5% TDS Applicable if loan taken from NRI

TDS-Tax-Deducted-at-source-indiaSection 194LC, inserted by the Finance Act, 2012, provides for a concessional rate of withholding tax @ 5% on payments to NRI in a case where an Indian Company borrows money in foreign currency from a source outside India either under a loan agreement or by way of issue of long-term infrastructure bonds.

Though the provision provides for concessional rate of tax @ 5%, in absence of PAN of the NRI lender, section 206AA mandates withholding at higher rate of 20%. This is perceived to be onerous considering that section 115A envisages exemption from filing return for the NRI where tax is deducted by the borrower and paid to the Government. Hence, obtaining PAN for the sole purpose of avoiding adverse impact of section 206AA results in an empty formality.

To address this concern, sub-section (7) is proposed to be inserted in section 206AA to provide that the provisions of section 206AA shall not apply in respect of payment of interest on long term infrastructure bonds, as referred to in section 194LC, to a non-corporate non­resident or to a foreign company.

Related Amendment  to Finance Bill 2013  which presented in Lok sabha on 28.02.2013 and as passed by Lok Sabha on 30.04.2013

19. Page 22, after line 42 insert-

43D (New)-Amendment of Section 206AA

43D. In section 206AA of the income-tax Act. after sub-section ( 6), the following sub-section shall be inserted with effect from the 1st day of June, 2013,

   “(7) The provisions of this sect on shall not apply in respect of payment of interest, on long-term infrastructure bonds, as referred to in section 194IC to a NRI, not being; a company. or to a foreign company “

Reference : Taxguru.in