Section 194LD of the Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on interest income paid to Foreign Institutional Investors (FIIs) or Qualified Foreign Investors (QFIs) from specific Indian debt instruments. Below is a structured breakdown of its provisions, rates, and compliance requirements:
1. Applicability of Section 194LD
✅ Covered Payments:
- Interest on rupee-denominated bondsissued by Indian companies.
- Interest on Government securities(e.g., sovereign bonds).
- Interest on municipal debt securities(from April 1, 2020, to July 1, 2023).
❌ Exemptions:
- Payments to resident investors(covered under other sections).
- Interest accruing after July 1, 2023(reverts to standard rates under Section 115AD).
2. Who Deducts TDS?
- Payer: Any entity (e.g., Indian companies, government bodies) making interest payments to:
- FIIs/FPIs(as per SEBI’s Foreign Portfolio Investor Regulations).
- QFIs(foreign individuals/groups from FATF-compliant countries).
3. TDS Rates & Key Conditions
| PARAMETER | DETAILS |
| Rate (PAN Provided) | 5% (plus 4% cess → 5.2%). |
| Rate (PAN Not Provided) | 20% (under Section 206AA). |
| Threshold | No minimum limit (TDS applies on all amounts). |
| Sunset Clause | Concessional 5% rate valid only for interest payable up to July 1, 2023. |
Example:
- Interest Paid: ₹10 lakh to an FII (PAN provided).
- TDS (5%): ₹50,000 → Net Payment: ₹9.5 lakh.
4. Compliance Requirements
- Deduction Timing: Earlier of credit to payee’s accountor actual payment.
- Deposit Deadline: By the 7th of the next month(March: April 30) via Challan 281.
- TDS Return: File Form 27Q
- Certificate: Issue Form 16Ato the investor.
5. Key Changes (Post-July 2023)
- Rate Reversion: Interest payable after July 1, 2023, taxed at 20%under Section 115AD.
- DTAA Benefits: Non-residents can claim lower rates under tax treaties by submitting a Tax Residency Certificate (TRC).
6. Penalties for Non-Compliance
- Late Deduction: Interest @ 1% per month.
- Late Payment: Interest @ 5% per month.
- Non-Filing: Penalty up to ₹1 lakh.
Key Points
🔹 5% TDS on interest to FIIs/QFIs (until July 2023) for rupee bonds/government securities.
🔹 PAN Mandatory to avoid 20% deduction.
🔹 No Threshold: Applies even on small interest payments.
🔹 Post-2023: Higher TDS (20%) under Section 115AD applies.
