Introduction
Section 194LB of the Income Tax Act, 1961, deals with the deduction of tax at source on income by way of interest from an infrastructure debt fund. This section mandates that any person who makes a payment of interest to a non-resident (not a company) or a foreign company on behalf of an infrastructure debt fund, as per Section 10(47), is required to deduct tax at source at the rate of 5%. In this article, we will discuss the provisions of this section, its applicability, and its impact on taxpayers.
Applicability of Section 194LB
Section 194LB of the Income Tax Act, 1961, is applicable to any person who makes payment of interest to a non-resident (not a company) or a foreign company on behalf of an infrastructure debt fund.
What is an Infrastructural Debt Fund?
According to Section 10(47) of the Income Tax Act, 1961, an organization or trust that has been established with the intention of investing in the infrastructure sector, referred to as an “infrastructure debt fund” will not be included in the total income.
Applicability of Provisions of SEBI
The provisions of this section are applicable to all infrastructure debt funds that are registered under the Securities and Exchange Board of India (SEBI) Regulations, 2011. These regulations provide for the registration and regulation of infrastructure debt funds in India.
Rate of TDS under Section 194LB
Under Section 194LB, the deduction of TDS shall be at the rate of 5%, including cess and surcharge. It is important to note that there is no prescribed threshold limit under Section 194LB.
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Surcharge and Cess under Section 194LB
Apart from the basic rate of TDS, surcharges and cess may also be applicable under Section 194LB. A surcharge is an additional tax levied on the income tax payable by the assessee. The rate of the surcharge varies depending on the income level of the assessee. The surcharge rate for the non-resident or foreign company will be as per the prevailing rate at the time of deduction of TDS.
Similarly, education cess and SEHC will also be levied on the TDS amount at a rate of 4% each.
The purpose of these grants is to fund education initiatives in the country. However, it is important to note that if the non-resident or foreign company is eligible for any tax treaty benefits, then the rate of TDS may be lower than 5%.
Non-Applicability of Section 197
The provision of Section 197 will not be applicable to the deduction of tax at source under Section 194LB for interest on infrastructure debt funds. Section 197 deals with lower rates of TDS and thus, it will not be applicable to payments made on infrastructure debt funds.
Time of deducting TDS on Joint Development Agreement under Section 194IC of the Income Tax Act, 1961
TDS is required to be deducted in case of payment made to the when-
- Such sum is credited of such sum to the account of the 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.
Impact of Section 194LB
Section 194LB of the Income Tax Act, 1961 has a significant impact on taxpayers. The non-resident or foreign company receiving the interest payment from the infrastructure debt fund will be subject to TDS at the rate of 5%. This means that the net amount received will be lower than the gross amount of interest payable.
For example, if an infrastructure debt fund pays interest of INR 1,00,000 to a non-resident or foreign company, the TDS applicable under Section 194LB will be Rs. 5,000. The net amount payable to the non-resident or foreign company will be INR 95,000. The TDS deducted will be remitted to the government. Such credit will be available to the non-resident or foreign company against their final tax liability.
Example of TDS under Section 194LB
To understand the concept of TDS under Section 194LB, let’s take an example:
ABC Ltd. is an infrastructure debt fund in India. It pays interest of Rs. 10,00,000 to a non-resident individual. ABC Ltd. shall deduct TDS of 5% on the interest paid to the non-resident individual. Therefore, the TDS amount will be Rs. 50,000 (5% of Rs. 10,00,000).
In cases where the non-resident individual is a resident of a country with which India has a Double Taxation Avoidance Agreement (DTAA), the rate of TDS may be lower than 5%. For instance, if the DTAA between India and the non-resident individual’s country provides for a lower rate of TDS on interest income, say 3%, then the TDS amount will be Rs. 30,000 (3% of Rs. 10,00,000).
Conclusion
Section 194LB of the Income Tax Act, 1961, is applicable to the payment of interest by an infrastructure debt fund to a non-resident or foreign company. Any person responsible for making such a payment must deduct TDS at the rate of 5%. The deduction of TDS is applicable to the interest paid, including the surcharge and cess.
