in the hands of a unitholder provided the underlying Special Purpose Vehicle (SPV) of the business trust has not opted for the beneficial tax regime under the Act. In case the underlying SPV opts for a beneficial tax regime, the dividend income shall be taxable at the rate of 20% (plus applicable surcharge and cess) under the Act.

The Indian companies / Business Trust are required to withhold taxes on such dividend paid to the non-resident shareholder, as applicable.

The total income of a non-resident investor may comprise of interest received from an Indian company / entity on debt borrowed by it or from investment in Government Securities which are taxable at the following rates (plus applicable surcharge and cess) under the Act:

FPIs may be eligible for a refund of excess taxes paid / withheld in India. A tax refund claim in India gets crystallised only after an annual tax return of income has been filed by the FPI, such tax return has been reviewed / assessed by the Indian tax authorities, and a tax refund has been determined as payable to the FPI.

Any excess tax paid / withheld on a particular source of income may be:

1. Adjusted against any other tax liabilities arising on different sources of income during the same financial year
2. In case of any excess tax discharged / withheld at source remaining at the end of the financial year, such an excess can be claimed as a reclaim from the Indian tax authorities vide lodging an annual income tax return

Such tax refunds may be received along with interest under Section 244A of the Act at the rate of 0.5% per month (i.e., 6% per annum). This interest on the refund amount would be as applicable and subject to certain conditions. The interest income received on such tax refund is taxable in India as “Income from Other Sources” in the year of receipt.,

1. The above rates are subject to the benefits available under relevant Double Tax Avoidance Agreement (‘DTAA’) and are exclusive of applicable surcharge and health & education cess.

Additionally, health & education cess of 4% on income-tax and surcharge shall be payable.

ii. In case of buyback, the cost of acquisition of such shares shall be fully allowed as a deduction under the head ‘Capital Gains’ and such loss can be fully set off against gains arising from other transactions.
iii. Long-term capital gains exceeding INR 125,000, arising from transfer of equity shares and units of equity oriented mutual funds would be taxed at the rate of 12.5% (plus surcharge and health & education cess), where in case of equity shares, the purchase and sale transaction is chargeable to STT, or in case of equity-oriented mutual funds, the sale transaction is chargeable to STT.

With a view to incentivise Sovereign Wealth Funds and Pension Funds (SWF/ PF) to invest in priority sectors, a special provision was introduced in the Act, in 2020.

As per the provisions of the Act, dividend, interest, long-term capital gains and any specified sum received from a business trust, arising to a specified person being a SWF/ PF (satisfying prescribed conditions and notified by the Central Government in its Official Gazette, upon an application made by the SWF/ PF), are tax-exempt for investments made up to March 31, 2030, in eligible infrastructure or other notified business entities provided the investments are held for a minimum of three years and subject to certain conditions.

¹Applicable only in respect of interest income and Income distributed by a mutual fund to a relevant FPI (other than capital gains income arising on transfer of units). Surcharge on dividend and capital gains capped at 15%.