Amendment of section 194LD of the Act to extend the period of concessional rate of withholding tax and also to extend this concessional rate to municipal debt securities.

Section 194LD of the Act provides for lower TDS of five per cent in case of interest payments to Foreign Institutional Investors (FII) and Qualified Foreign Investors (QFIs) on their investment in Government securities and RDB of an Indian company subject to the condition that the rate of interest does not exceed the rate notified by the Central Government in this regard. The section further provides that the interest should be payable at any time on or after 1st June, 2013 but before 1st July, 2020.

Representations have been received for extension of the time limit and also for a further concessional rate of TDS on interest payment on investment in municipal bonds, as Foreign Portfolio Investors (FPIs) have now been permitted to invest in municipal bonds by the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) under the limits available for FPI investments in State Development Loans (SDL).

In order to attract fresh investment, create jobs and stimulate the economy, it has been proposed to amend section 194LD to,-

(i) extend the period of rate of TDS of five per cent under the said section to 1st July, 2023 from the existing 1st July, 2020;

(ii) provide that the concessional rate of TDS of five per cent under the said section shall also apply on the interest payable, on or after 1st April, 2020 but before 1st July, 2023, to a FII or QFI in respect of the investment made in municipal debt security.

This amendment will take effect from 1st April, 2020.

[Clause 83]

Extract of Relevant Clauses of Finance Bill, 2020

Clause 83

“Clause 83 of the Bill seeks to amend section 194LD of the Income-tax Act relating to income by way of interest on certain bonds and Government securities.

Sub-section (2) of the said section specifies that the interest payable on or after the 1st day of July, 2013 but before the 1st day of July, 2020, in respect of investments made in a rupee denominated bond of an Indian company or a Government security shall be eligible for lower withholding tax of five per cent.

It is proposed to substitute the said sub-section so as to provide that the concessional rate of five per cent. withholding tax shall be available on the interest payable––

(i) on or after the 1st day of July, 2013 but before the 1st day of July, 2023, in respect of investments made in rupee denominated bond of an Indian company or a Government security;

(ii) on or after the 1st day of April, 2020 but before the 1st day of July, 2023 in respect of investments made in a municipal debt securities.

It is further proposed to provide that the rate of interest in respect of rupee denominated bond of an Indian company shall not exceed the rate as may be notified by the Central Government in this behalf.

It is also proposed to insert new clause (ba) in the Explanation to the said section so as to define the expression “municipal debt securities”.

These amendments will take effect from 1st April, 2020.”

Extract of Relevant Amendment Proposed by Finance Bill, 2020

83. Amendment of section 194LD.

In section 194LD of the Income-tax Act,––

(i) for sub-section (2), the following sub-section shall be substituted, namely:––

“(2) The income by way of interest referred to in sub-section (1) shall be the interest payable,––

(a) on or after the 1st day of June, 2013 but before the 1st day of July, 2023 in respect of the investment made by the payee in –

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

(ii) a Government security;

(b) on or after the 1st day of April, 2020 but before the 1st day of July, 2023 in respect of the investment made by the payee in municipal debt securities:

Provided that the rate of interest in respect of bond referred to in sub-clause (i) of clause (a) shall not exceed the rate as the Central Government may, by notification in the Official Gazette, specify.”;

(ii) in the Explanation, after clause (b), the following clause shall be inserted, namely:––

‘(ba) “municipal debt securities” shall have the meaning assigned to it in clause (m) of sub-regulation (1) of regulation 2 of the Securities and Exchange  Board of India (Issue and Listing of Municipal Debt Securities) Regulations, 2015 made under the Securities and Exchange Board of India Act, 1992;’.

Source- Finance Bill 2020 / Union Budget 2020-21

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