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Direct Tax Laws and International Taxation · Interest and Fees

Tax Rates and Computation on Gross Receipts of Foreign Companies

Updated 11 October 2026 · Fact-checked

Section 207 of the Income-tax Act, 2025 taxes dividend, certain interest, royalty and fees for technical services (FTS) of non-residents and foreign companies at flat rates, mostly 20%, on the gross receipt with no deduction for expenses. The balance of total income is taxed at rates in force. Compute each item and add the tax.

Understand Tax Rates and Computation on Gross Receipts

A foreign company or non-resident (not being a company) often earns passive income from India: dividend, interest, royalty or FTS. Working out their expenses is hard for the tax officer. So the Act taxes such income on its gross amount at a flat rate. This is a presumptive, simple regime.

Section 207(1) sets rates for a non-resident (not a company) or a foreign company:

  • Dividend is taxed at 20%, except dividend from a unit in an International Financial Services Centre, which is 10%.
  • Interest on foreign-currency borrowing by Government or an Indian concern is 20%.
  • Interest from an infrastructure debt fund is 5%.
  • Interest of the nature and extent referred to in section 393(2) (Table: Sl. Nos. 2, 3 and 4) is taxed at the rates specified there.
  • Distributed income being interest referred to in section 393(2) (Table: Sl. No. 6) is taxed at the rate specified there.
  • Income from units of a specified Mutual Fund or UTI bought in foreign currency is 20%.
  • Total income left after items 1 to 7 is taxed at rates in force.

Section 207(2) deals with royalty and FTS received from Government or an Indian concern under an agreement made after 31 March 1976. The agreement must be approved by the Central Government (where it is with an Indian concern), or, where it relates to a matter in the industrial policy, be as per that policy. Both royalty and FTS are taxed at 20%. The rest of the total income is taxed at rates in force.

This flat rate does not apply where section 59(1) applies. If the recipient has a permanent establishment (PE) or fixed place of profession in India, and the right, property or contract is effectively connected with it, the income is computed under business or profession, with the limits in section 59(2). Section 207 is for income with no such link.

Section 207 also has a no-deduction provision for the income in sub-sections (1) and (2). No deduction for any expenditure or allowance is allowed under sections 28 to 58, 60 and 61 and section 93 in computing that income.

Separately, section 207(6) deals with Chapter VIII and Schedule XV deductions, and it refers only to items 1 to 7 of sub-section (1). If the gross total income consists only of that income, no deduction is allowed under Chapter VIII and Schedule XV. If the gross total income also includes other income, you reduce it by the items 1 to 7 income and allow the Chapter VIII deduction as if the reduced amount were the gross total income. This bar does not extend to royalty or FTS under section 207(2). Section 207(7) also excludes the deduction of an IFSC Unit under section 147 from this rule.

Section 207 does not itself say anything about tax treaties. Whether a DTAA rate can replace the rate here is governed by the Act's separate provision on agreements with foreign countries. That provision is not part of the text this page is based on, so see the related treaty topic. If an exam question gives a treaty rate, follow its instruction.

Key rules to remember

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.

How to solve Tax Rates and Computation on Gross Receipts questions

Use this order for any question on taxing a foreign company's dividend, royalty or FTS.

  1. 1Identify the recipient: a non-resident (not a company) or a foreign company. Section 207 applies to nobody else.
  2. 2Check the payer and agreement for royalty or FTS: Government or an Indian concern, agreement after 31 March 1976, and either Central Government approval or compliance with industrial policy.
  3. 3Check whether section 59(1) applies: PE or fixed place of profession in India with effective connection. If yes, compute as business income instead.
  4. 4Classify each receipt and pick the rate from the table: 20% for dividend, foreign-currency borrowing interest, specified fund units, royalty and FTS; 10% for IFSC dividend; 5% for infrastructure debt fund interest; section 393(2) rates for items 5 and 6.
  5. 5Apply the rate to the gross amount. Ignore all expenses claimed in the question.
  6. 6Tax the remaining total income at rates in force. If the gross total income consists only of items 1 to 7 of section 207(1), no Chapter VIII or Schedule XV deduction is allowed. This bar does not apply to royalty or FTS under section 207(2).
  7. 7If the question says a DTAA applies and gives a treaty rate, follow the question's instruction on which rate to use. Section 207 does not deal with treaties; that rule sits in the Act's provision on agreements with foreign countries (see the related treaty topic). Add cess and surcharge only if the question asks for them.
  8. 8State the total tax and note whether a return is required under section 207(8).

Quickest way: Rate × Gross, Then Check the Conditions

When to use it: Use this for MCQs and short numerical questions where receipts and rates are given.

  1. Underline the recipient type and the payer.
  2. Tick the conditions: approved agreement, post-1976, no PE link.
  3. Multiply each gross receipt by its table rate.
  4. Ignore every expense figure in the question.
  5. If the question says a DTAA applies and gives a treaty rate, follow the question's instruction on which rate to use. Treaty interaction is outside section 207; see the related treaty topic.

Common mistakes in Tax Rates and Computation on Gross Receipts

  • Deducting expenses from royalty or FTS before applying 20%.

    Students are used to business income computation.

    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.

    The PE detail is missed in the case facts.

