Tax on FPI and Foreign Institutional Investor Income: Rates under the Income Tax Act 2025

Foreign portfolio investors are taxed on India-sourced securities income at flat special rates under section 210 of the Income-tax Act, 2025. A Foreign Institutional Investor (FII) pays 20% on income from securities, 30% on most short-term capital gains, 20% on short-term gains on STT-paid listed equity, and 12.5% on long-term capital gains. Two sister sections cover offshore funds (section 208) and non-residents holding foreign-currency bonds or Global Depository Receipts (section 209).

This guide explains who each section covers, the rate table, what deductions are blocked, and the forms a specified fund must file. Figures come from the Act as amended by the Finance Act, 2026 and the Income-tax Rules, 2026 (tax year 2026-27). It is information, not tax advice. Surcharge, cess and treaty relief are outside the text reviewed here and are not included in any example.

Which section applies to which foreign investor?

How is an FII taxed under section 210?

Section 210(1) taxes each kind of income at its own rate. The rest of the investor's total income is taxed at the rates in force.

Sl. No.	Income	Rate
1	Income from securities, other than units referred to in section 208	20% for an FII; 10% for a specified fund
2	Short-term capital gains on such securities, other than those in section 196	30%
3	Short-term capital gains referred to in section 196 (listed equity shares, equity-oriented fund units or business trust units on which STT is paid)	20%
4	Long-term capital gains on such securities, other than those in section 198	12.5%
5	Long-term capital gains referred to in section 198, to the extent above Rs 1,25,000	12.5%
6	All other total income	Rates in force

"Foreign Institutional Investor" means an investor specified in a notification by the Central Government (section 210(6)(a)). "Securities" has the meaning in section 2(h) of the Securities Contracts (Regulation) Act, 1956. A "specified fund" is defined in Schedule VI, Note 1.

Can an FII claim deductions against this income?

Mostly not. Under section 210(4)(a), if the gross total income consists only of the income at Sl. No. 1 (securities income), no deduction is allowed under sections 28 to 58, 60 and 61, section 93(1)(a) or (e), or Chapter VIII.

If the gross total income also has other income, section 210(4)(b) reduces the gross total income by the Sl. No. 1 to 5 income, and Chapter VIII deductions are allowed as if that reduced figure were the gross total income. Section 210(5) also switches off section 72(6) for the capital gains at Sl. No. 2 to 5.

How is a specified fund taxed on only the non-resident share?

For a specified fund, section 210 applies only to the income attributable to units held by non-residents who do not hold them through a permanent establishment in India (section 210(2)). Rule 140 gives the formulas.

• Capital gains (Sl. Nos. 2 to 5): income from the transfer multiplied by the ratio of the fund's daily assets under management held by such non-residents to its daily total assets under management, from the date of acquisition to the date of transfer (rule 140(1)).
• Securities income (Sl. No. 1): income received multiplied by the ratio of non-resident-held assets under management to total assets under management on the date of receipt (rule 140(2)).

The fund must file an annual statement in Form No. 69 by the due date in section 263(1)(c). Without it, the concessional rates are not available for that income (rule 140(3) and (4)).

Where the specified fund is an investment division of an offshore banking unit, section 210(3) limits the benefit to the income of the investment division, which must be a Category-I portfolio investor under the SEBI (Foreign Portfolio Investors) Regulations, 2019. Rule 143 sets the computation, bars expenditure incurred on this income from being deducted from any other income, and requires Form No. 70 by the same due date.

What about offshore funds and units bought in foreign currency (section 208)?

An "overseas financial organisation" (an Offshore Fund) is a fund or body established under the laws of another country that has an investment arrangement in India with a public sector bank, a public financial institution or a Schedule VII mutual fund, and the arrangement is approved by SEBI (section 208(3)(a)). Section 208(1) then taxes:

Income	Rate
Income received on units purchased in foreign currency	10%
Long-term capital gains on transfer of those units	12.5%
Remaining total income	Rates in force

The deduction block mirrors section 210. If the gross total income is only unit income or long-term gains on units, no deduction is allowed under sections 28 to 58, 60 and 61, section 93(1)(a) or (e), or Chapter VIII (section 208(2)).

How are non-residents taxed on foreign-currency bonds and GDRs (section 209)?

Section 209 applies to a non-resident. Interest on notified Indian company bonds, or on public sector company bonds sold by the Government and bought in foreign currency, is taxed at 10%. Dividends on qualifying Global Depository Receipts bought in foreign currency through an approved intermediary are also taxed at 10%. Long-term capital gains on transfer of those bonds or GDRs are taxed at 12.5%, and the rest of the income at rates in force.

Three further points from section 209:

• Section 72(6) does not apply to the long-term gains at Sl. No. 3 (section 209(3)).
• A return under section 263(1) is not required if the total income is only the interest and GDR dividend above and tax was deducted at source under Chapter XIX-B (section 209(4)).
• Bonds or GDRs received in an amalgamated or resulting company because of a holding in the amalgamating or demerged company keep the same treatment (section 209(5)).

Worked example 1: an FII's tax for 2026-27

Assumptions: Orion Global Fund is an FII under section 210. It has no other income, and all gains are on securities. Tax year 2026-27. Surcharge and cess are excluded.

