Section 194LD – Income Tax

To boost foreign investment, the government added Section 194LD to the Income Tax Act of 1961, which took effect on June 1, 2013. Interest income produced by a Foreign Institutional Investor or a Qualified Foreign Investor from government securities or specified bonds was taxed at a lower rate under Section 194LD. The purpose of this page is to provide a brief overview of Section 194LD of the Income Tax Act of 1961.

Boost Foreign Capital In India

  • Increase foreign capital inflows by providing a tax deduction at source (TDS) at a reduced rate for non-residents’ interest income generated on government securities or rupee-denominated bonds. Government Securities and Rupee Denominated Bonds are financial securities with a high financial value, attracting a wide range of overseas investors. Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI) are key contributors to India’s capital market, in addition to Indian investors. 
  • Tax is levied on the incomes obtained by Foreign Institutional Investors under Section 115AD of the Income Tax Act, 1961.  Income earned from interest on Government and Rupee denominated securities is also subject to taxation. With the addition of Section 194LD, Foreign Institutional Investors can now enjoy a lower TDS rate of 5% on their entire interest. This concession will assist India in attracting more foreign capital.
Section 194LD - Income Tax

Section 194LD 

  1. Any person who is responsible for paying any revenue using means of interest referred to in the subsection as a Foreign Institutional Investor or a Qualified Foreign Investor
  2. Shall deduct income tax at the rate of 5% at the time of crediting such income to the payee’s account or at the time of payment of such income in cash, by the issue of a check or draught, or by any other means, whichever is earlier.
  3. The interest income referred to in subsection (1) shall be the interest payable in respect of the payee’s investment in –
  • A rupee-denominated bond issued by an Indian corporation; or 
  • Government security

Provided that the interest rate on the bond referred to in section-

(i) shall not exceed the rate that the Central Government may notify in this regard.

 Explained: –

  • A registered institution that invests in a country other than its own is referred to as a ‘foreign institutional investor.’
  • A ‘Qualified Foreign Investor’ is a subset of FII that is a foreign individual, group, or association that is barred from investing in countries that are FATF members.
  • A rupee-denominated bond is one issued by an Indian entity in a foreign market using rupees as the buying, selling, and repayment currency.
  • A government security is a low-risk bond issued by the government.

A qualified foreign investor, often known as a foreign institutional investor (FII), considers investing in securities to be profitable and consequently makes investments with a security interest in the collateral.

Section 194LD

Extension of the Concessional Tax Rate for Eligible Period under Section 194LD

  • The existing provisions of section 194LD of the Act provide for a five percent reduction in TDS. Interest is payable at any time on or before the FIIs and QFIs on their investments in Government securities and rupee-denominated corporate bonds, provided that the rate of interest does not exceed the rate declared by the Central Government in this regard.
  • Considering stakeholder feedback, it is recommended to change section 194LD to give a 5% concessional rate. Interest payable before July 1, 2020, will now be eligible for TDS. This change will take effect on April 1, 2018, and will apply to the 2018-19 evaluation year and subsequent years.

Amendment – Section 194LD

With effect from the 1st day of April 2018, the figures, letters, and words “1st day of July 2017” shall be substituted for the figures, letters, and words “1st day of July 2020” in section 194LD of the Income Tax Act, sub-section (2).

Key Questions

1) Who is liable for deducting tax under Section 194LD?

Any person who is responsible for paying interest income to a Foreign Institutional Investor or a Qualified Foreign Investor.

2) What is the Payment Method?

Interest is due on or after the 1st of June 2013 but before the 1st of July 2023 (Amended in 2020) on an investment made by the payee in a rupee-denominated bond issued by an Indian corporation or a Government bond.

On or after April 1, 2020, but before July 1, 2023, about the payee’s investment in municipal debt securities.

3) When should TDS be deducted under Section 194LD?

When such income is credited to the payee’s account or when payment is made, whichever comes first. “Payment” for this purpose can be in cash, in the form of a cheque or drafts, or any other manner.

4) TDS Rate under Section 194LD

TDS levels shall be set at 5%. The surcharge, where applicable, as well as the Health and Education Cess of 4%, will be added to the above rates. If the deductee does not provide PAN, the TDS rate will be 20% in all circumstances.