    Fix: Check section 59(1) first. If its conditions are met, compute under business or profession, not under section 207(2).

  • Using 20% for dividend from an IFSC unit.

    Students remember one dividend rate.

    Fix: Dividend from a unit in an IFSC is 10%. Other dividend is 20%.

  • Allowing a Chapter VIII or Schedule XV deduction when the gross total income consists only of dividend, interest or fund units under section 207(1) items 1 to 7, or wrongly extending this bar to royalty and FTS.

    Students assume deductions are always available, or assume the bar covers all section 207 income.

    Fix: Under section 207(6)(a), if gross total income consists only of items 1 to 7 of section 207(1), no deduction is allowed under Chapter VIII and Schedule XV. The bar does not refer to royalty or FTS under section 207(2). If other income is also present, reduce gross total income by the items 1 to 7 income and allow the Chapter VIII deduction as if the reduced amount were the gross total income.

  • Taxing royalty at 20% without checking the agreement conditions.

    The agreement date and approval are treated as background.

    Fix: Confirm the agreement is after 31 March 1976 and approved or consistent with industrial policy. If not, the receipt falls under rates in force.

Worked examples

Example 1

Zenith Corp, a foreign company with no PE in India, received ₹40,00,000 as royalty and ₹10,00,000 as FTS from an Indian company under an approved agreement made in 2022. It claims expenses of ₹8,00,000 against these receipts. It has no other income. Compute tax under section 207, ignoring cess and surcharge.

Show the solution
  1. Zenith is a foreign company. Payer is an Indian concern. Agreement is after 31 March 1976 and approved. No PE, so section 59(1) does not apply.
  2. Royalty ₹40,00,000 and FTS ₹10,00,000 are taxed at 20% on the gross amount.
  3. Total of the two receipts = ₹50,00,000.
  4. Expenses of ₹8,00,000 are not allowed, as section 207 bars deductions for this income.
  5. The Chapter VIII and Schedule XV bar in section 207(6)(a) covers only items 1 to 7 of section 207(1). Royalty and FTS fall under section 207(2), so that clause is not the basis for any disallowance here.
  6. Tax = 20% × ₹50,00,000 = ₹10,00,000.

Answer: Tax payable is ₹10,00,000, computed on gross receipts without deduction of ₹8,00,000.

Example 2

Nova Ltd, a foreign company, earned in the tax year 2026-27: dividend from an Indian company ₹6,00,000; dividend from a unit in an IFSC ₹3,00,000; royalty ₹20,00,000 under a qualifying approved agreement (no PE link); and other income of ₹5,00,000 taxed at rates in force. Compute tax on the special-rate income and state the amount left for rates in force. Ignore cess and surcharge.

Show the solution
  1. Dividend from the Indian company: 20% × ₹6,00,000 = ₹1,20,000.
  2. IFSC unit dividend: 10% × ₹3,00,000 = ₹30,000.
  3. Royalty: 20% × ₹20,00,000 = ₹4,00,000.
  4. Tax on special-rate items = ₹1,20,000 + ₹30,000 + ₹4,00,000 = ₹5,50,000.
  5. The other income of ₹5,00,000 is taxed at rates in force; no rate is given, so leave it as a separate amount.
  6. No expenses are allowed against the special-rate items.

Answer: Tax on special-rate income is ₹5,50,000, plus tax at rates in force on ₹5,00,000.

Exam tips

  • Read the first line for who receives the income. A resident company or individual gets no section 207 treatment.
  • In case scenarios, look for PE or fixed place of profession. It decides between section 207 and section 59.
  • Write the rate and the gross figure on separate lines in the answer. This earns method marks even if the final figure goes wrong.
  • For MCQs, expense figures are usually a distractor. Ignore them.
  • Quote the section number, such as section 207(2) for the 20% rate or section 207(8) for the return exemption, when giving a reason.

Practice questions from Interest and Fees

Tax Rates and Computation on Gross Receipts: frequently asked questions

What is the tax rate on royalty and FTS of a foreign company in India?

Under section 207(2), royalty and fees for technical services are taxed at 20% of the gross amount. The payer must be Government or an Indian concern, and the agreement must be after 31 March 1976 and approved or in line with industrial policy. Income covered by section 59(1) is excluded.

Can a foreign company claim expenses against royalty under section 207?

No. Section 207 says no deduction is allowed under sections 28 to 58, 60 and 61 and section 93 for the income in sub-sections (1) and (2). Tax is on the gross receipt.

When does section 59 apply instead of section 207?

Section 59 applies when the royalty or FTS comes from Government or an Indian concern under an agreement, and the recipient has a PE or fixed place of profession in India with which the right, property or contract is effectively connected. Then the income is computed as business or profession income.

Does a tax treaty rate override the 20% rate?

Section 207 itself does not deal with tax treaties. Whether a DTAA rate applies instead is governed by the Act's provision on agreements with foreign countries, which is outside the text this page is based on; see the related treaty topic. In an exam numerical, follow the question's instruction if it gives a treaty rate.

Must a foreign company file a return if it has only dividend or royalty income?

Under section 207(8), no return under section 263(1) is needed if total income consists only of the listed items and TDS under Chapter XIX-B was deducted at a rate not less than the specified rate.