FPI Investors are typically seized by the below costs. FPIs are advised to check with their respective service
provider, intermediaries for further details on costs involved.
| 1 | Income Tax- Permanent Account
Number (PAN) Processing Charge | Tax Consultant |
- |
| 2 | FPI Registration Processing fees | Custodian / DDP | Between Investor and Custodian / DDP |
| 3 | FPI Registration | SEBI Fees | As per SEBI norm- Cat. I, II, III. Collected
by Custodian / DDP. |
| 4 | Trading Brokerage fees | Brokers | Includes SEBI Turnover fees, Stamp
duty, Service Tax and t ypically exclusive
of Securities Transaction Tax |
| 5 | Safekeeping and Transaction | Custodian / DDP |
- |
| 6 | FX Charges | Banks | Settlements are in local currency (INR) |
| 7 |
Income Tax |
Income Tax
Dept. |
- |
| 8 |
Tax Services including Annual Return
filing services |
Tax Consultant |
- |
|
Taxation
| A | Tax Framework - an overview |
| B | Taxation under the provisions of the Income - tax Act, 1961 (IT Act) |
| C | Taxation under the provisions of the Double Taxation Avoidance Agreement (DTAA) |
| D | Tax administration |
|
Appointment of a tax consultant
Prior to carrying out activities in India and to operationalize the cash and custody accounts, the FPI is
required to obtain an income-tax registration number i.e. PAN (Permanent Account Number). The Tax
Consultant will assist the FPI in obtaining the PAN.
Tax Consultants also render key compliance services like maintaining transaction details of the
investments made by the FPI in India, issuing periodic remittance letters to facilitate repatriation of funds
of the FPI (through the DDP/Local Bank), filing the annual income-tax return, etc.
- Tax Framework
The Indian tax laws provide for a special concessional tax framework for investments made by FPIs in India.
Typically, the following types of incomes are earned by FPIs in a financial year1 on account of investments in
securities:
- Dividend
- Interest and
- Capital gains earned on transfer of securities.
- Taxation under the provisions of the IT Act
- Dividend
Income earned by way of dividend declarations and distributions from an Indian company is exempt from
tax in the hands of the recipient under the provisions of the IT Act. However, the Indian company paying the
dividend will be subject to a dividend distribution tax (DDT) at the rate of 15% (plus applicable surcharge2
and education cess). DDT is required to be computed by grossing up the dividend payable3.
- Interest
A concessional tax rate of 5% (plus applicable surcharge4 and education cess) is provided on interest
income earned by an FPI from:
- Investment in Government securities; or
- Investment in Rupee denominated bonds of an Indian company (provided the rate of
interest does not exceed the rate notified by the Central Government as mentioned below). This is
applicable with respect to interest received before 1 July 2020.
The rate notified by the Central Government for Rupee denominated bonds issued:
| Prior to 1 July 2010 |
5% over the SBI Base Rate as on 1 July 2010 |
| After 1 July 2010 |
5% over the SBI Base Rate as on date of issue |
|
|
1A financial year in India runs from 1 April to 31 March of the following calendar year
2Surcharge at the rate of 12% (on the base tax rate) plus education cess (on the base tax rate plus surcharge) would apply
3The effective rate of DDT following the grossing-up mechanism would be 20.358%
4In case of corporate taxpayers, a surcharge of 2% (where total taxable income exceeds INR 10 million but not INR 100 million) or 5% (where total taxable
income exceeds INR 100 million) plus an education cess of 3% on income-tax and surcharge would be levied. Further, in case of non-corporate taxpayers,
a surcharge of 12% (where total taxable income exceeds INR 10 million) plus an education cess of 3% on income-tax and surcharge would be levied.
However, in case of non-corporate taxpayers (other than firms), a surcharge of 15% (where total taxable income exceeds INR 10 million) plus an education cess of 3% on income-tax and surcharge would be levied. The increase in the surcharge rate will be applicable (with effect from April 1, 2016), once the Finance Bill, 2016 has been approved by both houses of the Parliament and accorded assent by the President of India. Until then, the surcharge rate presently applicable (i.e. 12%) shall continue.
Interest earned from other securities (including from Rupee denominated bonds of an Indian company
where the rate of interest exceeds the rate notified by the Central Government) shall be taxable at 20% (plus
applicable surcharge
4 and education cess).
Capital Gains
- Characterization of income
Income earned by an FPI from sale of Indian securities will be characterized as 'capital gains' since the securities held by an FPI (in accordance with FPI Regulations) are deemed to be a capital asset under the provisions of the IT Act.
