Section 196A – TDS on Income from Units to Non-Residents

Introduction to Section 196A

Section 196A of the Income Tax Act, 1961, deals specifically with the deduction of Tax Deducted at Source (TDS) on income paid to non-residents from units of Mutual Funds or the Unit Trust of India (UTI). This section is crucial for ensuring that such income accruing to foreign investors is brought into the Indian tax net at the point of payment.

Key Provisions of Section 196A

1. Applicability:

Section 196A applies when any income in respect of units of a Mutual Fund (specified under clause (23D) of Section 10) or the Unit Trust of India is payable to a non-resident.

2. Who is the Deductor?

The person responsible for paying such income (i.e., the Mutual Fund or UTI) is liable to deduct TDS.

3. Who is the Deductee?

A non-resident recipient of income from such units.

4. Income Covered:

The section covers "income in respect of units." This primarily refers to dividends or other distributions made by Mutual Funds or UTI to their unit holders who are non-residents.

5. TDS Rate:

The TDS rate under Section 196A is **20%**.

• It's important to note that this rate applies **before** considering the surcharge and cess. The effective rate including surcharge and cess would be higher.
• This rate is also **subject to any beneficial provisions of a Double Taxation Avoidance Agreement (DTAA)**. If a non-resident can claim a lower rate as per the applicable DTAA, they can do so by providing the necessary documents (e.g., Tax Residency Certificate - TRC) to the deductor.

6. When TDS is Deducted:

TDS is to be deducted at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.

7. No Surcharge or Cess for TDS Calculation on Non-Resident Payments:

Unlike many other TDS sections, Section 196A(1) specifically states that the sum shall be deducted "without any deduction under the heading 'C.-Deductions' in Chapter VI-A". However, for the purpose of TDS on non-residents, the tax rates mentioned in the Finance Act are usually inclusive of surcharge and cess, unless explicitly stated to be basic rate. For Section 196A, the 20% rate is a **flat rate** and surcharge/cess are generally **not added** at the TDS stage. The final tax liability for the non-resident will be determined at the time of filing their income tax return, considering their total income and applicable rates, surcharge, and cess.

This is a subtle but important distinction from other TDS sections where surcharge and cess are typically added on top of the basic TDS rate (e.g., Section 192 for salaries). For non-residents, rates are often prescribed directly under the Finance Act, which might incorporate these elements or be a special rate.

8. No Threshold Limit:

Unlike many other TDS sections (e.g., Section 194A for bank interest), Section 196A does not prescribe any threshold limit. TDS is deductible irrespective of the amount of income paid.

9. Exemption if PAN Not Furnished:

If the non-resident recipient does not furnish their Permanent Account Number (PAN), TDS would be deductible at a higher rate as per Section 206AA, which generally defaults to 20% or the rate specified in the Act, whichever is higher.

Importance and Implications

Section 196A plays a vital role in the taxation of investment income for non-residents in India. It ensures a mechanism for collecting tax at source from income that might otherwise be difficult to track once it leaves the country. It also highlights the importance of DTAAs for non-resident investors to claim beneficial rates.