Effective Rate of TDS on the payment of interest to Foreign Institutional Investor
1. In this regard, it is relevant here to refer the provision of Section 194LD of the Act which reads as under:
Income by way of interest on certain bonds and Government securities.
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 on or after the 1st day of June, 2013 but before the 1st day of July, 2020 in respect of investment made by the payee in—
(i) a rupee denominated bond of an Indian company ; or
(ii) a 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.
2. Further Finance Act every year prescribes Surcharge to be added in case of non- resident while deducting tax at source. The Finance (No.2) Act, 2019, sub section (6) of Section 2, states as under:
(6) In cases in which tax has to be deducted under sections 192A, 194C, 194DA, 194E, 194EE, 194F, 194G, 194H, 194-I, 194-IA, 194-IB, 194-IC, 194J, 194LA, 194LB, 194LBA, 194LBB, 194LBC, 194LC, 194LD, 194M, 194N, 196B, 196C and 196D of the Income-tax Act, the deductions shall be made at the rates specified in those sections and shall be increased by a surcharge, for the purposes of the Union,—
(a) in the case of every individual or Hindu undivided family or association of persons or body of individuals, whether incorporated or not, or every artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2 of the Income-tax Act, being a non-resident, calculated,—
(i) at the rate of ten per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds fifty lakh rupees but does not exceed one crore rupees;
(ii) at the rate of fifteen per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one crore rupees but does not exceed two crore rupees;
(iii) at the rate of twenty-five per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds two crore rupees but does not exceed five crore rupees;
(iv) at the rate of thirty-seven per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds five crore rupees;
(b) in the case of every co-operative society or firm, being a non-resident, calculated at the rate of twelve per cent. of such tax, where the income or the aggregate of such incomes paid or likely to be paid and subject to the deduction exceeds one Crore rupees
3. A combined reading of Section 194 LD of the Income Tax Act, 1961 and Section 2(6) of the Finance (No.2) Act, 2019 will mean that rate of deduction of tax at source, if payment is made to non- resident, shall be as under:
| Non- Resident Payee | Income paid or likely to be paid | Rate of TDS | Surcharge | Health and Education Cess | Effective Rate of TDS |
| If FIP is a Company
|
Exceed 1 Crore but does not exceed Rs. 1 Crore | 5% | 2% | 4% | 5.304% |
| Exceed 10 Crore | 5% | 5% | 4% | 5.460% | |
| If FIP is Individual, HUF, AOP/BOI, Artificial Judicial Person | Exceed 50 Lakh but does not exceed Rs. 1 Crore | 5% | 10% | 4% | 5.720% |
| Exceed 1Crore but does not exceed Rs. 2 Crore | 5% | 15% | 4% | 5.980% | |
| Exceed 1Crore but does not exceed Rs. 5 Crore | 5% | 25% | 4% | 6.50% | |
| Exceed Rs. 5 Crore | 5% | 37% | 4% | 7.124% | |
| If FIP is a Firm/LLP | Exceed Rs. 1 Crore | 5% | 12% | 4% | 5.824% |
4. As regards CBDT Press Release dated 24.08.2019 withdrawing enhanced surcharge levied by Finance (No. 2) Act, 2019, it is to be noted that this withdrawal is on tax payable at special rate by both domestic as well as foreign investors on long term and short term capital gain arising from the transfer of equity share in a company or unit of an equity oriented fund/business trust which are liable for securities transaction tax and also on tax payable at special rate under section 115AD by the Foreign Institutional Investor (FPI) on the capital gains arising from the transfer of derivatives.
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