- Taxability of capital gains
The taxability of capital gains earned by an FPI on transfer of Indian securities broadly depends on:
- type of security transferred
- the period for which the securities were held prior to their transfer
- where Securities Transaction Tax (STT) is paid
The gains/losses are classified as short-term or long-term depending on the period of holding discussed below
| 1 | Capital gains/ loss arising from the transfer of listed equity shares/ units of an equity orientated mutual fund/ other listed securities | 12 months or less before date of sale | Short-term |
| More than 12 months before date of sale | Long-term |
| 2 | Capital gains/ loss arising from the transfer of securities other than those mentioned above | 36 months or less before date of sale | Short-term |
| More than 36 months before date of sale | Long-term |
|
|
Key tax rates
4 applicable to FPIs as prescribed under the IT Act for the income earned in respect of
securities with effect from 1 April 2017 are as under
5:
| Capital gains6 on transfer
of listed equity shares /
equity oriented mutual
fund on market (STT is
paid) | Long-term | Nil | Nil |
Nil |
Nil |
| Short-term | 15.759% | 16.223% |
16.995% |
17.768% |
| Capital gains on transfer
of debt securities
(including debt mutual
funds) |
Long-term |
10.506% |
10.815% |
11.330% |
11.845% |
| Short-term |
31.518% |
32.445% |
33.990% |
35.535% |
Sale of listed derivatives
(listed futures and
options) |
Short-term |
31.518% |
32.445% |
33.990% |
35.535% |
| Other Income |
- |
42.024% |
43.260% |
33.990% |
35.535% |
|
5 The tax rates may be amended in subsequent Union Budgets of the Government of India. Hence, kindly reach out to your TAX CONSULTANT for the most
recent tax rates applicable
6 For non-corporate tax-payers (other than firms), the surcharge rate is proposed to be increased from 12% to 15%. The increase in the surcharge rate will be applicable (with effect from April 1, 2016), once the Finance Bill, 2016 has been enacted into law i.e. approved by both houses of the Parliament and accorded assent by the President of India. Until then, the surcharge rate presently applicable (i.e. 12% shall continue). The table above mentions the effective tax rate.
7 Inter-se set-off of capital gains and losses allowed subject to rules, carry forward of losses allowed up to 8 years
The tax rates mentioned above are subject to relief under Double taxation Avoidance Agreement (DTAA), as applicable (discussed later in this section).
Hitherto, long-term capital gains arising on transfer of equity shares of a company or units of an equity oriented fund were exempt from tax provided :
- The sale transaction has been concluded on or after 1 October 2004
- The sale transaction is chargeable to STT
With effect from 1 April 2017, amendments brought in the Finance Act, 2017 impose a restriction for claiming an exemption of long-term capital gains tax in cases where :
- The equity shares are acquired on or after 1 October 2004
- The purchase transaction was not subject to levy of STT
The amendment thus seeks to provide the long-term capital gains exemption only where STT has been paid both at the time of purchase as well as sales.
However, the Central Board of Direct Taxes (CBDT), in order to protect certain genuine cases, has issued a notification providing a negative list of transactions for which the benefit of exemption would not be available.
STT
Securities transacted on a Recognized Stock Exchange in India are subject to STT levied as follows:
| Purchase and sale of equity shares on the stock exchange |
0.100% |
Purchaser/
Seller
|
| Sale/ redemption of units of equity oriented mutual fund |
0.001% |
Seller |
| Sale of an option in security on the stock exchange |
0.050%8 |
Seller |
| Sale of an option in security where option is exercis ed on the stock
exchange |
0.125%9 |
Purchaser |
| Sale of a future in securities on the stock exchange |
0.010% |
Seller |
|
|
8 STT would be computed on the amount of option premium
9 STT would be computed on the settlement price
No STT is payable on transaction in debt securities/ units of debt mutual funds.
Indirect Transfer provisions
Indirect transfer provisions were introduced in the IT Act by the Finance Act, 2012 to clarify that an asset being share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives its value (directly or indirectly) substantially from assets situated in India.
The Finance Act, 2017 has introduced an amendment to exempt asset or capital asset, being share or interest, held by investors by way of investment, directly or indirectly, in specified FPIs (being SEBI registered Category I and Category II FPIs) from the purview of indirect transfer provisions.
GST
Commission charged by stock brokers to FPIs prior to 1 July 2017 was subject to VAT (Service tax) at the rate of 14%10 as is discharged by the stock broker.
