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Section 194LD –  Income Tax


Section 194LD –  Income Tax

The Government of India has introduced a new Section 194LD in the Income Tax Act, 1961 to provide tax deduction at source (TDS) at a concessional rate for interest income earned by a non-resident from government securities or rupee-denominated bonds. Government Securities and Rupee Denominated Bonds are financial instruments with a high financial value which attract various foreign investors to invest in it. Besides the Indian investors, Foreign Institutional Investor (FII) and Foreign Portfolio Investor (FPI) are a major contributor to the capital market of India. Under Section 115AD of the Income Tax Act, 1961, tax is levied on the incomes earned by the Foreign Institutional Investor (FII). The taxability is also applicable on income earned from interest on Government and Rupee denominated securities. The insertion of Section 194LD has enabled the Foreign Institutional Investor to enjoy a lower TDS rate of 5% on the overall interest. This concession will help boost foreign capital into India.

Section 194LD

The text of the section is reproduced below for reference.

194LD. (1) Any person who is responsible for paying to a person being a Foreign Institutional Investor or a Qualified Foreign Investor, any income by way of interest referred to in sub-section (2), shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of five per cent.

(2) The income by way of interest referred to in sub-section (1) shall be the interest payable in respect of investment made by the payee in—

 (i) a rupee-denominated bond of an Indian company; or

 (ii) Government security:

Provided that the rate of interest in respect of bond referred to in clause, (i) shall not exceed the rate as may be notified by the Central Government in this behalf.

Explained: –

a) ‘Foreign Institutional Investor’ is a registered institution that invests in a country other than its own.

b) ‘Qualified Foreign Investor’ is a subcategory of FII who is a foreign individual, group or association restricted from those countries, which are the members of FATF.

c) ‘Rupee-denominated bond’ is a bond issued by an Indian entity in a foreign market where the buying, selling and repayment are expressed in rupees.

d) ‘Government security’ is a Government issued bond, which is of low risk.

Foreign Institutional Investor (FII) or a qualified foreign investor consider investing in securities to be gainful and thus make investments claiming a security interest on the collateral. The interest payable by the Indian concern or entity to a foreign entity is deducted 5% tax at source and disbursed in terms of rupees.