Income	Amount (Rs)	Taxable base (Rs)	Rate	Tax (Rs)
Interest on securities (Sl. 1)	10,00,000	10,00,000	20%	2,00,000
STCG on STT-paid listed equity (Sl. 3)	5,00,000	5,00,000	20%	1,00,000
Other STCG (Sl. 2)	2,00,000	2,00,000	30%	60,000
LTCG on STT-paid listed equity (Sl. 5)	8,00,000	8,00,000 - 1,25,000 = 6,75,000	12.5%	84,375
Other LTCG (Sl. 4)	3,00,000	3,00,000	12.5%	37,500
Total tax before surcharge and cess				4,81,875

Check: 2,00,000 + 1,00,000 + 60,000 + 84,375 + 37,500 = 4,81,875. Because the gross total income here includes capital gains as well as securities income, section 210(4)(b) applies: the gross total income is reduced by all the Sl. No. 1 to 5 income, leaving nil, so there is nothing left for Chapter VIII deductions.

Worked example 2: a specified fund's non-resident share

Assumptions: Meridian Fund is a specified fund. In the year it earns Rs 1,00,000 of income from securities (Sl. 1). On the date it receives this income, 60% of its assets under management are held by non-resident unit holders who have no permanent establishment in India.

1. Attributable income under rule 140(2): X = Y x Z = 1,00,000 x 60% = Rs 60,000.
2. Rate for a specified fund at Sl. No. 1: 10%.
3. Tax under section 210 on that share: 60,000 x 10% = Rs 6,000.

The remaining Rs 40,000 is outside section 210(1) for the fund and is taxed under the other provisions of the Act. The concession is available only if Form 69 is filed on time.

Real-life example 1: a fund and a bond

Ravi manages an offshore fund set up in Mauritius. It has an arrangement with a public sector bank in India that SEBI has approved. The fund buys units of a Schedule VII mutual fund in foreign currency and later sells them at a long-term gain. Because it fits the definition in section 208(3), the gain is taxed at 12.5% and the unit income at 10%.

Real-life example 2: an individual holding a notified bond

Meena lives abroad and has never filed an Indian return. She bought a notified Indian company bond in foreign currency and earned only interest on it. Tax was deducted at source under Chapter XIX-B. Under section 209(4) she does not need to file a return for that year. Had she also sold shares at a gain, her total income would include more than Sl. Nos. 1 and 2, and the return exemption would not apply.

Is interest on government securities taxed for an FII?

Not where Schedule IV, Sl. No. 13D applies. It exempts interest on a Government security, and capital gains on its sale, exchange or transfer, when the recipient is a Foreign Institutional Investor. The exemption depends on furnishing information in the prescribed form and manner. "Government security" has the meaning in section 2(f) of the Government Securities Act, 2006, and "Foreign Institutional Investor" has the section 210(6)(a) meaning (Schedule IV, Note 4). Sl. No. 13E gives the same exemption to the Bank for International Settlements. Check the notified form and manner before treating a particular holding as exempt, and keep these amounts out of the section 210(1) rate table.

Is tax deducted at source on FII income?

Yes, on securities income. Section 393(2), Table Sl. No. 15 covers income in respect of securities under section 210(1) (Sl. No. 1) paid to an FII, and Sl. No. 16 covers the same income paid to a specified fund at 10%. Capital gains from the transfer of securities payable to an FII are in the no-deduction list that points to Sl. No. 15, so TDS is not the collection route for those gains. They are taxed through the FII's own return.

Does the Act use "FPI" or "FII"?

The tax sections say Foreign Institutional Investor, defined by Central Government notification. A SEBI-registered FPI is taxed under section 210 only if it falls within that notification, so check the notification, not the SEBI category name.

Does the General Anti Avoidance Rule apply to FIIs?

Rule 128(1)(b) keeps Chapter XI (GAAR) from applying to an FII that is an assessee, has not taken benefit of a section 159 treaty, and invested in listed or unlisted securities with the competent authority's prior permission under the SEBI (Foreign Institutional Investors) Regulations, 1995. Rule 128(1)(c) gives the same carve-out to a non-resident who invests in an FII through offshore derivative instruments. Rule 128(1)(d) covers income from transfer of investments made before 1 April 2017.

Common mistakes

• Applying the 12.5% rate to the whole section 198 gain. Only the part above Rs 1,25,000 is charged at Sl. No. 5.
• Treating all short-term gains as 30%. STT-paid listed equity gains in section 196 are at 20%.
• Taxing the whole of a specified fund's income under section 210 instead of only the non-resident-held share.
• Missing Form 69 or Form 70, which removes the concessional rates (rules 140(4), 143(4)).
• Claiming Chapter VIII or business deductions against income that section 210(4) or 208(2) shuts out.
• Assuming section 209 applies to bonds bought in rupees. It covers bonds and GDRs purchased in foreign currency under the notified schemes.

Quick reference

Section	Who	Rates	Form
208	Offshore Fund (overseas financial organisation)	10% unit income; 12.5% LTCG	None named in these sections
209	Non-resident with foreign-currency bonds or GDRs	10% interest and GDR dividend; 12.5% LTCG	Return not needed if only this income and TDS deducted
210	FII or specified fund	20% or 10%; 30%; 20%; 12.5%	Form 69 (specified fund); Form 70 (offshore banking unit investment division)

Where this is in the Act

• Section 208: units purchased in foreign currency by Offshore Funds.
• Section 209: bonds and GDRs bought in foreign currency by non-residents.
• Section 210: FIIs and specified funds; sections 196 and 198 feed Sl. Nos. 3 and 5.
• Rule 128: GAAR exclusion for FIIs. Rule 140: specified fund attribution and Form 69. Rule 143: offshore banking unit investment division and Form 70.
• Section 263(1)(c): due date for Forms 69 and 70.

For related reading, see TDS on payments to non-residents and exempt income of non-residents.

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