India

Income computation and disclosure standards (ICDS)

The CBDT has notified ten ICDS to be followed by all taxpayers that follow the mercantile system of accounting for the purpose of computation of income chargeable to income tax under the head ‘profits and gains of business or profession’ or ‘income from other sources’ and not for the purpose of maintenance of books of accounts. In case of conflict between the provisions of the Income-tax Act and the ICDS, the provisions of the Income-tax Act will prevail to that extent. These standards have been in effect since tax year 2016/17.

The list of certain important points on implementation of ICDS is given below:

• Inventory has to be valued at lower of cost or net realisable value. Further, cost of inventory is to include taxes paid, irrespective of recoverable or not.
• Interest on compensation or enhanced compensation is to be offered to tax in the year of receipt.
• Any subsidy or grant received from the government that is not adjusted to cost of asset will be offered to tax in year of receipt of such subsidy/grant even if the conditions attached to it are not yet fulfilled.
• Marked-to-market loss computed in accordance with ICDS will only be allowed.
• Gain/loss on account of foreign currency fluctuation for monetary and non-monetary items will be computed and allowed as per provisions of ICDS.
• Profits from construction contracts and/or service contracts will be calculated based on the percentage of completion method. For service contracts with less than a 90-days period, the project completion method can be used. Further, for service contracts with an indeterminate number of acts over a specific period of time, the straight-line method can be used. Retention money will be included while computing contract revenue.
• It may be noted that ICDS does not recognise the concept of materiality and the concept of prudence.

Capital gains

Capital gains refer to the gains made on the transfer of a capital asset. Transfer includes sale, exchange, relinquishment, or extinguishment of rights in an asset. Capital assets are either short-term capital assets or long-term capital assets.

Finance Act, 2024 has rationalised the capital gains tax regime. These amended provisions are applicable for transfer made on or after 23 July 2024. The provisions amended by Finance Act, 2024 have been provided as follows:

• Period of holding for determining nature of capital gains:
  • All capital assets are to be treated as long-term capital assets if they are held for a period of more than 24 months.
  • All listed securities are to be considered as long-term capital assets if they are held for more than 12 months.

• Applicable tax rate:

• • Tax on short-term capital gains on transfer of listed securities that are subject to STT shall be levied at 20%.
  • Tax on long-term capital gains on all assets shall be levied at 12.5%. The benefit of indexation while computing long-term capital gains have been abolished (subject to certain exceptions for Individuals and HUFs).
  • The exemption limit on long-term capital gains on transfer of listed securities is increased to INR 125,000.
• Income on transfer, redemption, or maturity of unlisted debentures or unlisted bonds on or after 23 July 2024 is to be deemed as short-term capital gains.

Taxability of transfer of property for nil or inadequate consideration

Where a person is in receipt of the following property for nil consideration or for an inadequate consideration, then the difference between the fair value of the property and the consideration paid will be considered as deemed income in the hands of recipient of the property:

• Any sum of money.
• Any immovable property being land or building, or both.
• Any property, other than immovable property, being shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, and bullion.

In a case where the difference between the fair value of property and consideration paid does not exceed INR 50,000, the same will be ignored from this taxation. However, the limit of INR 50,000 was libralised in case of immovable property. It is now provided that no adjustments will be made in a case where the variation between stamp duty value and the sale consideration is not more than 10% of the sale consideration.

Dividend income

Dividend income received by a domestic company is taxable in hands of resident shareholders at the rates applicable to them.

A provision in the Income-tax Act has been introduced to provide for WHT at 10% on dividends in respect of units of mutual funds (in excess of INR 10,000) on dividend payments to resident shareholders.

In case of non-resident shareholders, dividends may be taxed at the rate of 20% under the Income-tax Act or tax treaty rate, whichever is beneficial.

WHT obligations will arise in the hands of a company distributing dividends to non-resident shareholders in such case. A corresponding deduction on account of interest would be allowed to the extent of 20% of such dividend income. This change is brought considering that the dividend distribution tax (DDT) has been abolished with effect from 1 April 2020.

The proceeds on buyback of shares are considered as deemed dividend in the hands of shareholders.

Finance Act, 2025 has amended the provisions related to deemed dividend to exclude any loan or advance by a finance company/ unit undertaking treasury activities in the IFSC, to its group entity listed outside India. These amendments have taken effect from 1 April 2025.

Interest income

Interest income received by an Indian company is taxable at normal CIT rates. Interest income received by a foreign company is taxed at a concessional rate of withholding at 5%/20%, subject to conditions. For companies engaged in manufacturing business and opting to pay corporate tax at the lower rate, interest income shall be taxable at 25.17% (including applicable surcharge and education cess).

Foreign income

An Indian company is taxed on its worldwide income. A foreign company is taxed only on income that is received in India, or that accrues or arises, or is deemed to accrue or arise, in India. This income is subject to any favourable tax treaty provisions. According to the current tax law, payments for allowing/transferring the right to use software, customised data, or transmission of any signal by satellite, cable, optic fibre, or similar technology are taxable as royalty income deemed to accrue or arise in India, whether or not the location of such right or property is in India. The Indian Revenue Department notified the rules to grant foreign tax credit to resident taxpayers in respect of taxes paid in overseas countries. The rules lay down broad principles and conditions for computation and claim of foreign tax credit, respectively. In cases where the taxpayer has not been given credit of certain taxes paid outside India since the tax was under dispute, the taxpayer can approach the tax officer within six months from the end of the month in which the dispute was settled with prescribed documents. The tax officer has been empowered to pass an order granting consequential relief. This has been made effective from FY 2018/19 onwards.

Double taxation of foreign income for residents is avoided through tax treaties that generally provide for the deduction of the lower of foreign tax or Indian tax on the doubly taxed income from tax payable in India. Similar relief is allowed unilaterally where no tax treaty exists, in which case a resident would be taxed under the Income-tax Act but would be allowed a deduction from the Indian income tax payable of a sum being the lower of the Indian tax rate on the doubly taxed income or the rate of tax prevailing in the other country in which income is already taxed.