Section 194LB Payment of interest on infrastructure bonds to Non-Resident Indians

Introduction

Section 194LB of the Income Tax Act, 1961, relates to tax deduction at source on interest income from an infrastructure debt fund. The law requires a 5% tax deduction at source on interest payments to non-residents or foreign companies by infrastructure debt funds as per Section 10(47). This article discusses the section's provisions, applicability, and effects on taxpayers.

Applicability of Section 194LB 

Section 194LB of the Income Tax Act, 1961, applies to anyone paying interest to a non-resident or a foreign company for an infrastructure debt fund. 

What is an Infrastructural Debt Fund? 

Per Section 10(47) of the Income Tax Act, 1961, an "infrastructure debt fund" is an organization or trust set up to invest in infrastructure. Its income is not included in the total income.

SEBI Provisions Applicability 

This section applies to all infrastructure debt funds registered under the SEBI Regulations, 2011. These regulations manage the registration and regulation of infrastructure debt funds in India. 

TDS Rate under Section 194LB 

Section 194LB mandates a TDS deduction at a rate of 5%, including cess and surcharge. Note, there is no threshold limit under this section. 

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Surcharge and Cess under Section 194LB 

Section 194LB includes surcharges and cess in addition to the basic rate of TDS. A surcharge is an extra tax on the income tax payable. The surcharge rate depends on the income level of the payer, and it's current rate for foreign companies is based on the time of TDS deduction. 

Education cess and SEHC are also charged on the TDS amount at 4% each. These charges fund education initiatives in the country. Note that if foreign companies are eligible for tax treaty benefits, the TDS rate could be less than 5%. 

Non-Applicability of Section 197 

Section 197 does not apply to tax deductions at source under Section 194LB for interest on infrastructure debt funds. This section involves lower TDS rates, and thus, does not apply to payments made on infrastructure debt funds. 

TDS on Joint Development Agreement under Section 194IC of the Income Tax Act, 1961 

TDS is deducted when: 

• The sum is credited to the account of the payee, or
• Payment is made to the payee in cash or by issue of cheque/draft/any other mode

This applies to whichever event occurs first. 

Impact of Section 194LB 

Section 194LB of the Income Tax Act, 1961, reduces the net amount received by non-resident or foreign companies from infrastructure debt fund interest payments due to a 5% TDS. For example, if a debt fund pays INR 1,00,000 interest to a non-resident company, the TDS under Section 194LB will be Rs. 5,000. The non-resident company then receives INR 95,000. The TDS deducted is remitted to the government and can be credited against the company's final tax liability.

Example of TDS under Section 194LB

To illustrate, let’s consider this scenario: 

ABC Ltd., an Indian infrastructure debt fund, pays Rs. 10,00,000 interest to a non-resident individual. ABC Ltd. deducts a 5% TDS on this interest, amounting to Rs. 50,000. 

If the non-resident individual is from a country with a Double Taxation Avoidance Agreement (DTAA) with India that specifies a lower TDS, for example, 3%, the TDS will be Rs. 30,000 instead. 

Conclusion

Section 194LB of the Income Tax Act, 1961, applies to interest payments by infrastructure debt funds to non-resident or foreign companies. The person responsible for the payment must deduct a 5% TDS. This deduction applies to the total interest paid, including surcharge and cess.