The Income-tax framework has undergone key changes as Income Tax Department has recently updated the capital gains taxation table, especially taxation on securities-related income earned by residents, non-residents, and foreign institutional investors The new tax regime now mandates higher capital gains tax rates on equity transactions and introduces revised thresholds for long-term capital gains (LTCG) exemptions.It’s important to note that the tax rates for both long-term (LTCG) and short-term (STCG) gains differ across various asset classes for investors. These revised tax rates apply to individuals under both the new and old tax regimes, as they are considered special rate incomes.These rules hold critical implications for investors in equity shares, mutual funds, business trusts, Global depository receipts (GDRs), and foreign bonds, and necessitate renewed attention from financial advisors, tax consultants, and institutional fund managers.To provide a clearer picture of how various provisions differ across investor categories and income types, the following table summarizes the special tax provisions under Sections 111A, 112A, 115A, 115AB, 115AC, and 115AD of the Income-tax Act:
Determination of Tax in Certain Special Cases
LTCG & STCG tax planning for resident individuals (Sections 111A & 112A)
With the Finance (No. 2) Act raising the long-term capital gains tax on listed equity from 10% to 12.5%, and short-term capital gains from 15% to 20%, residents are being advised to actively plan and restructure their equity investments.According to Rahul Jain, Partner at Khaitan & Co, “This amendment applies across all taxpayer categories. However, there could be marginal tax benefit for individuals investing through partnerships or LLPs due to a lower surcharge. For example, individuals with income between Rs 50 lakh and Rs 1 crore would pay LTCG at 14.3%, while an LLP would pay only 13%.”Sonam Chandwani, Managing Partner at KS Legal & Associates told TOI “Resident individuals should maximize the Rs 1.25 lakh LTCG exemption under Section 112A through scrip-wise tracking and annual realization of long-term gains. Prioritize long-term holdings over short-term ones, harvest losses to offset gains, reinvest LTCG into Section 54F properties or ELSS, and stagger disposals via SWPs to stay tax efficient while complying with Schedule 112A.”Strategically advisors also suggest selling short-term assets before July 23, and using family members in lower tax brackets for selective transfers (with clubbing rules in mind).
Cross-border investment income structuring (Sections 115A, 115AB, 115AC)
For non-residents holding GDRs, FCCBs, or FCEBs, differentiated treatment across dividend, interest, and capital gains calls for treaty-driven structuring and precise documentation. “Non-residents benefit from concessional tax rates on dividend and interest under Indian law, but these are further subject to relief under DTAAs. Effective tax outflow must be computed after considering both. However, eligibility depends on obtaining a Tax Residency Certificate (TRC), demonstrating substance, and meeting other prescribed conditions,” Rahul Jain told TOI. Sonam Chandwani concurs, emphasizing timing and structure “Non-residents should hold GDRs, FCCBs, or FCEBs for over 12 months (listed) or 36 months (unlisted) to access the 12.5% LTCG rate. Use DTAA benefits via TRC and Form 10F to bring down withholding tax to 10–15%. Explore IFSC units for TDS-exempt interest income and ensure GAAR-compliant treaty structures, especially in jurisdictions like Singapore.”
Tax planning for FPIs & specified funds (Section 115AD)
Foreign Portfolio Investors (FPIs) and Specified Funds are governed by a special tax regime under Section 115AD. The new regime taxes LTCG on listed equity at 12.5% and STCG at 20%, with interest and dividends taxed at 20% plus applicable surcharge and cess.“FPIs located in treaty countries may apply lower DTAA rates, subject to documentation. But Specified Funds—particularly those registered as Category III AIFs in IFSC or offshore banking divisions—enjoy further concessions. For them, interest and dividend income is taxed at 10% without surcharge/cess, while capital gains from other securities are exempt,” Rahul Jain noted. Chandwani also adds a strategic angle “FPIs should time equity disposals to low-income years to optimize DTAA credits. Route dividends through treaty jurisdictions to reduce the 20% tax to 10–15%, and consider REITs/InvITs for their LTCG advantage. Maintain SEBI-compliant demat records, use automated tax tools, and seek advance rulings for complex deals.”(Disclaimer: The opinions, analyses and recommendations expressed herein are those of brokerage and do not reflect the views of The Times of India. Always consult with a qualified investment advisor or financial planner before making any investment decisions.)
