The provisions relating to TDS on interest payable to non-residents on foreign borrowings have been restructured under the Income-tax Act, 2025. The earlier Section 194LC of the Income-tax Act, 1961 is now covered under Section 393(2) [Table: Sl. No. 2 and Sl. No. 4.E(a)/(b)], effective from 1st April, 2026.
This restructuring retains the concessional tax regime applicable to specified foreign borrowings and bonds, while introducing differentiated rates based on the nature and period of issuance of such instruments.
Quick Reference – Section Mapping & Reporting
- New Section (IT Act 2025): Section 393(2)
- Table Reference:
- Sl. No. 2
- Sl. No. 4.E(a)
- Sl. No. 4.E(b)
- Nature of Payment: TDS on Interest Payable to Non-Residents
- Earlier Section (IT Act 1961): Section 194LC
- Return Form: 27Q
- Code (for return filing): 1040, 1042, 1043
- Rate:
- 5%
- 4% (specified IFSC bonds)
- 9% (post July 2023 issuances)
Applicability of TDS under Section 194LC
TDS is required to be deducted on interest payable by an Indian company or a business trust in respect of monies borrowed in foreign currency from a source outside India or through specified bonds. The responsibility to deduct tax lies with the payer making such interest payment, and the provisions apply to non-resident recipients, including foreign companies.
Nature of Income Covered
The section applies to interest income arising from specified foreign borrowings, including:
- Interest on loans borrowed in foreign currency under approved loan agreements
- Interest on long-term infrastructure bonds and long-term bonds issued within specified time periods
- Interest on rupee denominated bonds issued to non-residents
- Interest subject to limits approved by the Central Government
These provisions ensure concessional taxation for foreign investment routed through approved instruments.
Time of Deduction
Tax is required to be deducted at the time of credit of such interest to the account of the payee or at the time of payment, whichever is earlier.
Rate of TDS
The applicable rate of TDS depends on the nature and timing of the borrowing:
- 5% on interest payable in respect of approved foreign currency borrowings and specified bonds issued within prescribed periods
- 4% on interest payable on long-term bonds or rupee denominated bonds listed on a recognised stock exchange in an IFSC, issued between 1st April 2020 and 1st July 2023
- 9% on similar instruments issued on or after 1st July 2023
In addition to the base rate, applicable surcharge and Health & Education Cess shall also be levied.
Conditions for Concessional Rate
The concessional rates under this section are subject to certain conditions:
- The borrowing must be in foreign currency or through specified bonds
- The borrowing or bond issue must be approved or fall within prescribed timelines
- In certain cases, the rate of interest must not exceed the limit specified by the Central Government
Failure to meet these conditions may result in loss of concessional tax treatment.
Additional Applicability for Non-Residents (As per IT Act 2025)
| Nature of Payment | New Section Reference | Rate | Remarks |
|---|---|---|---|
| Any income by way of interest payable in respect of monies borrowed in foreign currency from a source outside India— (a) under a loan agreement or issue of long term infrastructure bond on or after the 1st July, 2012 but before the 1st July, 2023; or (b) by way of issue of any long-term bond on or after the 1st October, 2014 but before the 1st July, 2023, which is approved by the Central Government in this behalf | 393(2) [Table: Sl. No. 2] | 5% | Approved borrowings / bonds |
| Any income by way of interest payable in respect of monies borrowed from a source outside India by way of issue of any long-term bond or rupee denominated bond, which is listed only on a recognised stock exchange located in any International Financial Services Centre – Issued on or after the 1st April, 2020 but before the 1st July, 2023 | 393(2) [Table: Sl. No. 4.E(a)] | 4% | Time-bound concessional rate (IFSC bonds) |
| Any income by way of interest payable in respect of monies borrowed from a source outside India by way of issue of any long-term bond or rupee denominated bond, which is listed only on a recognised stock exchange located in any International Financial Services Centre – Issued on or after the 1st July, 2023 | 393(2) [Table: Sl. No. 4.E(b)] | 9% | Applicable for new IFSC bond issuances |
Recent Addition (Applicable for Specified Period)
A concessional TDS rate of 4% was applicable on interest payable to a non-resident in respect of money borrowed in foreign currency from a source outside India by way of issue of any long-term bond or rupee denominated bond (RDB), issued on or after 1st April, 2020 but before 1st July, 2023, and listed on a recognised stock exchange located in an IFSC.
This concessional rate was introduced to attract foreign investment and stimulate economic activity.
Note: This provision was applicable only for bonds issued within the specified period and is no longer available for new issuances after 1st July, 2023. However, it may continue to apply to interest payments on eligible bonds issued during the specified period.
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