With effect from 1 July 2017, the Goods and Services Tax (GST) law has been enacted in substitution of inter alia service tax on services. Under the GST regime, the commission charged by stock brokers to FPIs is subject to a tax rate of 18%.
Service tax
Commission charged by stock brokers to FPIs is subject to VAT (Service tax) at the rate of 14%
10 as is
discharged by the stock broker.
10 The effective service tax rate is proposed to be increased to 15% comprising service tax at the rate of 14% plus Swachh Bharat Cess of 0.5% plus a new Krishi Kalyan Cess of 0.5% (effective from 1 June 2016 after the Finance Bill, 2016 is enacted into law).
C. Taxation under the provisions of DTAA
Where the Government of India has entered into an agreement with the Government of any other country
for avoidance of double taxation (DTAA), then in relation to a taxpayer to whom such agreement applies,
provisions of DTAA to the extent more beneficial will override the provisions of the IT Act. For example, DTAA
entered by Government of India with countries like Mauritius and Singapore exempt capital gains arising
from transfer of securities in India (subject to compliance with conditions prescribed in the respective
DTAA).
In order to avail beneficial provisions of the DTAA, the FPI will have to obtain a tax residency certificate (TRC)
confirming its tax residency under the DTAA from the home country tax authorities and maintain a
self-declaration (in Form 10F) where the TRC does not contain the prescribed particulars.
Update — Protocol to India-Mauritius DTAA dated 10 May 2016
On 10 May 2016, India signed a Protocol with Mauritius to re-negotiate the existing India-Mauritius DTAA. As per the Protocol, India gets taxation rights on capital gains arising from alienation of shares acquired on or after 1 April 2017 in a company resident in India with effect from financial year 2017-18, while simultaneously protection to investments in shares acquired before 1 April 2017 has also been provided. Further, in respect of capital gains arising during the transition period from 1 April 2017 to 31 March 2019, the tax rate will be limited to 50% of the domestic tax rate of India, subject to the fulfillment of the conditions in the Limitation of Benefits (LOB) Article.
Update - Protocol to India-Singapore DTAA dated 30 December 2016
The Government of India has re-negotiated the India-Singapore DTAA on the same lines as the India-Mauritius DTAA giving taxation rights on sale of shares acquired on or after 1 April 2017 to India and providing for a concessional rate of 50% of the domestic tax rate of India for a two year transition period, subject to fulfilment of conditions in the LOB Article.
Under both the Mauritius and Singapore DTAAs, capital gain on securities other than shares for example - debt securities, listed derivatives, etc. will continue to be exempt from tax in India under the respective DTAA, subject to domestic General Anti-Avoidance Rules as discussed below.
General Anti-Avoidance Rules (GAAR)
India has GAAR provisions as part of the IT Act. GAAR applies to any arrangement where the main purpose is to obtain tax benefit. GAAR as prescribed under the IT Act, has the power to override DIM.
The provisions of GAAR comes into effect from 1 April 2017 (existing investments up to 31 March 2017 to be grandfathered).
D. Tax administration
Obtain a Permanent Account Number (PAN)
To obtain a PAN, an application is required to be filed in Form 49AA with the Indian authorities along with
the documentary evidence for identity and address of the applicant.
Withholding tax
No withholding tax applies on capital gains income payable to an FPI. The FPI will need to self-discharge
taxes, prior to remittance or on quarterly advance tax due dates, whichever is earlier, based on capital gains
tax computed by the Tax Consultant. The person responsible for paying any other sum chargeable to tax to
an FPI (other than capital gains) will be required to withhold tax at source at the applicable tax rate.
Payment of taxes on income earned in India
A taxpayer is required to estimate tax liability for a financial year and discharge the same by way of 'advance
tax' on the due dates prescribed (mentioned below):
| June 15 |
15% |
| September 15 |
45% |
| December 15 |
75% |
| March 15 |
100% |
|
Delay/ deferment in deposit of advance tax has interest implications
Filing of annual income-tax return
Income earned by the FPI in India is required to be reported in an annual income-tax return to be filed with the CBDT as per the following schedule:
| Non-corporate taxpayer |
Before 31 July following the financial year* |
| Corporate taxpayer |
Before 30 September following the financial year* |
|
* Extended to 30 November, following the financial year where transfer pricing provisions apply to the taxpayer.
The above information provided is for general guidance only. For your specific requirements you are advised to consult your Tax Consultant with respect to tax implications arising out of their investments in India.