No. F.5(13)/SE/91/FIU
Government of India
Ministry of Finance
(Department of Economic Affairs)
(Investment Division)
North Block,
New Delhi, the 24th March 1994
Press Note

MODIFIED GUIDELINES FOR FOREIGN INSTITUTIONAL INVESTORS
(TAXATION ASPECT)

The following modifications of FII guidelines dated 14.9.92 in general, and paragraph 9(f) and paragraph 18 of those guidelines in particular, are issued by way of clarification in the light of the enactment of section 115AD of the Income-Tax Act through the Finance Act, 1992:-
(1) The taxation of income of Foreign Institutional Investors from securities or capital gains arising from their transfer, for the present, shall be as under:-
(i) The income received in respect of securities (other than units of Offshore Funds covered by section 115AB of the Income Tax Act) is to be taxed at the rate of 20%.;
(ii) Income by way of long-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 10%;
(iii) Income by way of short-term capital gains arising from the transfer of the said securities is to be taxed at the rate of 30%;
(iv) The rates of income-tax as aforesaid will be apply on the gross income specified above without allowing for any deduction under sections 28 to 44C, 57 and Chapter VI-A of the Income-Tax Act.

The expression "securities" referred to above shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contract (Regulation) Act, 1956. These include:-

(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated or other body corporate;
(ii) Government securities; and
(iii) Rights or interests in securities.

On account, of the concessional rate of income-tax on the capital gains, the provisions currently available to non- residents for protection from fluctuation of rupee value against foreign currency for computing capital gains arising from the transfer of shares in, or debentures of, an Indian company, will not apply to the Foreign Institutional Investors covered under section 115AD of the Income-Tax Act. Further, the benefit of cost inflation indexation will also not be available to FIIs while computing long-term capital gains arising to them on transfer of securities.

Shares in a company shall have to be held for more than 12 months in order to qualify as a long-term capital asset. other securities shall have to be held for more than 36 months in order to qualify as a long term capital asset.

(2) The expression "Foreign Institutional Investor" has been defined in section 115AD of the Income-Tax Act to mean such investors as the Central Government may, by notification in the official Gazette, specify in this behalf. The FIIs as are registered with Securities and Exchange Board of India will be automatically notified by the Central Government for the purposes of section 115AD.
(3) Income of Foreign Institutional Investors from securities shall be subject to deduction of tax at source. However, no deduction of tax shall be made from any income by way of capital gains arising from the transfer of securities. In order that the tax on capital gains arising to FIIs can be realised, each FII, while applying for initial registration with Securities and Exchange Board of India, will have to specify an agent, including a person who is treated as an agent under section 163 of the Income-Tax Act for the said purpose.