FPIs avoiding taxes by treating capital gains from NCDs as interest income

Interest income attracts a concessional tax rate of 5%, against 15-20% in case of capital gains

Foreign portfolio investors (FPIs) are nowadays categorising the gains from non-convertible debentures (NCDs) as interest income to benefit from tax arbitrage, a stark contrast to the earlier practice of showing such income as capital gains. 

Currently, the interest income of FPIs is subjected to five per cent withholding tax, against 15-20 per cent tax on capital gains, depending on the treaty. The amended Double Tax Avoidance Agreements (DTAAs) with several countries, especially Mauritius and Singapore, are the reason behind this shift, experts say.

Earlier, capital gains were a more viable option for FPIs, as they could claim benefits under the