Section 193: tax on GDR income of resident employees in knowledge-based industries

Introduction

The special rates in section 193 are confined to qualifying Global Depository Receipts linked to a specified employee stock-option scheme. The employee’s status, the Indian company’s industry or service and foreign-currency purchase are all part of the scope test.

The section taxes the covered dividend and long-term transfer gain under its own table, while other income remains subject to otherwise applicable rates.

Key takeaways

Who this section applies to

The section applies to a resident individual who is an employee of an Indian company engaged in a specified knowledge-based industry or service, or an employee of that company's subsidiary engaged in such an industry or service (referred to in the section as the "resident employee").

The special rates

Where the resident employee's total income includes the income below, tax is computed at these flat rates on that income, with the rest of the total income taxed at the rates otherwise in force:

Deduction restrictions

If the resident employee's gross total income consists only of the dividend income described above, no deduction is allowed to him under any other provision of the Act.

If the gross total income includes the dividend income and/or the long-term capital gains described above along with other income, the gross total income is first reduced by that GDR-related income, and deductions under any other provision are then allowed as if the reduced amount were the gross total income.

No indexation on the long-term capital gains

The indexation provision (section 72(6)) does not apply when computing the long-term capital gains arising from transfer of these Employees' Stock Option GDRs.

Key definitions

The section defines several terms for its own purposes:

• "Global Depository Receipts" - an instrument in the form of a depository receipt or certificate created by an Overseas Depository Bank outside India (or in an International Financial Services Centre) and issued against ordinary shares of an Indian listed company, foreign currency convertible bonds, or (if listed and traded in an International Financial Services Centre) ordinary shares of a company incorporated outside India.
• "Specified knowledge based industry or service" - information technology software, information technology service, entertainment service, the pharmaceutical industry, the bio-technology industry, or any other industry/service notified by the Central Government.
• "Overseas Depository Bank" - a bank authorised by the issuing company to issue GDRs against Foreign Currency Convertible Bonds or ordinary shares of the issuing company.
• "Subsidiary" - as defined in section 2(87) of the Companies Act, 2013, and includes a subsidiary incorporated outside India.

Eligibility checks before using the rates

Check the investor, employer and instrument conditions together. The opening provision concerns a resident individual employee; the dividend row refers to GDRs of the specified Indian company, issued under the notified employee stock-option scheme and purchased by the employee in foreign currency.

The broader definition of a GDR does not remove these operative conditions. A document being called a GDR, a foreign-currency investment, or an ordinary ESOP allotment alone is insufficient to establish this section’s application.

Documents and calculation records to retain

For a practical review, retain employee and residency records, the employer and subsidiary details, scheme documents and the relevant notification, foreign-currency purchase evidence, depository statements, and dividend or sale records. This is a preparation checklist, not a separately prescribed filing obligation in section 193.

Show the qualifying dividend, qualifying long-term gain and remaining income separately in the computation. Apply subsection (2) when working out deductions, and preserve the capital-gain calculation showing that section 72(6) was not applied.

Section 193 eligibility and computation

1. 1

   Is the individual resident and within the specified employee category?

   Confirm the opening conditions concerning the Indian company or its subsidiary and the specified industry or service.

   • Conditions not met: Do not apply section 193 automatically; examine the otherwise applicable provision.
2. 2

   Do the GDRs satisfy the notified scheme and foreign-currency purchase conditions?

   Check the statutory dividend row and supporting scheme and acquisition documents.

3. 3

   Which income category is present?

   Separate qualifying dividend, long-term transfer gain and all remaining income.

4. 4

   Have deduction and computation restrictions been applied?

   Apply subsection (2) to deductions and subsection (3) to the long-term-gain computation before combining tax under the three table rows.

Practical checklist

Glossary

Qualifying GDR income

The dividend or long-term gain meeting the conditions in rows 1 and 2 of section 193(1), rather than all income from depository receipts.

Resident employee

The resident individual employee described in the opening words of section 193(1), including the specified subsidiary-employee case.

Notified Employees’ Stock Option Scheme

The scheme specified by Central Government notification for the GDR dividend row.

Rates in force

The otherwise applicable rates used for total income after removing the two specified GDR income categories.

Frequently asked questions