Section 196 of the Income Tax Act, 1961 provides an exemption from Tax Deducted at Source (TDS) for payments made to:
- The Government(Central or State)
- Reserve Bank of India (RBI)
- Corporations established under a Central Actthat are exempt from income tax
- Mutual Fundsspecified under Section 10(23D).
Key Points of Section 196
✅ No TDS Required – Payments in the form of interest, dividends, or other income made to these entities are exempt from TDS.
✅ Applicable Payments – Covers:
- Interest on securities
- Dividends on shares
- Any other income accruing to these entities.
✅ Exemption Conditions – The corporation must be:
- Established by a Central Act
- Exempt from income taxunder any law.
✅ CBDT Clarifications – Circular No. 18/2017 lists exempt entities, including:
- Local authorities
- Provident funds
- IRDA, SEBI, CERC
- Prasar Bharati
- PM National Relief Fund
- Agricultural Produce Marketing Committees (APMCs).
Practical Example
If a private company pays rent to a government department, no TDS is required under Section 194I because the payee is the Government.
Exceptions & Controversies
- APEDA Case: Some argued that Agricultural and Processed Food Products Export Development Authority (APEDA)is a statutory body, not a corporation, hence Section 196 may not apply.
- Government vs. Autonomous Bodies: Not all government-affiliated bodies qualify. Only those explicitly exempt under tax lawsare covered.
