Section 194-LC, deals with the TDS on interest paid on external commercial borrowings (ECBs) and bonds. This section encourages foreign investment in India by offering a lower tax rate on interest payments made to non-residents. A specific rate of TDS applies to the interest paid on these borrowings under this section. This also helps make India an attractive destination for international investors.
What is Section 194-LC?
This section mandates that when an Indian company or a business trust pays interest on ECBs or bonds to a non-resident, it must deduct TDS at a concessional rate. This section primarily covers interest on funds raised through foreign currency bonds or overseas loans that are treats as ECBs. The purpose of this provision is to reduce the tax burden on foreign investors, thus promoting a favorable investment climate.
Key Points:
- Applicable to Non-Residents: The section applies when interest is paid to non-residents or foreign companies. This includes interest on bonds, debentures, or government securities issued by Indian companies or the Indian government.
- Tax Rate: The TDS rate is reduced to 5% for interest payments on bonds which Indian companies or the government issue. If the bonds are issued in foreign currency or by a specified entity, this lower rate is available.
- Timing of Deduction: The tax is deducted at the time of payment of interest, whether the interest is paid periodically or at maturity.
- Benefit of Lower Tax: The reduced rate of TDS makes India an attractive investment destination for foreign investors since they can earn interest income with a lower tax burden compared to the general tax rate for non-residents.
- No TDS on Interest to Certain Entities: There are exemptions for interest payments made to certain foreign financial institutions or entities. This also depends on the terms of the bond and investment agreement.
Example:
Let’s consider an Indian company, XYZ Ltd., which issues a bond to a foreign investor, Mr. A, who is a non-resident. Mr. A is earning an annual interest of ₹1,00,000 on the bond. As per Section 194-LC, XYZ Ltd. has to deduct 5% TDS on the interest income.
So, the TDS would be:
TDS = 5% of ₹1,00,000 = ₹5,000
Therefore, XYZ Ltd. will deduct ₹5,000 from the ₹1,00,000 interest and pay Mr. A ₹95,000 as the net interest. on behalf of Mr. A, ₹5,000 gets deposit with the government.
TDS Return Filing:
The Indian company files Form 24Q, and reports the TDS deducted. The company will also issue a TDS certificate (Form 16A) to the foreign investor, detailing the amount of TDS deducted and deposited.
Conclusion:
This section is an important provision that helps attract foreign investment into India by providing a reduced tax rate on interest from bonds. This section also offers a tax-efficient way for non-residents to invest in India’s financial markets and government securities. Understanding this section is thus crucial for foreign investors and financial institutions involved in international bond markets.
– Ketaki Dandekar (Team Arthology)
Read more about Section 194 – LC here – https://taxguru.in/income-tax/194lc.html