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Updated On : July 20, 2025

Section 194LBC – Income from Securitization Trust: TDS Provisions

In the intricate world of finance, securitization trusts play a crucial role in transforming illiquid assets into marketable securities. To ensure appropriate tax collection on the income distributed by these trusts to their investors, the Income Tax Act, 1961, introduced Section 194LBC. This section mandates Tax Deducted at Source (TDS) on certain income payments made by a securitization trust to its unitholders, reflecting the "pass-through" taxation mechanism for such trusts.

Understanding Securitization Trusts

A securitization trust is essentially a Special Purpose Vehicle (SPV) established to facilitate the process of securitization. Securitization involves pooling various types of financial assets (like loans, receivables, mortgages) and issuing securities (often called Pass-Through Certificates or PTCs) backed by these assets to investors. The income generated from the underlying assets is then passed through the trust to the unitholders.

For income tax purposes, a securitization trust is generally treated as a pass-through entity under Section 115TCA, meaning the income accruing to or received by the investor from the trust is taxable in the investor's hands as if they had earned it directly. This avoids double taxation.

Applicability of Section 194LBC

Section 194LBC applies when a securitization trust makes payments of income to its investors. This income can be in various forms, such as:

Interest income derived from the underlying pooled assets.
Returns from the investment in the securitized debt instruments or security receipts.
Any other specified income that is distributed to the unitholders.

TDS is required to be deducted by the securitization trust at the time of credit of such income to the account of the investor or at the time of actual payment, whichever is earlier. Even if the amount is credited to a suspense account or any other temporary account, it is deemed to be credited to the payee's account for TDS purposes.

Who is the Deductor and Deductee?

Deductor: The securitization trust itself, which is responsible for distributing the income.
Deductee: The investor (unitholder) who receives the income from the securitization trust. An "investor" means a person who holds any securitized debt instrument or securities or security receipt issued by the securitization trust.

TDS Rates under Section 194LBC (As per current provisions applicable from April 1, 2025 for FY 2025-26 onwards)

The TDS rates under Section 194LBC vary depending on the residential status and nature of the investor:

1. For Resident Investors

For any income distributed to a resident investor, the TDS rate is a flat 10%. This applies to all resident investors, whether individuals, Hindu Undivided Families (HUFs), companies, or other persons.

Example: A resident individual receives ₹50,000 as income from investments in a securitization trust. The trust will deduct ₹5,000 as TDS (10% of ₹50,000) before making the payment.

2. For Non-Resident Investors (including Foreign Companies)

For income distributed to non-resident investors (not being a company) or a foreign company, the TDS is deducted at the "rates in force". This generally means the rates prescribed under the Income Tax Act for that specific type of income, as applicable to non-residents, along with applicable surcharge and cess.

For non-resident individuals/entities (other than companies), the rate is generally 30%.
For foreign companies, the rate is generally 40%.
Double Taxation Avoidance Agreements (DTAAs): Non-resident investors can claim benefits under a relevant DTAA, if it provides for a lower tax rate on such income. To avail of a lower DTAA rate, the non-resident must provide a valid Tax Residency Certificate (TRC) and other necessary documents as prescribed.

Example: A foreign company receives ₹2,00,000 as income from an Indian securitization trust. If no DTAA benefit is claimed, the trust will deduct TDS at 40%, amounting to ₹80,000. If a DTAA allows for a lower rate (e.g., 15%), and proper documentation is provided, TDS would be ₹30,000 (15% of ₹2,00,000).

Key Compliance Aspects

No Threshold Limit: There is no specific threshold limit for TDS deduction under Section 194LBC. TDS is to be deducted irrespective of the amount of income distributed.
PAN Requirement: If an investor (resident or non-resident) fails to furnish their Permanent Account Number (PAN), TDS will be deducted at a higher rate, usually 20%, or the rate specified in the Act, whichever is higher, as per Section 206AB. For non-residents, failure to provide PAN can result in DTAA benefits being denied.
Income Character Retention: The nature of income (e.g., interest, capital gains) distributed by the securitization trust generally retains its character in the hands of the investor for tax purposes.
TDS Certificates: The securitization trust must issue a TDS certificate (typically Form 16A) to the investor. Investors can then claim credit for the TDS deducted against their final tax liability when filing their Income Tax Return (ITR).
Reporting by Trusts: Securitization trusts are required to file quarterly TDS statements (Form 26Q for residents and Form 27Q for non-residents) with the income tax authorities.

Significance of Section 194LBC

Section 194LBC plays a vital role in the tax framework for securitization transactions in India. By imposing TDS at the source of income distribution, it facilitates efficient tax collection, minimizes tax evasion, and provides clarity on the tax treatment of income from these complex financial instruments. This provision ensures that despite the pass-through nature of securitization trusts, the government's revenue stream is secured and income traceability is maintained.

Navigating Securitization Trust Taxation? Get Expert Guidance!

The tax implications of investing in or operating a securitization trust, especially concerning Section 194LBC, can be intricate. Understanding the correct TDS rates, compliance requirements, and DTAA benefits (for non-residents) is crucial for both trusts and investors.

