Section 194LC of the Income Tax Act: TDS on Interest from Indian Company or Business Trust to Non-Residents

Section 194LC of the Income Tax Act, 1961, is a crucial provision that facilitates foreign investment in India by offering a concessional rate of Tax Deducted at Source (TDS) on certain interest income. This section applies when an Indian company or a business trust pays interest to a non-resident or a foreign company for moneys borrowed from outside India.

Applicability of Section 194LC

Section 194LC applies under the following key conditions:

• Payer (Deductor): An Indian company or a business trust.
• Payee (Recipient): A non-resident (not being a company) or a foreign company.
• Nature of Income: Income by way of interest in respect of money borrowed from a source outside India. This typically covers:
  • Moneys borrowed in foreign currency under a loan agreement.
  • Moneys borrowed in foreign currency by way of issue of long-term infrastructure bonds or any long-term bond.
  • Moneys borrowed by way of issue of rupee-denominated bonds (RDBs) outside India.
• Purpose: The provisions aim to incentivize foreign borrowing and investment in India.

Key Dates for Applicability: The concessional TDS rates under Section 194LC are often tied to specific periods during which the moneys were borrowed or bonds were issued. For instance, the beneficial rate primarily applied to borrowings made before July 1, 2020. However, subsequent amendments have extended similar benefits for certain borrowings (e.g., listed on IFSC) up to July 1, 2023.

TDS Rates under Section 194LC

The TDS rates under Section 194LC are concessional, and they can vary based on the type of borrowing and the period:

• General Concessional Rate: **5%**
  • This rate generally applies to interest arising out of moneys borrowed in foreign currency or through rupee-denominated bonds. This rate includes applicable surcharge and Health and Education Cess.
• Specific Rates for IFSC-Listed Bonds:
  • **4%** on interest payable to a non-resident in respect of monies borrowed in foreign currency or by way of issue of any long-term bond or rupee-denominated bond, if the borrowing was on or after April 1, 2020, but before July 1, 2023, and the bond is listed on a recognized stock exchange located in an International Financial Services Centre (IFSC).
  • **9%** for interest income from borrowings by issuance of long-term bonds or rupee-denominated bonds on or after July 1, 2023, if listed on an IFSC.
• Higher Rate for Non-PAN: If the payee (non-resident or foreign company) does not provide a valid Permanent Account Number (PAN), TDS will be deducted at **20%**, as per Section 206AA of the Income Tax Act, unless DTAA provisions apply and relevant documents are furnished.
• Impact of DTAA: If a Double Taxation Avoidance Agreement (DTAA) exists between India and the payee's country of residence, and it provides for a lower tax rate on interest, that lower rate may apply, provided the payee furnishes necessary documents like a Tax Residency Certificate (TRC) and Form 10F.

Threshold Limit for TDS Deduction

Section 194LC does not prescribe any specific threshold limit for the deduction of TDS. Tax is required to be deducted irrespective of the amount of interest paid, provided the conditions for applicability are met.

Time of Tax Deduction

The deductor is required to deduct TDS under Section 194LC at the earliest of the following two events:

• At the time of credit of such interest income to the account of the payee.
• At the time of actual payment of such interest (whether in cash, by cheque, draft, or any other mode).

Responsibilities of the Deductor

Indian companies and business trusts responsible for deducting tax under Section 194LC must adhere to the following compliance procedures:

• Obtain TAN: Obtain a Tax Deduction and Collection Account Number (TAN).
• Verify Payee's PAN/Documents: Obtain the payee's PAN or, for DTAA benefits, relevant documents like TRC and Form 10F.
• Deduct Tax: Deduct TDS at the correct rate (5%, 4%, 9% or DTAA rate, or 20% for non-PAN cases).
• Deposit Tax: Deposit the deducted TDS to the Central Government within the prescribed due dates.
• File TDS Returns: File quarterly TDS returns in Form 27Q (for payments to non-residents).
• Issue TDS Certificates: Issue TDS certificates in Form 16A to the payee as proof of deduction.

Penalties for Non-Compliance: Failure to comply with the provisions of Section 194LC can result in penalties and interest, similar to other TDS defaults, including:

• Interest under Section 201(1A) for delay in deduction or deposit.
• Penalty under Section 271C for failure to deduct or pay TDS.
• Late filing fees for TDS returns (Section 234E).

Taxability for the Non-Resident/Foreign Company (Payee)

The interest income received by the non-resident or foreign company is taxable in India. The TDS deducted under Section 194LC can be claimed as a credit against their final tax liability in India when they file their Income Tax Return (ITR) (if applicable) or seek a refund. This credit can be verified by checking Form 26AS.

Conclusion

Section 194LC is a significant provision that supports foreign investment by offering a lower TDS rate on specific interest income to non-residents. Given the varying rates and conditions tied to borrowing dates and listing locations (like IFSC), it is crucial for Indian companies, business trusts, and foreign investors to thoroughly understand its provisions. Proper adherence ensures compliance with Indian income tax laws and smooth cross-border financial transactions.