Section 194LC of the Income Tax Act, 1961

Introduction

Section 194LC of the Income Tax Act, 1961 is a provision that was introduced by the Finance Act, 2012. Its purpose is to promote foreign investment in India by providing favorable tax treatment on interest income earned by non-resident investors on their investments in Indian companies. In this article, we will explore the eligibility criteria for Section 194LC, its tax treatment, key features, comparison with other tax provisions, and practical implications. 

Eligibility Criteria under Section 194LC 

Where income by way of interest is paid to a non-resident (not a company or foreign company) paid by a specified company or business trust, the person responsible for making the payment will deduct TDS. To be eligible for benefits under Section 194LC, non-resident investors must meet certain criteria. The term “non-resident” includes a person who is not a resident in India, as well as a foreign company that does not have a permanent establishment in India. Eligible instruments and transactions include rupee-denominated bonds, foreign currency bonds, and loans. However, investments made before July 1, 2012, are not eligible for benefits under this provision. 

Tax Treatment under Section 194LC 

The rate of TDS on interest income earned by non-resident under this provision will be as follows: 

1. TDS at the rate of 5% – in general cases.  
2. TDS at the rate of 4% – Money borrowed from a source outside India by issue of long-term bond or rupee denominated bond on or after the 1st April 2020 but before the 1st July 2023, that is listed on a recognised stock exchange located in any International Financial Services Centre (IFSC) 
3. TDS at the rate of 9% – Money borrowed from a source outside India by issuance of long-term bond or rupee denominated bond on or after the 1st July, 2023, that is listed on a recognised stock exchange located in any IFSC 
4. TDS at the rate of 20% in case of interest paid by specified company under a loan agreement, if PAN is not given. 

Additionally, non-residents are to add surcharge and education cess on the interest income earned through eligible instruments and transactions. 

Time of deducting TDS under Section 194LC of the Income Tax Act, 1961 

TDS is required to be deducted when- 

• Such sum is credited of such sum to the account of payee; or 
• Payment is made to the payee in cash or by way of issue of cheque/ draft/ any other mode 

whichever event takes place earlier. 

Benefits of Section 194LC 

The impact of Section 194LC on foreign investment in India has been significant. It has helped to attract foreign investment in a range of sectors, including infrastructure, renewable energy, and manufacturing. However, some challenges remain, including compliance with applicable laws and potential penalties for non-compliance.  

Conclusion 

In conclusion, Section 194LC of the Income Tax Act, 1961, is critical for promoting foreign investment in India. However, challenges remain, including compliance with applicable laws and potential penalties for non-compliance.  

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