Section 115ACA of ITA, 1961 : Section 115Aca: Tax On Income From Global Depository Receipts Purchased In Foreign Currency Or Capital Gains Arising From Their Transfer

Explanation using Example

Imagine John, an Indian resident, works as a software engineer for an Indian IT company that has a subsidiary in Germany. The company is recognized as operating in a "specified knowledge based industry or service," specifically information technology service. John was offered Global Depository Receipts (GDRs) as part of an Employee Stock Option Plan approved by the Indian government. He purchased these GDRs in foreign currency.

After a few years, the value of the GDRs appreciates, and John decides to sell them, resulting in long-term capital gains. Additionally, during the same fiscal year, he receives dividends from these GDRs (which are not covered by section 115-O).

When John files his income tax return, he must include these dividends and capital gains in his total income. However, under Section 115ACA, his tax liability on these specific incomes is calculated separately:

1. Dividends from the GDRs are taxed at a flat rate of 10%.
2. Long-term capital gains from the sale of GDRs are also taxed at a flat rate of 10%.
3. The rest of his income (after excluding the dividends and capital gains from GDRs) is taxed according to the regular income tax slabs applicable to him.

No deductions under other provisions of the Income-tax Act are allowed on the dividend income from the GDRs if that is his only income. If he has other income, deductions are allowed on his gross total income minus the GDR-related income.