CMA Final · Direct Tax Laws and International Taxation

Interest and Fees: formula sheet

Full chapter guide

Key formulas

Dividend (general): Tax = 20% × dividend; Section 207(1), Sl. No. 1. Applies to a non-resident (not a company) or a foreign company.
Dividend from IFSC unit: Tax = 10% × dividend; Section 207(1), Sl. No. 2. Only dividend received from a unit in an International Financial Services Centre.
Interest on foreign currency borrowing: Tax = 20% × interest; Interest from Government or an Indian concern on money borrowed or debt incurred in foreign currency. Interest covered by Sl. Nos. 4 and 5 is excluded.
Infrastructure debt fund interest: Tax = 5% × interest; Interest received from an infrastructure debt fund referred to in Schedule VII (Sl. No. 46).
Fund units bought in foreign currency: Tax = 20% × income from units; Units of a specified Mutual Fund or of the Unit Trust of India purchased in foreign currency.
Royalty and fees for technical services: Tax = 20% × (royalty + FTS); Section 207(2). Needs an agreement after 31 March 1976 with Government or an Indian concern, approved or as per industrial policy. Excludes income under section 59(1).
Other income: Tax = rates in force × (total income − income at special rates); Sl. No. 8 of sub-section (1) and Sl. No. 3 of sub-section (2).
No deduction rule: No deduction under sections 28 to 58, 60, 61 and 93; Applies to income in sub-sections (1) and (2). The tax is on the gross amount.
Chapter VIII deductions: GTI reduced by Sl. Nos. 1 to 7 income, then deduction allowed on the balance; Section 207(6). If GTI has only such income, no Chapter VIII or Schedule XV deduction is allowed.
Return exemption: No return if total income = only listed income AND TDS rate ≥ section 207 rate; Section 207(8). Covers Sl. Nos. 1 to 7 of sub-section (1) and Sl. Nos. 1 and 2 of sub-section (2).
Meaning of terms: FTS takes its meaning from section 9; royalty takes its meaning from section 9(5) (section 207(4)(b) and (c)); Royalty is for use of or rights in property and know-how. FTS is for managerial, technical or consultancy services.
Specified assessee: Non-resident (not a company) or a foreign company (section 59(5)); Only such payees fall under sections 59 and 207.
Business-income route (section 59(1)): Received from Government or Indian concern + agreement + PE or fixed place in India + effective connection → computed as business income; All four conditions must be met. Audit of accounts is required under section 59(4).
Disallowed deductions under section 59(2): No deduction for expenses not wholly and exclusively for the PE's business, or for amounts paid to head office (other than reimbursement of actual expenses); Applies to income computed under section 59(1).
Special rate (section 207(2)): Tax = 20% × royalty or FTS, from Government or Indian concern under post-31 March 1976 agreement; Agreement approved by the Central Government, or as per industrial policy. Not available if section 59(1) applies.
No expense deduction (section 207): No deduction under sections 28 to 58, 60, 61 and 93 against income in section 207(1) and (2); Tax is on gross receipts.
Software and book copyright (section 207(3)): Royalty for book copyright to an Indian concern, or software to a person resident in India: section 207(2) applies without clause (a) or (b); Only the approval and industrial-policy conditions are waived. Payer, agreement date, no section 59(1) and the 20% rate still apply.
Return exemption (section 207(8)): No return needed if total income is only section 207(1) or (2) items and TDS was deducted at not less than the specified rate; Both conditions must be met.
Tax on royalty or FTS (section 207(2)): Tax = 20% × gross royalty or FTS; Only if received from Government or an Indian concern under a qualifying agreement made after 31 March 1976 and not covered by section 59(1). Add cess and surcharge as applicable to the question.
Tax on dividend (section 207(1)): Tax = 20% × gross dividend; 10% if from a unit in an IFSC; Item 1 is 20%. Item 2, dividend from an IFSC unit, is 10%.
Interest items (section 207(1)): Foreign-currency borrowing interest: 20%; infrastructure debt fund interest: 5%; section 393(2) interest and distributed income being interest: rates in section 393(2); Items 5 and 6 take the rates specified in section 393(2) (Table: Sl. Nos. 2, 3 and 4 for item 5; Sl. No. 6 for item 6). Use the rate given in the question.
Units bought in foreign currency: Tax = 20% × income from specified Mutual Fund or UTI units; Units must be purchased in foreign currency.
Remaining income: Total income − items taxed at special rates = taxed at rates in force; Applies under both sub-section (1) and sub-section (2).
No deductions: Gross receipt = taxable income (no deduction under sections 28 to 58, 60, 61, 93); Applies to income in sub-sections (1) and (2) of section 207. Separately, under section 207(6)(a), no Chapter VIII or Schedule XV deduction if the gross total income consists only of items 1 to 7 of section 207(1). That bar does not cover royalty or FTS under section 207(2).
Return exemption: No return needed if total income has only these items and TDS was at not less than the specified rate; Section 207(8). TDS must be under Chapter XIX-B.
No deduction rule: Taxable amount = gross income; no deduction under sections 28 to 58, 60, 61 and 93; Applies to income referred to in section 207(1) and (2). Rate is applied on gross receipts.
Section 207(1) rates: Dividend 20%; IFSC unit dividend 10%; foreign currency interest from Government or Indian concern 20%; infrastructure debt fund interest 5%; specified foreign currency units 20%; Interest at serial 5 and 6 follows rates in section 393(2). Serial 8 (rest of income) is at rates in force.
Section 207(2) rates: Royalty 20%; FTS 20%; Needs a Government or Indian concern payer, an agreement after 31 March 1976, and approval or consistency with industrial policy as stated in the section.
Chapter VIII deduction rule: Only serial 1 to 7 income: no deduction. Mixed income: deduction on (GTI − serial 1 to 7 income); Section 147 IFSC Unit deduction is outside this restriction.
Return exemption: Total income only from 207(1) serial 1-7 and 207(2) serial 1-2, AND TDS rate ≥ section rate → no return under section 263(1); Both conditions must be met.

