Tax Implication and Compliance for Foreign Portfolio Investment (FPI) in India

Foreign Portfolio Investment (FPI) sounds similar to Foreign Direct Investment(FDI), however, they both have a fundamental difference of intent. Considering the developing Indian Economy and growth, India has become a point of attraction for investment across the globe. In line with the Indian economy, the progressive Indian Share market is alluring not only Indian Investors but also global Investors to invest their funds in India to get better returns.

As per reports, FPI Investment in India in equities has reached INR 1.16 Lakhs Crores by the first week of July itself. However, Such a substantive amount of investment requires the investors to be very vigilant about the legal Compliances applicable in India for approval and taxes.

This article gives an overview of Foreign Portfolio Investment and discusses the tax implications and compliances applicable thereon in India:

1. What is Foreign Portfolio Investment?

• As the name depicts, Foreign Portfolio Investments allow investors to form an investment portfolio in a foreign country. Investment can be made in Equity shares, Mutual funds, bonds, Fixed Deposits, or any other permitted security.
• Unlike Foreign Direct Investments, Investors do not intend to get control of the entity. Rather such investments are meant for handsome returns.
• Investors are willing to take higher risks by investing in securities of other countries to get higher returns.

Read Also: Input tax credit of rejected refund amount can be taken manually by the taxpayer if not recredit by tax authorities

2. Regulation of Foreign Portfolio Investments?

• Foreign Portfolio Investment is regulated by the Security Exchange Board of India through the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (“FPI Regulations”).
• FPI regulations define the criteria for registration of FPI, permissible securities for investment, reporting requirements, etc.
• As per the FPI Regulations, a Foreign Portfolio Investment is required to satisfy the eligibility conditions given under Regulation 4 and to register itself as an FPI with a Designated Depository Participant (DDP). Upon receipt of the application from FPI, the Designated Depositary Participant shall grant the certificate of registration.
• Further, an FPI is allowed to invest only in lists of securities specified under Regulation 20 of the regulations. 

3. Permitted Investments in India

As per Regulation 20 of FPI regulations, an FPI is permitted to Invest in the following securities:

1. shares, debentures, and warrants issued by a body corporate; listed or to be listed on a recognized stock exchange in India;
2. units of schemes launched by mutual funds under Chapters V, VI – A, and  VI – B of the Securities and Exchange Board of India
3. Units of scheme floated by a Collective Investment Scheme by the SEBI (Collective Investment Scheme) Regulations, 1999
4. Derivatives traded on recognized stock exchange
5. Units of real estate investment trusts, infrastructure investment trusts, and units of category III Alternative Investment funds registered with SEBI
6. Indian Depository receipts
7. Any debt securities or other instruments as permitted by RBI for FPI to invest from time to time
8. Any other instrument as specified by SEBI from time to time.

4. Tax Implications and Compliances on FPI:

4.1 Obtain Permanent Account Number (PAN) in India

• The FPI is required to obtain a PAN in India.
• The Application for allotment of PAN is automatically generated and sent by the Digital Depository Participant  (DDP) once registration of FPI is completed through the Common Application Form.
• Following is the process flow of generation of PAN:

4.2 Tax Framework for FPI

• Funds of FPI are invested in India to obtain handsome returns. Such investment is made in Securities (listed or unlisted), Fixed Deposits, bonds, etc.

1. Capital Gains

• Any security (whether listed or unlisted) held by the FPI is considered a capital asset and profit or loss arising from the transfer of such capital asset shall be taxed as capital gains.
• Such capital gain shall be taxed as Long Term Capital Gain or Short Term Capital gain depending on the period of holding of capital asset.
• Capital assets shall be classified as short-term capital assets or long-term capital assets in the following manner:

Nature of Capital Asset	Short Term Capital Asset	Long Term capital Asset
Security listed on recognised stock exchanges or Units of equity oriented mutual funds which are subject to STT	Held for 12 Months	Held for more than 12 months
Unlisted securities	Held for 24 Months	Held for more than 24 months
Other Capital Asset	Held for 36 Months	Held for more than 36 months

