Taxation of Periodic Interest income earned from investments in bonds and Debentures :-
When Investments is made in Listed /Unlisted Securities being Bonds and Debentures in a currency other than Indian Currency by the Non Residents.
FAQs on above –
1) What is the treatment of interest income earned on bonds and Debentures subscribed in Foreign Currency?
Ans – Interest income earned by Foreign Institutional Investors shall always be taxable under ” other Sources”. For other Non Residents, it’s however may be different. Means if the Securities are held as Stock in Trade, then it is taxable under Profits and gains from business / profession, otherwise it us taxable under other sources. However what will be tax rates on interest is the subject matter of class and types of investments.
2) Please elaborate the Provisions of concessional Rates of Taxation on interest income earned by Non Residents Assessee including Foreign Institutional Investors?
Ans – To Strengthen the Foreign Exchange Market, Government of a India introduced the New Economic Policy, 1991 under the leadership of Hon’ble (Past) Finance Minister Dr. Manmohan Singh and Hon’ble (Past) Prime minister Shri Narsimha Rao Which was proved to be the boon and turning points for Indian economy. To further promote the Foreign Currency Flows Central Government from time to time liberals the provisions of taxation for non residents.
And to be very frank, India provides one of the lowest effective Tax Rates to NRI in the world provided other conditions are satisfied.
Some of the Glimpse of important sections are as Following –
↔️ Section 194LC read with Section 115A – This Section Contemplates that if a Non Residents subscribed the long term Bonds of Indian company or Business Trust, which is notified by the Central Government in Foreign Currencies, then such interest income shall be taxable @ concessional rates of tax i.e only @ 5 percent.
Further to make Indian companies more competitive in world Market, the central government along with Securities Exchange Board of India now allowed certain Indian companies to issues Rupee Denominated Bonds of outside India.
When a Non Residents subscribed RDBs issued by Indian Companies, in Foreign Currencies, and earned interest from such bonds, Then such interest shall be taxable @ 5 percent. (This is amended vide Finance Act, 2017)
Reason of Amendment – Earlier only The benefits of the concessional Rates of taxation on interest income on Rupee denominated bonds is available only to Foreign institutional investors or qualified institutional buyers, and not to other non residents, Such benefits is incorporated in section 194LD discussed below. Hence, in order to bring the parity, and to promote the other foreign investors to subscribe the Rupee denominated Bonds in foreign currencies, section 194LC had been amended to provide the benefits of concessional Rates of taxation to Such Non – Residents Assessee.
↔️ Section 194 LD read with Section 115A contemplates that if the Foreign Institutional Investors and qualified Institutional buyers subscribed the Rupee Denominated Bonds and notified Government Securities in Foreign Currencies and earned interest income from those bonds, then such interest shall be taxable @ 5 percent.
Note – it will hardly the matter of concern that at which market such Rupee Denominated Bonds are issued at indian Market or Foreign Market.
↔️ Section 115AC Contemplates that if a non residents earned interest income by subscribing the Foreign Currency convertible bonds / Exchangeable Bonds in Foreign Currencies which is notified by the Central government, then interest income shall be chargeable @ 10 %. However it is interesting to note that, if such Securities is notified and covered us 194LC/194LD, then such Rate shall be substituted with “5%”,
↔️ Normally Foreign Institutional Investors are incorporated as Corporates.
And Since they are incorporated outside India, hence normally their income is liable to be taxed @ 40%. + Surcharge and Educational Cess which is applicable to Foreign Companies.
It might also be possible, that foreign Institutional Investors invest in other interest bearing Securities which are neither notified by Central Government / means not covered in above sections. Hence in such a case, it will discouraged them to invest in those Securities which are not notified. Since, it will attract higher rates of Taxation.
Hence, in order to curb down, this issues, section 115AD is introduced which describes that if a foreign Institutional Investors invest in a Securities which is not covered in notified categories, then interest income on such Securities shall be taxed @ 20 percent,
All though, it is acceptable that interest rate is still high, but there is also a benefit attached to it. In Section 115AD, Foreign Institutional Investors can invest in any currencies including Indian national Rupees, While in all of the above sections, there is a strict requirements of investments in Foreign Currencies.
