Section 196D | TDS on Income of foreign institutional investors from securities

CA.R.S.KALRA | Last updated: 06 March 2021

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Quick Summary

Section 196D outlines the Tax Deducted at Source (TDS) obligations for income earned by Foreign Institutional Investors (FIIs) from securities. The payer must deduct tax at a rate of 20% on income related to securities, excluding interest covered by Section 194LD. This deduction occurs at the earliest of when the income is credited or paid to the FII. Importantly, no TDS is applicable on capital gains arising from the transfer of these securities.

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.

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

1) Who is responsible to deduct tax u/s 196D?

Any person responsible for making payment to Foreign Institutional Investors

TDS on Foreign Institutional Investors Securities Income

2) Nature of Payment

Income in respect of securities referred to in section 115AD (not being interest referred to in section 194LD)

3) When to Deduct TDS under Section 196D?

At the time of credit of such income to the account of payee or at the time of payment, whichever is earlier.

For this purpose, "payment" can be in cash or by issue of a cheque or draft of by any other mode.

4) Rate of TDS under Section 196D

The rate of tax deduction u/s 196D is 20% (+ SC+H&E Cess)

5) Other key point related to Section 196D

No deduction shall be made in respect of capital gains arising from transfer of such securities.

FAQ :

Any person responsible for making a payment to a Foreign Institutional Investor is responsible for deducting tax under Section 196D.

The income subject to TDS is income from securities as referred to in section 115AD, excluding income by way of interest covered under section 194LD.

TDS must be deducted at the time of crediting the income to the payee's account or at the time of payment, whichever occurs first. Payment can be made in cash, cheque, draft, or any other mode.

The rate of TDS under Section 196D is 20%, plus applicable Surcharge and Health & Education Cess.

Yes, 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.