Section 196C of the Income Tax Act, 1961 mandates Tax Deducted at Source (TDS) on income paid to non-residents (including foreign companies) from:
- Foreign currency-denominated bonds
- Global Depository Receipts (GDRs)issued by Indian companies.
Key Provisions of Section 196C
- Applicability
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- Payee: Non-residents or foreign companies.
- Income Covered:
- Intereston specified foreign currency bonds.
- Dividendson GDRs (referenced under Section 115AC).
- Long-term capital gains (LTCG)from the transfer of such bonds/GDRs.
- TDS Rate
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- Default Rate: 10%(excluding surcharge/cess).
- DTAA Benefit: Lower treaty rates apply if the payee submits a Tax Residency Certificate (TRC)and Form 10F.
- Who Deducts TDS?
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- The payer(e.g., Indian company issuing bonds/GDRs or its agent).
- Timing of Deduction
TDS is deducted at the earlier of:
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- Creditto the payee’s account (even if in a suspense account).
- Actual payment(cash, cheque, etc.).
- Compliance Requirements
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- PAN Mandatory: If absent, TDS defaults to 20%under Section 206AA.
- Form 15CA/CB: Required for remittances exceeding ₹5 lakh.
- TDS Return: Filed quarterly in Form 27Q.
Exemptions & Special Cases
- No TDS on Dividends Covered by Section 115-O: Dividends exempt under this section are excluded.
- Grossing Up: Permitted under Section 195Aif the contract specifies a “net of tax” payment.
Practical Example
- Scenario: An Indian company pays ₹10 lakh interest on foreign currency bonds to a US-based investor.
- Default TDS: ₹1 lakh (10%).
- If US Treaty Rate is 5%: TDS reduces to ₹50,000 (with TRC submission).
Penalties for Non-Compliance
- Late Deduction/Payment: Interest @ 1%–1.5%per month.
- Non-Filing of Returns: Penalty up to ₹1 lakhunder Section 271H
