What is FPIs Taxability in India: Meaning, Tax Rates, SEBI Rules, Benefits & Examples

Foreign Portfolio Investment (FPI) plays a crucial role in the Indian financial markets by bringing in global capital, enhancing liquidity and boosting the country's economy. FPI investments in India are attractive due to liberalized regulations and access to one of the world's largest capital markets. For foreign investors, the Indian government has been working to make it easy to comply with Indian investment rules, tax implications, and Income Tax Return (ITR) filing obligations.

What is Foreign Portfolio Investment (FPI)?

FPI refers to investments made by foreign investors in Indian financial markets. Unlike foreign Direct Investment (FDI), which involves controlling and owning a company, FPI is a passive investment in the Indian financial markets. For example, if a US-based mutual fund buys shares of Infosys (an Indian company) on the Indian stock exchange, that is considered an FPI.

The Securities and Exchange Board of India regulates Foreign Portfolio Investment. FPI must also comply with the Indian Income Tax Act 1961 and the Foreign Management Act 1999.

Investment Avenues Allowed to FPIs

FPIs are allowed to make investments in the following securities in India :

• Shares, debentures and warrants issued by a corporate body, whether listed or to be listed on a recognized stock exchange in India
• Units of category III Alternative Investment Funds (AIF)
• Infrastructure Investment Trusts recognized Estate Investment Trusts (REITs registered with SEBI).
• Units of mutual funds 
• Units of schemes floated by a Collective Investment Scheme are traded on a recognized stock exchange. 

Taxability of FPI Income in India

FPIs are categorised under ‘Foreign Institutional Investors’(FII) in India. The tax provisions are governed under section 115AD of the Income Tax Act.

FPIs are required to compute their tax liability on income in Indian rupees. They must discharge income taxes before repatriating the proceeds out of India.

Tax implications on income earned by FPIs can be broadly categorized into income from specified funds and others. It can be capital gains, listed and unlisted, other income from securities like dividend or income or income other than from securities.

It is to be noted that certain income from specified securities, can be treated as exempt on satisfaction of certain conditions. Also, there are special tax rates, for transfer of unlisted equity shares.

FPIs Benefit From DTAA

Indians have signed DTAA agreements with over 100 countries worldwide. DTAA agreements are signed to avoid taxing the same income twice, make a country an attractive destination, and enable NRIs to avoid paying taxes multiple times. 

FPIs can avail reduced tax rates under DTAA by furnishing:

• Tax Residency Certificate (TRC) of their home country
• Form 10F
• Self-declaration on beneficial ownership

For example, in India–U.S. DTAA, capital gains may be exempt or taxed at reduced rates, depending on the asset and conditions.