At DisyTax, we offer comprehensive tax advisory and compliance services to ensure seamless handling of your securitization trust income:

TDS Compliance for Trusts: Assisting securitization trusts with accurate TDS deduction, timely deposit, and filing of necessary forms (26Q, 27Q, etc.).
Investor Tax Advisory: Guiding investors on the taxability of their income from securitization trusts and how to effectively claim TDS credit in their ITR.
DTAA Benefit Application: For non-resident investors, advising on DTAA applicability and assisting with documentation like TRC and Form 10F.
Income Tax Return (ITR) Filing: Ensuring precise reporting of all income sources and TDS details for accurate tax computation.

Ensure full compliance and optimize your tax position with expert assistance. Contact DisyTax today!

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Section 194LBC – TDS on Income from Securitization Trust: FAQs

What is Section 194LBC of the Income Tax Act?

Section 194LBC of the Income Tax Act mandates Tax Deducted at Source (TDS) on certain income distributed by a "securitization trust" to its investors. This section ensures that income flowing from securitization activities is brought into the tax net at the time of distribution.

What kind of income is covered under Section 194LBC?

This section applies to any income payable to an investor by a securitization trust in respect of an investment in such a trust, as specified under Section 115TCA. This covers income like interest, or any other returns generated from the underlying securitized assets.

Who is responsible for deducting TDS under Section 194LBC?

The securitization trust itself, or the person responsible for making the payment of income to the investor, is liable to deduct TDS under this section.

What are the TDS rates under Section 194LBC?

The TDS rates depend on the status of the investor and the effective date:

**Before April 1, 2025:**
- **25%** if the payee is an individual or a Hindu Undivided Family (HUF).
- **30%** if the payee is any other resident person.
- For non-residents (not being a company) or foreign companies, generally **30% or 40%** respectively, plus applicable surcharge and cess, or as per DTAA.
**On or after April 1, 2025 (as per recent updates):**
- **10%** for all resident payees (individuals, HUFs, and others).
- For non-residents (not being a company) or foreign companies, **10%** plus applicable surcharge and cess, or as per DTAA.

When is TDS to be deducted under Section 194LBC?

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

Are there any threshold limits for TDS under Section 194LBC?

Generally, there are no specific monetary threshold limits for TDS deduction under Section 194LBC. This means TDS is applicable on the distribution of covered income regardless of the amount.

What is a "securitization trust" in this context?

A "securitization trust" typically refers to a trust that pools various financial assets (like loans or receivables) and issues marketable securities backed by these assets to investors. These trusts are usually regulated by SEBI or RBI and include entities like Asset Reconstruction Companies (ARCs) for certain purposes.

How does the "pass-through" status work for securitization trusts?

Under Section 115TCA, income accruing or arising to a securitization trust, or received by it, is generally not taxed at the trust level (with some exceptions). Instead, it is treated as if it were the income accruing directly to the investor, maintaining its original nature. Section 194LBC then ensures that TDS is deducted on this income when it is distributed to the investors, facilitating tax collection at the source.

Can an investor claim a refund of TDS deducted under Section 194LBC?

Yes, any TDS deducted under Section 194LBC can be claimed as a credit by the investor when filing their Income Tax Return. If the investor's final tax liability is less than the TDS deducted, they may be eligible for a refund.

How is income from securitization trusts reported in the ITR?

Income received from securitization trusts is typically reported in the Income Tax Return under the relevant head of income (e.g., 'Income from Other Sources' or 'Capital Gains' depending on the nature of income). Similar to business trusts and AIFs, there may be a specific schedule (like Schedule PTI - Pass Through Income) in the ITR forms to furnish these details and claim TDS credit.

Does this section apply to non-resident investors as well?

Yes, Section 194LBC also applies to income distributed to non-resident investors (including foreign companies). The applicable TDS rates for non-residents are generally higher, but may be reduced if a beneficial Double Taxation Avoidance Agreement (DTAA) exists between India and the non-resident's country of residence, provided proper documentation like a Tax Residency Certificate (TRC) is provided.

What are the consequences of non-compliance with Section 194LBC?

Failure to deduct or deposit TDS under Section 194LBC by the securitization trust can lead to penalties, interest charges, and potential disallowance of expenditure, as prescribed under the Income Tax Act.

Is "Excess Interest Spread" (EIS) also subject to TDS under 194LBC?

Recent judicial pronouncements have clarified that Excess Interest Spread (EIS) paid by a securitization trust to the originator (the entity that originated the loans/assets) is generally *not* subject to TDS under Section 194LBC. This is because the originator is typically not considered an 'investor' of the trust and the EIS is not treated as income from an investment in the trust for this section's purpose.

When was Section 194LBC introduced?

Section 194LBC was inserted into the Income Tax Act with effect from June 1, 2016, to regulate TDS on income distributions from securitization trusts, building upon the pass-through taxation framework for such entities.

Are there any specific forms for TDS under 194LBC?

The securitization trust is generally required to deduct TDS and issue Form 16A (TDS Certificate) to the investors, detailing the income paid and the tax deducted. The trust itself files quarterly TDS returns (Form 26Q for residents, Form 27Q for non-residents) for these deductions.

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