Section 194LC of the Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on interest payments made by Indian companies or business trusts to non-residents (excluding companies) or foreign companies for specified foreign borrowings. Below is a structured breakdown of its provisions, rates, and compliance requirements:
1. Applicability of Section 194LC
✅ Covered Payments:
- Interest on foreign currency borrowings(ECBs) under loan agreements (July 1, 2012–July 1, 2023).
- Interest on long-term bonds(including infrastructure bonds) issued abroad (October 1, 2014–July 1, 2023).
- Interest on rupee-denominated bonds (RDBs)listed on IFSC exchanges (April 1, 2020–July 1, 2023).
❌ Exemptions:
- Payments to resident entities(covered under other sections).
- Interest exceeding rates approved by the Central Government.
2. TDS Rates & Key Conditions
| BORROWING TYPE | TDS RATE (PAN PROVIDED) | PAN NOT PROVIDED |
| General Foreign Borrowings | 5% (+4% cess) | 20% |
| IFSC-Listed Bonds (RDBs/Long-term Bonds) | 4% (+4% cess) | 20% |
| Post-July 2023 Borrowings | Not covered (reverts to Section 195) |
Notes:
- DTAA Benefits: Lower rates apply if supported by Tax Residency Certificate (TRC).
- No Threshold: TDS applies irrespective of the interest amount.
3. 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 payee.
4. Penalties for Non-Compliance
- Late Deduction: Interest @ 1% per month.
- Late Payment: Interest @ 5% per month.
- Non-Filing: Penalty up to ₹1 lakh.
5. Key Changes (Post-July 2023)
- Concessional Rates Expired: Borrowings after July 1, 2023, revert to standard TDS under Section 195(20%+).
- IFSC Bonds: New rate of 9%for bonds listed on IFSC exchanges post-July 2023.
Example Scenario
- Borrowing: ₹10 crore via ECB (July 2022) → Annual interest: ₹50 lakh.
- TDS (5%): ₹2.5 lakh (₹50L × 5%) → Net Payment: ₹47.5 lakh.
Key Points
🔹 5% TDS on pre-July 2023 foreign borrowings; 4% for IFSC-listed bonds.
🔹 PAN Mandatory to avoid 20% deduction.
🔹 No Annual Threshold: Applies even on small interest payments.
🔹 Post-2023 Borrowings: Higher TDS under Section 195 applies.
