1007. Whether non-resident person (corporate as also  non-corporate) owning 4 per cent National Defence Loan, 1968 and 43 /4 per cent National Defence Loan, 1972, are entitled to receive interest thereon without deduction of tax at source

1. A question has arisen whether the provisions of paragraph 5 of the Ministry of Finance (Department of Economic Affairs) Notification No. 4(28) W&M/65, dated 19-10-1965, which lays down, inter alia, that non-residents will be exempt from tax under the Income-tax Act, on the interests on the above-mentioned loans held by them, has the effect to exempting the  interest on these loans from deduction of tax at source under section 193, where these loans are held by non-resident persons, and, if so, whether foreign banks are entitled to receive the interest on those loans without deduction of tax at source even where these are held by the bank on behalf of a constituent. The position in the matter is stated in the following paragraphs.

2. By virtue of the Ministry of Finance (Department of Revenue) Notification (Income-tax) No. SO 3331, dated 19-10-1965, issued under clause (4) of section 10 non-residents are eligible for exemption from income-tax on their income by way of interest on 4¼ per cent National Defence Loan, 1968 and 4¾ per cent National Defence Loan, 1972. As a corollary to this position non-resident persons (corporate as also non-corporate) owning  these loans are entitled to receive the interest thereon without deduction of tax at source.

3. Resident persons are chargeable to income-tax on their  income by way of interest on the above-mentioned loans. However clause (ia) of the proviso to section 193 exempts from deduction of tax at source the interest on these loans where this is payable to a resident individual. Where the interest is payable to residents who are not individuals (e.g., companies),tax is deductible at source from such interest.

4. In view of the position stated in the preceding paragraphs, where the above-mentioned loans are registered in the name of a non-resident bank, no tax is deductible at source from the interest if the beneficial ownership over the securities vests in the bank itself or in any of its  constituents who is a non-resident. The same position obtains where the securities are deposited in a resident bank on behalf of a constituent who is resident individual but not where such constituent is a resident person other than an individual (e.g., a resident company). In the latter case, tax will be deductible at source under section 193 from the interest on these securities.

5. Where a foreign bank holding 4¼ per cent National Defence Loan, 1968, or 4¾ per cent National Defence Loan, 1972, claims that it is entitled to receive payment of the interest on these loans without deduction of tax at source, it will be required to furnish to the Public Debt Office a declaration as to the beneficial ownership of these securities. Where the securities are beneficially owned by the bank itself or by a non-resident constituent of the bank, the interest will be paid without deduction of tax at source. Where the securities are beneficially owned by a resident constituent of the foreign bank, the declaration should further state whether the constituent is an individual or a person other than an individual (e.g., firm, company, etc.). Where the beneficial owner, according to this declaration,is a resident individual, the interest will be paid without deduction of tax at source. Where the beneficial owner is a resident person other than an individual, tax will be deducted at source from the interest on these securities. The Public Debt Offices of the Reserve Bank of India have been informed of the position stated above.

Circular : No. 13 [F. No. 12/224/68-ITCC], dated 14-4-1969.

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