What is the Difference Between FPI and FII?

In foreign portfolio investment, foreign investors invest in financial assets like stocks and bonds without having any control over firms. The focus is on capital appreciation and income generation in the form of dividends or interest, thereby offering diversification and liquidity. FII involves huge financial groups like mutual funds, pension funds, insurance companies, and hedge funds that stabilize the financial markets and use analysts to scan choices on investments. Investors need to know what is FII and FPI in the share market. Let’s learn about the difference between FPI and FII in this blog.

Difference Between FPI and FII

The key difference between FII and FPI is summarized in the below table.

Features of FII vs FPI

Now that you know the difference between FPI and FII, let’s take a look at the features of these two types of investors. Understanding the features of FPI and FII  along with the FPI and FII differences is necessary as they play a vital role in the share market. 

Features of Foreign Portfolio Investment (FPI)

• It comprises institutional as well as individual foreign investors.
• Investments are made through different financial instruments and include stocks, bonds, mutual funds, etc.
• Low entry and exit barriers and relatively more flexible than FIIs
• Higher volatility is prone to speculative trading patterns.
• Primarily focused on short-term capital gains rather than focusing on wealth creation in the long term.

Features of Foreign Institutional Investment (FII)

• This is open only to institutional investors that oversee large sums of money.
• The investments are usually significant and more pronounced when compared to a few individual FPIs.
• Undergoes more severe regulatory scrutiny by regulators such as SEBI
• Acts more persuasively in terms of shaping the dynamics of the market due to significant investment
• Undertakes detailed research work before investing; often maintains highly specialized research departments

What are FII and FPI in the Income Tax?

Along with FII and FPI meaning, it is helpful to know about the taxes applicable to them. Under the taxation, FII and FPI are regulated under their own rules of how the gains would be taxed.  

Taxation for Foreign Portfolio Investors (FPIs)

• Capital Gains Tax: Profits realized from sales of securities through FPI qualify as capital gains. Short-term capital gains, that is, assets sold in less than a year, are taxed far more than long-term capital gains, that is, assets held over a time frame of more than one year.
• Tax Rates: Capital gains tax short-term tends to be around 15%. Long-term capital gains tax can be exempted up to₹1 lakh in a single year; over and above that, they are subjected to a tax of 10%.
• Dividend Income: The dividend income of FPIs is also subjected to withholding tax at applicable rates.

Taxation for Foreign Institutional Investors (FIIs)

As is the case with FPIs, FIIs also get charged with capital gains tax as per the period for which the investments have been held. 

• Tax Rates for FIIs: Tax on short-term capital gains is equal and roughly 15%. Long-term capital gains tax is equally charged but differs concerning the conventions between countries that are parties to double taxation avoidance treaties.
• Further Taxes: FIIs may be liable to any other taxes or exemptions in the country of origin as per bilateral tax treaties.
• Tax aspects: It plays an integral role for foreign investors who need to run with optimum returns without upsetting the local law. 

Conclusion
FII and FPI are two types of investors. The regulatory frameworks, market impact, investor strategies taxation issues, and overall economic impact differ for them. FPIs involve individual and institutional investors with diversified portfolios having quick returns without management control. FIIs are primarily institutions, focussing more on long-term investments.  Understanding the difference between FPI and FII is essential for newcomers and potential investors, helping them make informed decisions about resource allocation. For more insights regarding these investors, consider exploring a reliable share market app designed to enhance your investment strategies.