Section 10(4C) of the Income Tax Act, 1961 in India provides an exemption for interest income earned by a non-resident on specific bonds or debentures issued by certain Indian companies or public sector companies. This provision aims to incentivize foreign investment in designated debt instruments by exempting the interest income from tax in India.
Provisions of Section 10(4C)
Exemption:
- Interest payable to a non-resident on bonds or debentures issued by an Indian company or a public sector company (PSU) is exempt from income tax, provided the bonds or debentures are notified by the Central Government and the interest is payable in foreign currency.
Conditions:
- The recipient must be a non-resident as defined under the Income Tax Act (Section 6).
- The bonds or debentures must be notified by the Central Government for this exemption.
- The bonds or debentures must be issued by an Indian company (public or private) or a public sector company as defined under Section 2(36A) of the Income Tax Act.
- The interest must be payable in foreign currency (e.g., USD, EUR) to qualify for the exemption.
- The exemption applies only to interest income and not to other forms of income, such as capital gains on the sale or redemption of these bonds/debentures.
Examples of Section 10(4C)
Scenario 1:
- Facts:
- Mr. James, a non-resident living in Singapore, invests in Rupee Denominated Bonds (Masala Bonds) issued by an Indian public sector company (e.g., NTPC) and notified by the Central Government.
- The bonds are issued in foreign currency (USD), and he earns interest of ₹1,00,000 in FY 2024-25.
- Tax Treatment:
- The interest of ₹1,00,000 is exempt from income tax in India under Section 10(4C), as the bonds are notified, issued by a public sector company, and the interest is payable to a non-resident in foreign currency.
- If Mr. James sells the bonds and earns a capital gain, the gain is not exempt and may be taxable under the head “Capital Gains.”
Scenario 2:
- Facts:
- Ms. Maria, a non-resident in the USA, holds debentures issued by a private Indian company (notified by the Central Government) in foreign currency.
- She earns ₹75,000 as interest in FY 2024-25.
- In the same year, she becomes a resident in India due to her stay exceeding 182 days.
- Tax Treatment:
- The interest of ₹75,000 is not exempt under Section 10(4C) for the period she is a resident, as the exemption applies only to non-residents. The interest will be taxable under the head “Income from Other Sources.”
- If she had remained a non-resident, the interest would have been exempt.
