Evolving the Taxation of Foreign Portfolio Investment : Clause 210 of the Income Tax Bill, 2025 Vs. Section 115AD of the Income Tax Act, 1961

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....dia's capital markets and the proliferation of alternative investment funds operating from International Financial Services Centres (IFSCs). This commentary undertakes an in-depth analysis of Clause 210, elucidating its objectives, mechanics, and implications. It then compares and contrasts the clause with the extant Section 115AD of the Income Tax Act, 1961, as well as the operational rules-Rule 21AJ and Rule 21AJAA of the Income-tax Rules, 1962  that govern the computation and attribution of income for specified funds and investment divisions of offshore banking units. The analysis highlights both the continuities and the innovations introduced by the new Bill, as well as areas where legal or practical ambiguities may arise. Objective and Purpose The legislative intent behind Clause 210 is to provide certainty and clarity in the taxation of income arising to FIIs and specified funds from investment in securities. The provision aims to: * Harmonize the tax rates and computation methods applicable to different categories of investors and types of income (interest, dividends, short-term and long-term capital gains). * Facilitate the operation of specified funds, part....

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....cessional tax rates apply only to the extent of income attributable to units held by non-residents (excluding permanent establishments in India). The manner of attribution is to be prescribed, drawing upon the computation mechanisms set out in the Rules (notably Rule 21AJ and Rule 21AJAA). Further, sub-section (3) carves out a special regime for specified funds that are investment divisions of offshore banking units, subject to conditions in Schedule VI. This reflects policy efforts to attract global fund management activity to Indian IFSCs. 4. Disallowance of Deductions (Sub-section 4) Clause 210(4) restricts the availability of deductions u/ss 26 to 61, section 93(1)(a) or (e), and Chapter VIII, where the gross total income consists solely of income in respect of securities. Where the gross total income includes both such income and other income, deductions are allowed only on the residual income. This is designed to prevent double benefits and to ensure that the concessional tax regime is not eroded through the layering of deductions. 5. Exclusion of Section 72(6) (Sub-section 5) The clause explicitly disapplies section 72(6) (relating to the carry-forward and set-off of lo....

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....me from securities for FIIs, 10% for specified funds, 30% on STCG (other than section 111A), 15%/20% for STCG u/s 111A, and 12.5% for LTCG (with 10%/12.5% for LTCG u/s 112A exceeding Rs. 1,25,000). * Clause 210 largely aligns with these rates but consolidates and clarifies the categories, and explicitly references the new sections (196, 198) for concessional gains. The rate structure is maintained, but the presentation is more systematic and transparent. * Attribution to Non-Residents: * Both provisions restrict concessional rates to income attributable to non-resident unit holders, but Clause 210 mandates prescribed calculation methods, anticipating more detailed rules and compliance. * Denial of Deductions: * Section 115AD(2) and Clause 210(4) both deny deductions for income solely from securities, and allow deductions only on the residual income where applicable. * Loss Set-Offs: * Section 115AD(3) denied the benefit of the first and second provisos to section 48 (indexation and foreign exchange adjustment) for capital gains computation, while Clause 210(5) denies the application of section 72(6), which may relate to loss set-off. The focus is consistent: to preven....

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....* Rule 21AJAA explicitly denies the use of expenditure incurred for generating the specified income to offset income from other activities or sources, thereby preventing double-dipping. * Clause 210(4)-(5) achieves a similar result at the level of the principal provision. IV. Key Differences and Harmonization * Structural Reorganization: * Clause 210 reorganizes and clarifies the regime, especially in the categorization of income streams and the explicit referencing of new sections for concessional gains. * The move from section-based references (111A, 112A) to new section numbers (196, 198) in the Bill may require careful cross-referencing and transition management. * Granularity and Anti-Abuse Measures: * Clause 210 is more granular in its references and more explicit in its anti-abuse measures, especially regarding attribution and compliance. * The rules (21AJ, 21AJAA) are expected to be updated or reissued to align with the new Bill, but the underlying principles are consistent. * Compliance Burden: * Both the existing and new regimes impose significant compliance obligations on specified funds and investment divisions, including detailed record-keeping, annu....