However, as per Finance Act, 2024, the following shall be the criteria for the classification of capital assets as long-term capital assets or short-term capital assets with effect from 23rd July 2024:

Nature of Capital Asset	Short Term Capital Asset	Long Term capital Asset
Long-Term Capital Asset	Held for 12 Months	Held for more than 12 months
Other capital Assets	Held for 24 months	Held for more than 24 months

• As per Section 115AD of the Income Tax Act, Any capital gain arising from the transfer of the above-mentioned capital assets shall be taxed at the following rates depending on the nature of the capital asset:

Nature of Capital Asset	Long-Term Capital Gain	Short-Term Capital Gain
Long Term Capital Gain	15%	10% on such capital exceeding INR 1,00,000
Other Capital Assets	30%	10%

As per the Finance Act, 2024, Any capital gain arising from the transfer of the above-mentioned capital assets shall be taxed at the following rates depending on the nature of the capital asset with effect from 23rd July 2024:

Nature of Capital Asset	Long Term Capital Gain	Security listed on recognised stock exchanges or Units of equity-oriented mutual funds which are subject to STT
Security listed on recognized stock exchanges or Units of equity-oriented mutual funds which are subject to STT	15% (For any transfer takes place before 23.07.2024)20% (For transfer taking place after 23.07.2024)	capital gain exceeding INR 1,25,000:10% (For transfer taking place before 23.07.2024)12.5% (For transfer taking place before 23.07.2024)
Other Capital Assets	30%	Short-Term Capital Gain

2. Income from other Sources
   • Any other Income earned by the FPI through its investment such as Interest, Dividend Income, etc. shall be taxed as Income from other sources.
   • As per Section 115AD of the Income Tax Act, any income received by FPI shall be taxed at the following rate

Nature of Income	Income Tax Rate
Any income arising in respect of securities (Interest, Dividend etc)	20%
Income by way of interest on certain bonds and Government securities (REIT and InviT)	5%

• The TDS shall be deducted on such income as per the applicable rates.

c. cess and surcharge

• In addition to the above-mentioned income tax, applicable surcharge (ranges from 2–37%) and health and education cess (4%) is also leviable

d. Double Taxable Avoidance Agreement

• The above-mentioned tax rates are subject to the applicability of the respective country’s Double Taxation Avoidance Agreement (DTAA) with India
• An FPI is eligible to claim the benefit of DTAA of the respective country.
• The provisions of the DTAA shall prevail over the Indian tax laws to the extent such provisions are beneficial for FPI.

4.3 TDS on payments made to FPI

• As per the Income Tax Act, of 1961, the payer is required to deduct a specific % of the amount as TDS while making payment to the payee based on the nature of the Income. Such as TDS on 10% on payment of interest income, 10% of dividend income, 1% on sale of immovable property, etc.
• Therefore, FPI shall receive the interest and dividend income after the deduction of TDS at the applicable rate. However, benefits of such TDS can be claimed while filing an Income tax return after the closure of the financial year.

4.4 Payment of Tax before remittance of funds out of India

• The FPI is required to pay tax on the above-mentioned income on earlier of the following dates:
  • Every quarter as Advance Tax;
  • Before remittance of funds out of India

4.5 Filing of Income Tax Returns

• FPIs are required to file Income tax returns as per the due date applicable to them, i.e., 31st July, 31st October, or 30th November
• FPI are required to get their audit done under provisions of the Income Tax Act, if applicable.
• Further, in the case where FPI is claiming the benefit of DTAA then Form 10F is required to be filed before filing of the Income tax return.

5. Conclusion

The Indian economy is alluring foreign investors across the globe to invest their funds in India and get handsome returns. However, income earned in India is liable to Income Tax in India. Therefore, FPI are required to seek professional opinions on tax liability that may arise in India on the Income earned through such investments such as interest, dividend, capital gain, etc, and what forms an FPI is liable to furnish in India. Further, FPI shall be allowed to remit funds out of India only after seeking a tax clearance certificate from specified professionals in India.