TaxTMI 
TaxTMI 
TaxTMI 
Analysis of Tax Deduction at Source on Securities Income of FIIs and Specified Funds under Indian Tax Law : Clause 393(2)[Table: S.No. 15 & 16], Clause 393(4)[Table: S.No. 16 & 17] of Income Tax Bill, 2025 Vs. Section 196D of Income Tax Act, 1961
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....ted withholding tax regime for FIIs, and, following the emergence of new fund structures and investment vehicles, the law has evolved to address specified funds and related entities. With the introduction of the Income Tax Bill, 2025, Clause 393 proposes a comprehensive overhaul of the tax deduction at source (TDS) regime, including detailed tables for payments to both residents and non-residents. Of particular relevance are Clause 393(2) [Table: S.No. 15 & 16] and Clause 393(4) [Table: S.No. 16 & 17], which directly address TDS on income from securities payable to FIIs and specified funds, and the circumstances where such deduction is not required. This commentary undertakes a detailed analysis of these provisions, their legislative inte....
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....15 * Nature of Income: Any income in respect of securities referred to in section 210(1) (Table: Sl. No. 1). * Payee: Any Foreign Institutional Investor. * Payer: Any person. * Rate: As per Note 2. This provision mandates that any person responsible for making payment of income in respect of specified securities to a Foreign Institutional Investor must deduct tax at source at the rate specified in Note 2. The reference to section 210(1) and Table: Sl. No. 1 is critical, as it defines the universe of "securities" for this purpose. Note 2 (not fully reproduced in the excerpt) typically clarifies the applicable rate, which may be the rate prescribed under the Act or the rate as per the relevant DTAA, whichever is lower, subject to th....
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....ble: S.No. 17 * Provision for TDS: Income of Specified Fund from securities referred to in section 393(2)(Table: Sl. No. 16). * Condition for No Deduction: Income exempt at Schedule VI (Table: Sl. No. 1) to (Table: Sl. No. 4). This provision ensures that where the income of a specified fund is exempt under the relevant Schedules (typically corresponding to the exempt income u/s 10(4D) of the 1961 Act), no TDS is to be effected. This prevents unnecessary withholding and subsequent refund procedures where the underlying income is statutorily exempt. Practical Implications A. For Foreign Institutional Investors (FIIs) The provisions ensure that FIIs are subject to TDS only on income from securities (such as dividends, interest, etc.), ....
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....tween revenue protection (by ensuring TDS on taxable income) and administrative efficiency (by exempting TDS on capital gains and exempt income). The requirement for documentation to avail treaty rates helps prevent abuse and ensures that only eligible entities benefit from concessional rates. Comparative Analysis with Section 196D of the Income Tax Act, 1961 A. Scope and Structure Both Section 196D and Clause 393(2) of the new Bill address TDS on income from securities payable to FIIs and specified funds. However, the Bill adopts a tabular format, making the provisions more accessible and operationally clear. The structure allows for easy identification of the applicable rate, payee, payer, and nature of income. B. TDS Rates * FIIs: ....
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....utes. * Interaction with DTAAs: While both regimes provide for the application of lower treaty rates, practical issues may arise regarding documentation, timing, and the scope of "beneficial ownership." * Specified Funds: The definition and eligibility criteria for "specified funds" must be clear to prevent misuse or unintended exclusion. G. Unique Features of the Bill * The Bill's Clause 393(4) provides a consolidated table of exemptions from TDS, which is more user-friendly than the scattered provisos and explanations in the 1961 Act. * The Bill's approach allows for easier updates and amendments, as new categories of payees or types of income can be added to the tables without redrafting the entire section. H. Internati....
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....lytics and risk assessment by the tax authorities. Potential Issues and Areas for Clarification * Definition Alignment: The definitions of "securities", "specified fund", and "income" should be harmonized across the substantive and procedural provisions to avoid confusion or litigation. * Applicability of DTAA: While the general law provides for DTAA override, explicit mention in the TDS provisions (as in the 1961 Act) would enhance clarity for payers and recipients. * Procedural Compliance: The onus on payers to identify exempt income (especially for specified funds with mixed portfolios) may require robust documentation and, potentially, certification from the recipient fund. * Transition Issues: Implementation of the new Bill ma....