Section 194LC | TDS on Interest Income from Indian Company or Business trust

1) Who is responsible to deduct tax under section 194LC of Income Tax Act, 1961?

If an Indian company or a business trust pays income by way of interest to non-resident (not being a company) or foreign company, has to deduct TDS under this section.

2) Nature of Payment

• Interest payable by an Indian Company or a Business Trust in respect of monies borrowed by it in foreign currency from a source outside India,—

a. under a loan agreement at any time on or after the 1st day of July, 2012 but before the 1st day of July, 2023(amended w.e.f. 01.04.2020); or

b. by way of issue of long-term infrastructure bonds at any time on or after the 1st day of July, 2012 but before the 1st day of October, 2014; or

c. by way of issue of any long-term bond including long-term infrastructure bond at any time on or after the 1st day of October, 2014 but before the 1st day of July, 2023 (amended w.e.f. 01.04.2020);, as approved by the Central Government in this behalf.

d. in respect of monies borrowed by it from a source outside India by way of issue of any long-term bond or rupee denominated bond on or after the 1st day of April, 2020 but before the 1st day of July, 2023, which is listed only on a recognised stock exchange located in any International Financial Services Centre, and”;

e. Interest payable in respect monies borrowed by it from a source outside India by way of issue of rupee denominated bond before the 1st day of July, 2020.

3) When to Deduct TDS under Section 194LC?

At the time of credit of such income to the account of payee or at the time of payment whichever is earlier.

For this purpose, “payment” can be in cash or by issue of a cheque or draft of by any other mode.

4) Rate of TDS under Section 194LC

The rate of tax u/s 194LC is 4%( w.e.f. 01.04.2020)(plus Health & Education Cess @ 4%).

5) Other key points related to section 194LC

• Interest does not exceed the amount of interest calculated at the rate approved by Central Government in this behalf after considering the terms of bond or loan and its repayment.
• The provisions of section 206AA shall not apply in respect of payment of interest on long-term infrastructure bonds, as referred to in this section.

Extract of Section 194LC of Income Tax Act, 1961

Section 194LC TDS on Income by way of Interest from Indian Company or Business trust

194LC. (1) Where any income by way of interest referred to in sub-section (2) is payable to a non-resident, not being a company or to a foreign company by a specified company or a business trust, the person responsible for making the payment, shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct the income-tax thereon at the rate of five per cent:

[Provided that in case of income by way of interest referred to clause (ib) of sub-section (2), the income-tax shall be deducted at the rate of four per cent.]

(2) The interest referred to in sub-section (1) shall be the income by way of interest payable by the specified company or the business trust,—

(i)  in respect of monies borrowed by it in foreign currency from a source outside India,—

(a)  under a loan agreement at any time on or after the 1st day of July, 2012 but before the 1st day of July, [2023]; or

(b)  by way of issue of long-term infrastructure bonds at any time on or after the 1st day of July, 2012 but before the 1st day of October, 2014; or

(c)  by way of issue of any long-term bond including long-term infrastructure bond at any time on or after the 1st day of October, 2014 but before the 1st day of July, [2023],

as approved by the Central Government in this behalf; or

(ia) in respect of monies borrowed by it from a source outside India by way of issue of rupee denominated bond before the 1st day of July,  [2023; or]

[(ib) in respect of monies borrowed by it from a source outside India by way of issue of any long-term bond or rupee denominated bond on or after the 1st day of April, 2020 but before the 1st day of July, 2023, which is listed only on a recognised stock exchange located in any International Financial Services Centre, and]

(ii) to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan or the bond and its repayment.

Explanation.—For the purpose of this section—

(a)  “foreign currency” shall have the meaning assigned to it in clause (m) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);

(b)  “specified company” means an Indian company;

⁹⁷[(c) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);

(d)  “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43.]

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