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Updated On : July 20, 2025

Section 194LD – Interest on Government Securities or Bonds

Section 194LD of the Income Tax Act, 1961, deals with the Tax Deduction at Source (TDS) on interest income earned by specific foreign investors from certain Indian debt instruments. This section was introduced to encourage foreign investment in India's debt market by offering a concessional TDS rate.

1. Purpose and Background

To attract foreign capital, particularly for infrastructure development, the Indian government introduced a concessional TDS rate on interest income for certain foreign entities.
Section 194LD, along with Section 194LC, aimed to incentivize foreign borrowing and stimulate the Indian economy.

2. Who is Liable to Deduct TDS?

Any person responsible for paying the specified interest income to a Foreign Institutional Investor (FII) or a Qualified Foreign Investor (QFI) is liable to deduct TDS under this section.

3. Who is the Payee?

The payee must be a Foreign Institutional Investor (FII) or a Qualified Foreign Investor (QFI).

Foreign Institutional Investor (FII): An institution registered in a country other than its own that invests in India. (Note: The concept of FII has largely been replaced by Foreign Portfolio Investor (FPI) under SEBI (Foreign Portfolio Investors) Regulations, 2019.)
Qualified Foreign Investor (QFI): A subcategory of FIIs, typically foreign individuals, groups, or associations from countries that are members of the Financial Action Task Force (FATF) and signatories to IOSCO's Multilateral Memorandum of Understanding (MMOU).

4. What Income is Covered?

Section 194LD applies to interest income payable on investments made by FIIs/QFIs in:

Rupee-denominated bonds of an Indian company: These are bonds issued by an Indian entity in a foreign market, with the buying, selling, and repayment denominated in Indian Rupees.
Government securities: These are low-risk bonds issued by the Government of India.
Municipal debt securities: (Introduced later, from April 1, 2020)

5. TDS Rate under Section 194LD

The concessional TDS rate under Section 194LD was 5%. This rate was subject to applicable surcharge and health and education cess.
Important Note on Sunset Clause: The beneficial rate of 5% was applicable for interest payable to FIIs/FPIs on or before July 1, 2023. For interest payable after this date, the rate of TDS on interest income from government securities and rupee-denominated bonds for FIIs/FPIs would generally be 20% under Section 115AD.

6. Timing of Deduction

TDS under Section 194LD is to be deducted at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by any other mode, whichever is earlier.

7. Impact of PAN and Non-filing of Returns

If the payee (FII/QFI) does not provide their Permanent Account Number (PAN) to the deductor, TDS may be deducted at a higher rate (generally 20%) as per Section 206AA.
If the payee has not filed their income tax returns for specified periods, higher TDS rates may apply under Section 206AB (though Section 206AB doesn't apply to a non-resident who doesn't have a Permanent Establishment in India). If both Section 206AA and Section 206AB apply, the higher of the two rates is applicable.

8. Comparison with Section 194LC

While both sections aim to encourage foreign investment, there are distinctions:

Section 194LC primarily deals with interest on foreign currency loans and long-term bonds issued by Indian companies or business trusts to non-residents (not necessarily FIIs/FPIs).
Section 194LD specifically targets interest on rupee-denominated bonds and government securities for FIIs/FPIs/QFIs.

Navigating TDS on Foreign Investments? Get Expert Guidance!

Understanding and complying with TDS provisions like Section 194LD for interest on government securities or bonds can be complex, especially for foreign investors and Indian payers. Accurate application of rates, understanding the sunset clauses, and navigating DTAA benefits are crucial.

At DisyTax, we provide specialized tax advisory and compliance services for both Indian entities making payments and foreign investors receiving income:

TDS Compliance for Payers: Guiding Indian companies and other entities on correct TDS deduction rates, timely deposits, and filing of required forms (Form 27Q).
Foreign Investor Tax Optimization: Advising FIIs/FPIs/QFIs on the taxability of their interest income and maximizing TDS credit claims in India.
DTAA Analysis: Evaluating Double Taxation Avoidance Agreement benefits and assisting with documentation (Tax Residency Certificates (TRC), Form 10F) to ensure application of beneficial rates.
Income Tax Return Filing: Ensuring precise reporting of interest income and TDS details in relevant ITR forms.

Ensure seamless tax compliance and optimize your tax position on foreign investments. Contact DisyTax today!

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Section 194LD – TDS on Interest from Government Securities & Bonds: FAQs

What is Section 194LD of the Income Tax Act?