Again, the Provisions of Section 115AD only applies to the Foreign Institutional Investors and not for other assessee. It means if a foreign companies which subscribed the Bonds and Debentures of Indian companies which is not covered by the provisions of section 194LB/194LC/194LD/ 115AC, then interest shall be chargeable at the tax rates of 40% flat and the benefits of 20% is not given to them. Since, Section 115AD only covers foreign Institutional Investors and not all the non residents.
3) Whether there is any requirements of deductions of Tax at sources while paying the above mentioned sum, if yes what are the consequences if tax is not deducted in accordance with law?
Ans – The law of chapter XVIIB with respect to tax deductions at sources is pretty much clear regarding the payment made to the non residents which is taxable for them as per the income tax act, 1961.
Simply put whatever may be the amount of tax Liabilities become due, the payer is responsible to deduct the tax on such income and be liable to pay to the credit of central government.
Further Section 40(a)(i) said that if any interest, Royalty, and other payment made to the Foreign companies and Non Residents, which is chargeable to income tax,
then No deductions shall be allowed to the Assessee in respect of such expenditures which is deemed to be the income of the non residents until the person responsible to make the payments to the non residents Deduct and Paid the appropriate amount of TDS on or before making the payment to the credit of central government.
However, there is a major amendments made in Section 40(a)(i) made by Finance Act, 2019 which crux is Following :-
suppose Mr X a resident fails to deduct the TDS on interest income paid to the non resident individual Mr. John and the interest amount is Rs 6,00,000.
Earlier, this expenditures of Rs 6,00,000 shall not be allowed as deductions while computing the business income of the Mr X even if Mr John himself pay the taxes later on in form of self assessment tax us 140A and file the ROI.
But Now, after the amendment Mr X will be allowed to take the deductions of interest expenditures while computing his business income provided other conditions are satisfied.
However there is also an exception where the Resident is not required to deduct the tax deductions at sources even he paid interest to the non residents which is subject to tax us 115A.
The provisions is contained in section 172 read with Section 44B of the Income tax act, 1961.
4) Non Residents including Foreign Institutional Investors also incurred certain expenditure in order to earn those interest income. Whether such expenditures will allows as deductions while calculating the taxable Portion of income ?
Ans- Since we are providing the lowest rates of taxation on above income, hence non residents are not allowed to claim any expenditures within section code of 28 to 44 and /or Section 57 of the “Act”.
5) Non Residents including Foreign Institutional Investors and foreign corporates also make investments in chapter VIA deductions series. Whether they are eligible to claim the deductions against the interest income in which concessional rates of taxation is claimed by the Assessee?
Ans – No, Non Residents can’t claim the deductions under chapter VIA against any interest income which is being subjected to concessional ray of tax @5%/10%/20%.
However, if non residents have also other incomes apart from interest income, then he claim deductions only to the extent of such income.
For example, X Inc earn interest which is taxable @5 percent amounting to Rs 1,80,000. He had earned commission income to the tune of Rs 4,00,000.
He also make an donation to PM relief fund and eligible for 80G deductions to the extent of 3,00,000. Compute his total tax Liabilities
1) Tax @ 5 % us 115A – Rs 9,000
2) Commission Income (4,00,000-3,00,000)*40% – Rs 40,000
Hence Total Tax Liabilities comes to Rs 49,000 + applicable cess and surcharges if any.
Hence from the above it is very much clear that deductions under chapter VIA will available against those income which are not subject to concessional Rates of taxation.
6) Suppose, Mr X earn an interest income of Rs 6,00,000 subject to Tax Rates of 5 percent. Apart from that he also have a Losses under the head business head say Rs 4,50,000. He have also an unabsorbed depreciation of Rs 50,000, and also current year depreciation is Rs 20,000. Whether he is eligible to set off such deductions?
Ans – Section 115A overrides chapter VIA and Section 28 to 44 and Section 57. Hence Assessee is not eligible to claim the deductions of depreciation and unabsorbed depreciation since they are governed by section 32 and 32(2).
