Tax on Dividends, Royalty and Fees for Technical Services of Foreign Companies (Income Tax Act 2025, Section 207)

Section 207 of the Income-tax Act, 2025 sets special tax rates for a foreign company or a non-resident who is not a company that earns dividends, certain interest, mutual fund unit income, royalty or fees for technical services (FTS) from India. The headline rate is 20% on the gross amount, with 10% for dividend from an International Financial Services Centre (IFSC) unit. No expenses can be deducted against this income. Figures below are from the Act as amended by the Finance Act, 2026 (tax year 2026-27).

Who does section 207 apply to?

Section 207(1) and (2) apply to the total income of a non-resident (not being a company) or of a foreign company that includes the income listed in the section's tables. Each listed item is taxed at its own rate, and the rest of the total income is taxed at "rates in force".

What are the tax rates under section 207(1)?

Sl. No.	Income	Rate
1	Dividend (other than Sl. No. 2)	20%
2	Dividend received from a unit in an IFSC	10%
3	Interest from Government or an Indian concern on money borrowed in foreign currency (other than Sl. Nos. 4 and 5)	20%
4	Interest from an infrastructure debt fund (Schedule VII, Table Sl. No. 46)	5%
5	Interest of the nature and extent in section 393(2) (Table: Sl. Nos. 2, 3 and 4)	As in section 393(2)
6	Distributed income that is interest under section 393(2) (Table: Sl. No. 6)	As in section 393(2)
7	Units, bought in foreign currency, of a Mutual Fund (Schedule VII, Table Sl. No. 20 or 21) or of the Unit Trust of India	20%
8	Remaining total income	Rates in force

What is the tax rate on royalty and fees for technical services?

Under section 207(2), royalty and FTS received from the Government or an Indian concern are each taxed at 20%, but only if the agreement was made after 31 March 1976 and one of these holds:

• the agreement is approved by the Central Government (where it is with an Indian concern); or
• the agreement relates to a matter in the Government's industrial policy for the time being in force, and it is as per that policy.

Royalty and FTS covered by section 59(1) are left out of this rate. "Royalty" and "fees for technical services" have the meanings in section 9 (sub-sections (6) and (7)). FTS there means consideration for managerial, technical or consultancy services, and excludes consideration for construction, assembly, mining or like projects undertaken by the recipient, and income that is chargeable as salary.

What if royalty is for a book or software?

Section 207(3) removes the approval and policy conditions for two kinds of royalty: the transfer or grant of rights in a copyright in any book to an Indian concern, and rights in computer software to a person resident in India. The 20% rate in section 207(2) then applies without conditions (a) or (b).

Can expenses be deducted from this income?

No. Section 207(5) disallows any deduction or allowance under sections 28 to 58, 60 and 61 and section 93 when computing income covered by section 207(1) and (2). The rate applies to the gross amount.

Are Chapter VIII deductions available?

Section 207(6) says:

• if gross total income consists only of the income in section 207(1) (Table: Sl. Nos. 1 to 7), no deduction is allowed under Chapter VIII and Schedule XV;
• if it includes such income along with other income, gross total income is reduced by the section 207(1) income and Chapter VIII deductions are worked out on the reduced amount.

Section 207(7) keeps the section 147 deduction available to a Unit of an IFSC.

Does the foreign company have to file a return?

Not always. Under section 207(8), a return under section 263(1) is not necessary if both conditions hold:

1. the total income for the tax year consisted only of income in section 207(1) (Table: Sl. Nos. 1 to 7) and section 207(2) (Table: Sl. Nos. 1 and 2); and
2. tax deductible at source under Chapter XIX-B was deducted from that income at a rate not less than the rate in section 207(1) and (2).

Can a tax treaty (DTAA) give a lower rate than 20%?

Yes, where India has a tax treaty with the foreign company's country. Section 159(4) says that for an assessee to whom a treaty applies, the Act applies only to the extent it is more beneficial, so the lower of the Act rate and the treaty rate is the one that works. The treaty rate itself is not in the Act. Read it in the specific treaty.

A non-resident can claim treaty relief only if (section 159(8)) it obtains a certificate of residence from the Government of its country or territory, and provides such other documents and information as are prescribed. Section 159(6) adds that Chapter XI (anti-avoidance) applies even where it is not beneficial to the assessee. Terms such as "royalty" take the meaning given in the treaty where the treaty defines them (section 159(7)).

