Section 196D of ITA, 1961 : Section 196D: Income Of Foreign Institutional Investors From Securities

Explanation using Example

Imagine a foreign institutional investor (FII) from Germany holds shares in an Indian company. This Indian company announces dividends for its shareholders. According to Section 196D(1) of the Income-tax Act, 1961, when the Indian company distributes the dividend to the FII, the company is responsible for deducting a 20% tax on the income generated from the shares before handing over the dividend to the FII. However, the proviso to this section clarifies that no tax should be deducted on dividends that are covered under Section 115-O (which relates to dividends distributed by domestic companies that have already paid dividend distribution tax).

Furthermore, if the FII decides to sell some of its shares in the Indian company and makes a profit from the sale (capital gains), as per Section 196D(2), the buyer or the broker facilitating the sale is not required to deduct any tax on the capital gains income payable to the FII. This is because Section 115AD specifically exempts FIIs from tax deduction at source (TDS) on capital gains arising from the transfer of securities.