However it is to be noted that losses in the Income tax act, is governed by chapter VI consists of Section 70 to section 80 which is not overruled by section 115A.
Hence Assessee is eligible to set off such losses even against the income referred to in section 115A.
Hence applying the above Provisions, the taxable portion of interest shall be 1,50,000 on which tax @ 5 percent shall be apply.
And the total depreciation of Rs 70,000 which Includes current year Depreciation of Rs 20,000 will be carried forward normally us 32(2) of the “Act”
7) Whether the Rate of TDS will subsequently got increased by educational Cess @ 4 % ?
Ans – The answer of the above questions will found in chapter XVIIB of the Act, which clearly described that the Rates of TDS shall be further increase by educational Cess @ 4 Percent in all cases when the payment is going to make to Non Residents. Hence, the effective rate of taxation us 115A will be 5.20 %.
8) Whether the above Provisions of the concessional Rates of Taxation on interest income be equally applicable when Non Residents investors make investments in the bonds and Debentures of a private limited indian Company in Foreign Currencies?
Ans – Section 194LC and 194 LD both mentioned the Words ” Indian Companies “, There is no specific demarcation to exclude the closely held Companies means private limited Companies from such sections. Further, Private Limited Companies are also allowed to issues the Bonds and Debentures after full filing the prescribed conditions if any.
Hence, We can make a conclusion that yes even if the Bonds and Debentures are issued by the Private Limited Companies, then also the benefits of concessional Rates of taxation on such interest income shall be passed on to Such Foreign investors provided other statutory conditions with respect to Foreign Direct investments have been compiled with.
No Doubt, that private limited company can’t borrow/ Solicit monies from public at large using public platforms.
Hence, the Concept of private placement of issues of Bonds and Debentures still be relevant here also for private limited apart from other regulatory restrictions that may be imposed by (if any) Reserve Bank of India, Securities Exchange Board of India, Foreign Exchange Management Act, Securities Control and Regulations Act, Companies Act, 2013 and Income Tax Act, 196
However, In section 115AC, we will find the Words ” issued by Public Sector Companies “.. and hence the Benefits of Section 115AC with Concessional Rates of Taxation @ 10 % is not applicable to private limited Companies at all.
Again the benefits of Section 115 AD doesn’t restrict only to Listed Companies. Hence benefits of 115AD shall applicable even if the Securities which are not covered in section 194LC/ 194LD/115AC shall be given to foreign institutional investors provided other statutory conditions are satisfied.
However, if other non residents assessees subscribed the Securities of a private limited company even in foreign currencies, and other aspects of Section 115AD holds goods, then also the benefits of concessional Rates of Taxation on such interest income @ 20 % us 115AD not be given to them,
Since, the Provisions of Section 115AD shall solely applicable to Foreign institutional investors and not for other non residents assessees.
9) It is a well established principles, that private limited Companies are restricted to raise money from here and there specially from public. However this is the matter of raising the Funds from Non Residents. No doubts that there is central government interventions, but still what can be the possible logics to substantiate the Intentions of the Government ?
Ans – To substantiate the Intentions of the Government, I want to draw the Intentions of the reader towards the amendment made in Chapter VI by introduction of new Section 79(b), Introduction of Section 80- IAC, and many other benefits that are added to the act in recent years. After the promotion of “Make in India” and extensive growth in “Digital India”, many of the small startups is incorporated,
However, they are normally incorporated as private limited Companies,
In the initial days, they incurred the Losses.
However section 79 puts a restrictions in carry forward of Losses of private limited Companies if the shareholding had been changed in accordance with section 79.
Hence, recently Government after amending section 79, introduced a new Section 79B, which allows the private limited to carry forward their losses and hence clear their path of raising the funds easily. Amendment in section 79 is a classic example of Intentions of government to promote the start up not only in India but on a global scales.
Apart from that, Section 80IAC allows the Eligible startup to claim 100 percent Deductions from income of the Eligible startup for 3 consecutive financial years within the Block of 7 Assessment Years, Provided other conditions are satisfied.