How is the tax worked out? Two examples (tax year 2026-27)

Example 1: foreign company with dividend and approved royalty. Assumptions: Orion Holdings, a foreign company, receives Rs 10,00,000 dividend from an Indian company, and Rs 6,00,000 royalty from an Indian concern under an agreement made in 2019 and approved by the Central Government. Its only other income is Rs 4,00,000 taxed at rates in force (not computed here).

Step	Income	Rate	Tax
Dividend, Sl. No. 1	Rs 10,00,000	20%	Rs 2,00,000
Royalty, section 207(2) Sl. No. 1	Rs 6,00,000	20%	Rs 1,20,000
Total on special-rate income	Rs 16,00,000		Rs 3,20,000

Expenses Orion incurred to earn the dividend or royalty cannot reduce Rs 16,00,000 (section 207(5)). The Rs 4,00,000 is taxed separately at rates in force. Orion has other income, so section 207(8) does not excuse the return.

Example 2: non-resident individual with IFSC dividend and foreign-currency interest. Assumptions: Mr. Tan, a non-resident individual, receives Rs 5,00,000 dividend from a unit in an IFSC and Rs 8,00,000 interest from an Indian concern on money it borrowed in foreign currency (not an infrastructure debt fund or section 393(2) interest).

Step	Income	Rate	Tax
IFSC dividend, Sl. No. 2	Rs 5,00,000	10%	Rs 50,000
Foreign-currency interest, Sl. No. 3	Rs 8,00,000	20%	Rs 1,60,000
Total	Rs 13,00,000		Rs 2,10,000

Section 207 sets these base rates. Any surcharge or cess is outside what this section says, so check it separately before quoting a final figure.

Real-life scenarios

Software licence. Meena runs an Indian company that pays a licence fee to a foreign company for software rights. The foreign company has no Central Government approval for the agreement. Because section 207(3) covers computer software rights granted to a person resident in India, the approval and policy conditions in section 207(2)(a) and (b) are not applied, and the 20% rate can still apply.

Royalty through a branch. Ravi's Indian company pays royalty to a foreign company that runs a permanent establishment in India, and the licensed right is effectively connected with it. Section 59(1) taxes this as business income, so section 207(2) does not apply to it. The foreign company must then keep books and get them audited under section 59(4).

Dividend only, tax already deducted. A foreign company's only India income for the year is Rs 3,00,000 of dividend, and the payer deducted tax at 20% under Chapter XIX-B. Both conditions of section 207(8) are met, so a return under section 263(1) is not necessary.

Common mistakes

• Claiming expenses against dividend, royalty or FTS. Section 207(5) does not allow them.
• Applying 20% to royalty without checking the agreement date, approval or industrial policy condition, unless section 207(3) applies.
• Using section 207(2) for royalty that is effectively connected with an Indian permanent establishment, which falls under section 59(1).
• Skipping the return when other income exists. Section 207(8) works only if the total income is entirely from the listed items.
• Ignoring the treaty. Without a residence certificate from the home country, treaty relief under section 159(8) cannot be claimed.
• Treating 10% as the dividend rate for all cases. The 10% is only for dividend from an IFSC unit.

Quick reference

Point	Rule	Provision
Dividend	20% (10% from IFSC unit)	207(1), Sl. Nos. 1, 2
Royalty, FTS	20% each	207(2), Sl. Nos. 1, 2
Agreement date	After 31 March 1976	207(2)
Expenses	Not deductible	207(5)
Return not needed	Only listed income, TDS at not less than these rates	207(8)

Where this is in the Act

• Section 207: rates, conditions, no-deduction rule, return exemption.
• Section 9(6) and 9(7): meaning of royalty and fees for technical services.
• Section 159(4), (6), (8): treaty relief, anti-avoidance override, residence certificate.
• Section 59: royalty and FTS of a specified assessee with a permanent establishment in India.
• Section 393(2): TDS on payments to non-residents.
• Section 263(1): return of income.

For the withholding side, see TDS on payments to non-residents and TDS on professional fees and technical services. For a CA firm, tracking which clients have foreign payers, agreements on file and returns pending is a workflow problem, and Finexo's practice management software keeps those deadlines and document checklists in one place. It does not compute tax. This article is general information, not tax advice.