Section 194LD of the Income Tax Act provides for a concessional rate of Tax Deducted at Source (TDS) on interest income earned by specific non-resident investors (Foreign Institutional Investors - FIIs, and Qualified Foreign Investors - QFIs) from investments in Government securities and Rupee Denominated Bonds of Indian companies. The primary aim of this section was to encourage foreign investment in India's debt market.

What kind of income is covered under Section 194LD?

This section covers interest income payable in respect of investments made by the eligible payee in:

A Rupee Denominated Bond (RDB) of an Indian company.
A Government Security.
Municipal Debt Securities (added later to the scope of this section for a period).

The interest rate on RDBs should not exceed the rate notified by the Central Government.

Who is eligible to receive income under Section 194LD with concessional TDS?

The concessional TDS rates under Section 194LD are specifically applicable to:

**Foreign Institutional Investors (FIIs)**, as defined in Section 115AD.
**Qualified Foreign Investors (QFIs)**.

It is crucial to note that this section is designed for a specific class of non-resident investors.

Who is responsible for deducting TDS under Section 194LD?

Any person who is responsible for paying the interest income covered under this section to a Foreign Institutional Investor (FII) or a Qualified Foreign Investor (QFI) is required to deduct TDS.

What are the TDS rates under Section 194LD, and what is their current status?

Historically, Section 194LD provided a concessional TDS rate of **5%** (plus applicable surcharge and cess) on the specified interest income. This concessional rate was initially applicable for interest payable up to July 1, 2017, and was subsequently extended multiple times, with the last extension typically up to **July 1, 2023**.

**Post July 1, 2023, for FIIs/FPIs, interest income from rupee-denominated bonds and government securities may generally be subject to a TDS rate of 20% under Section 115AD, unless a more beneficial rate is available under an applicable Double Taxation Avoidance Agreement (DTAA).** The continued application of the 5% rate after this date would depend on any further amendments or extensions by the government.

When is TDS to be deducted under Section 194LD?

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

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

No, Section 194LD does not specify any monetary threshold limits for TDS deduction. If the income and payee fall under the purview of this section, TDS is to be deducted on the entire amount of interest.

How does Section 194LD relate to DTAA benefits for non-residents?

While Section 194LD provides for a specific concessional rate, non-resident investors (including FIIs/QFIs) may also claim a lower TDS rate as per the provisions of a Double Taxation Avoidance Agreement (DTAA) between India and their country of residence, if such DTAA provides for a rate lower than the domestic tax law. To avail DTAA benefits, the non-resident must provide a Tax Residency Certificate (TRC) and other necessary documents as per Section 90 of the Income Tax Act.

When was Section 194LD introduced and why?

Section 194LD was inserted into the Income Tax Act with effect from June 1, 2013, by the Finance Act, 2013. Its introduction was a measure to attract foreign investment into India's long-term debt market, particularly in infrastructure, by offering a lower withholding tax rate to FIIs and QFIs on interest earned from specific government securities and corporate bonds.

What is the difference between Section 194LD and Section 194LC?

Both Section 194LD and 194LC provide for concessional TDS rates on interest income to non-residents, but they cover different types of borrowings and payees:

**Section 194LD:** Focuses on interest paid to FIIs/QFIs on investments in Rupee Denominated Bonds and Government Securities.
**Section 194LC:** Deals with interest paid by an Indian company or business trust to a non-resident (not necessarily FII/QFI) on monies borrowed in foreign currency (via loan agreements or issue of long-term bonds, including long-term infrastructure bonds, and also Rupee Denominated Bonds issued outside India for a period).

While both aimed at attracting foreign debt, their specific scope and conditions differ.

What if the non-resident payee does not have a PAN?

As per Section 206AA, if the payee does not furnish their Permanent Account Number (PAN), the deductor is generally required to deduct TDS at a higher of the following rates: the rate specified in the relevant section, or the rate in force, or 20%. This higher rate would apply unless a beneficial DTAA rate is claimed by providing a TRC and other necessary documents.

How is the TDS deducted under 194LD reflected for the non-resident?

The payer deducting TDS under Section 194LD is required to deposit the tax to the government and issue a TDS Certificate (Form 16A) to the non-resident payee. The non-resident can then claim this TDS credit while filing their Income Tax Return in India, if required, or utilize it as a credit against their tax liability in their home country, subject to DTAA provisions.

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