Thus These Sections also supports the government Intentions to promote the small startups and encouraged them.
Since Eligible startup not only included Private limited Companies but also includes even a limited liabilities partnership.
Hence, to put restrictions on them to raise funds from foreign investments would certainly discouraged them to go and established themselves in global markets.
Hence, this may be the one possible Supporting Reasons behind such concepts.
Classic Practical Life Example may includes Acquisition of controlling interest in Indian E commerce Giant ” Flipkart ” by the US Company “Walmart”
When Investments is made in Listed /Unlisted Securities being Bonds and Debentures in a Indian currencies.
FAQs on the above issues –
1) Whether all the benefits that are applicable to the non residents assessee in case of investment made in foreign currency is equally applicable when investments are made in INR ?
Ans – The answer is straight forward No with one exception. One has to be very much clear about government Intentions, that government wants to increased the Flows of foreign exchange so that the demand of Indian currencies will increase and accordingly our Indian national Rupees will appreciate in global phenomenon.
2) You are talking about one exception in FAQs No 1. What is that ?
Ans – There is a exception where the benefits of reduced rates of taxation on interest income, and i.e. Section 115AD. As per Section 115AD, If the foreign institutional investors earns any income from Securities which is not covered by 194LC/194LD/115AC, etc.
Then such interest shall be taxable @ 20 percent. There is no such restrictions on which currency is to be used.
3) Whether other Non Residents like Non Residents Individuals and Foreign Companies can avail the benefits of Section 115AD, by investing the amount using indian national Rupees?
Ans – No, the benefits us 115AD only applicable to Foreign institutional investors and not to other non residents, Hence they will be liable to taxes normally and no benefits of concessional Rates of taxation will be passed to them.
4) what is the possible reason to cover only foreign institutional investors in section 115AD?
Ans – Normally, in Indian stock markets, the Foreign institutional investors are the major player and hold a remarkable Percentage of holdings of Securities of market. Hence, it is quite reasonable to passed on the benefits of Section 115AD to the foreign institutional investors as compared to other non residents assessees.
5) If Foreign institutional investors make certain expenditure in order to earned the interest income us 115AD. Whether they will be eligible to claim the deductions of such expenditures?
Ans – No Deductions us 57 shall be allowed while calculating the interest income us 115AD. Hence Foreign institutional investors are not allowed to claim any expenditures on above income,
6) Whether they are allowed to set off losses and Depreciation including unabsorbed Depreciation and Deductions under Chapter VIA ?
Ans – Section 115AD overrides only section 28 to 44D and 57 and Chapter VI- A and not Chapter VI which dealt with Losses in income taxes. Hence, Foreign institutional investors are eligible to set off losses against the income deemed us 115AD and But they can’t claim Deductions of Depreciation and Chapter VIA.
7) What about the other non residents like Non Residents Individuals and Foreign Companies ?
Ans – Since, the Provisions of Section 115AD is not apply to them, hence there is no questions of applying the other subsidiary aspects of Section 115AD. So, they can normally claim such Deductions, losses as per the other relevant Provisions of the Income Tax Act, 1961.
8) Is it Correct to Say, Then where the benefits of concessional Rates of taxation on interest income not given to the non residents Assessee, then Expenditures related to those expenses be it us 57 or Section 28-44C shall be allowed to the Assessee ?
Ans – Yes, The Non Residents Individual (Except the case that Falls under Section 115AD) can claim the benefits of such expenditures including Depreciation and unabsorbed Depreciation also.
Disclaimer :- this article is for the purposes of information and shall not be treated as solicitation in any manner or of for any other purposes whatsoever. For the benefits of reader a short glimpse of provisions is presented in my personal language as per my capabilities. It shall not to be used for any legal advice /opinion and shall not to be used to rendering any professional opinion. Readers are advised to kindly go through to original government publications and published case laws and judicial pronouncements. Errors may creep in and hence it will be highly appreciable to highlight such errors or providing suggestions for effective improvements.