Quick revision

Section 207 covers non-residents (not companies) and foreign companies.
Dividend is taxed at 20%, but dividend from an IFSC unit is 10%.
Interest on foreign currency borrowings from Government or an Indian concern is 20%; infrastructure debt fund interest is 5%.
Units bought in foreign currency (specified mutual funds or UTI) are taxed at 20%.
Royalty and FTS under Section 207(2) are taxed at 20% if the agreement is with Government or an Indian concern after 31 March 1976, is approved by the Central Government (where with an Indian concern) or, where it relates to a matter in industrial policy, conforms to that policy. Under Section 207(3), royalty for book copyright to an Indian concern or software to a resident is still taxed at 20% under sub-section (2), without the clause (a) or (b) approval or policy condition. The rest of the income is at rates in force.
Section 59 applies to a specified assessee (a non-resident who is not a company, or a foreign company) when income is received from Government or an Indian concern, under an agreement made by the specified assessee with that payer, with a PE or fixed place in India, and with an effective connection. Then it is business income.
No deduction under sections 28 to 58, 60, 61 and 93 is allowed for income referred to in Section 207(1) and (2).
If gross total income has only items 1 to 7 of the Section 207(1) table, no deduction is allowed under Chapter VIII and Schedule XV.
If other income exists, reduce gross total income by those items and then allow Chapter VIII deductions on the balance.
Section 207(8): no return is needed if total income is only items 1 to 7 of sub-section (1) and items 1 and 2 of sub-section (2), and TDS was deducted at not less than the specified rates.
Section 209 rates are 10% on bond interest and GDR dividend, and 12.5% on long-term capital gains from those assets.
Section 209(4): no return is needed if total income is only bond interest and GDR dividend (items 1 and 2) and TDS has been deducted. There is no 'not less than' rate condition, unlike Section 207(8).
Under Section 59, a head office payment is not deductible unless it is reimbursement of actual expenses.

Common mistakes

Deducting expenses from royalty or fees for technical services before applying 20%. Fix: Remember that no deduction is allowed under sections 28 to 58, 60, 61 and 93 for this income. Apply the rate on gross receipts.
Applying section 207 to an Indian company or a resident. Fix: Check the status first. The section covers a non-resident (not a company) or a foreign company.
Allowing expense deduction against royalty taxed at 20%. Fix: Section 207 bars deduction under sections 28 to 58, 60, 61 and 93 for this income. Tax the gross amount.
Applying the 20% rate when the payee has an effectively connected PE. Fix: Test section 59(1) first. If all four conditions hold, it is business income and not section 207(2).
Deducting expenses from royalty or FTS before applying 20%. Fix: Section 207 bars deductions under sections 28 to 58, 60, 61 and 93 for this income. Tax the gross receipt.
Applying 20% when the foreign company has a PE and the royalty is effectively connected to it. Fix: Check section 59(1) first. If its conditions are met, compute under business or profession, not under section 207(2).
Deducting expenses from royalty or FTS before applying 20%. Fix: Section 207(5) bars deductions under sections 28 to 58, 60, 61 and 93. Apply the rate on gross receipts.
Claiming the return exemption when the person also has other income. Fix: Both conditions are needed. Total income must consist only of listed income.

Exam tips

Start every answer by naming the assessee type. A one-line status check earns marks and avoids wrong application.
Write the Table rate against each receipt in a small list. Examiners look for the correct rate for each item, including 10% and 5%.
When a question gives expenses against royalty or fees, state clearly that they are not allowed, and quote the sections barred.
In case scenarios, read the agreement date and approval details closely. These decide whether sub-section (2) applies.
Remember the two side rules that are easy to test: no Chapter VIII deduction when GTI has only special-rate income, and the return exemption in sub-section (8).
Always state first whether section 59 or section 207(2) applies, and why. The PE test is the usual trap.
Write the conditions of the section 207(2) in your answer, such as agreement date and approval, before applying 20%.
In case scenarios, mention that expenses are not deductible for the 20% route and that head office payments are barred under section 59(2).