Taxation of long-term capital gains in the case of Foreign Institutional Investor

The existing provisions of section 115AD of the Act inter alia, provide that where the total income of a Foreign Institutional Investor (FII) includes income by way of long-term capital gains arising from the transfer of certain securities, such capital gains shall be chargeable to tax at the rate of ten per cent. However, long term capital gains arising from transfer of long term capital asset being being equity shares of a company or a unit of equity oriented fund or a unit of business trusts, is exempt from income-tax under clause (38) of section 10 of the Act.

Consequent to the proposal for withdrawal of exemption under clause (38) of section 10 of the Act, such long term capital gain will become taxable in the hands of FIIs also. As in the case of domestic investors, the FIIs will also be liable to tax on such long term capital gains only in respect of amount of such gains exceeding one lakh rupees. The provisions of section 115AD are proposed to be amended accordingly.

This amendment will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

[Clause 32]

Long-term capital gains tax for foreign institutional investors applies above the exemption threshold after withdrawal of the exemption. Withdrawal of the statutory exemption makes long-term capital gains on equity shares, equity-oriented fund units and business trust units taxable for foreign institutional investors; the FII tax provision is amended so gains are taxed only to the extent they exceed the applicable exempt threshold, with the amendment operative from the stated assessment year onward.