Section 196C – TDS on Income from Foreign Currency Bonds/Shares to Non-Residents

Introduction to Section 196C

Section 196C of the Income Tax Act, 1961, is a specialized provision that deals with the deduction of Tax Deducted at Source (TDS) on income payable to non-residents from certain financial instruments denominated in foreign currency. This section is particularly relevant for Foreign Institutional Investors (FIIs) and other non-resident investors holding specific types of Indian securities.

Key Provisions of Section 196C

1. Applicability:

Section 196C applies to income payable to a non-resident in respect of:

• Bonds or Global Depository Receipts (GDRs) referred to in Section 115AC. These are typically Indian company bonds or shares issued in foreign currency in accordance with the scheme notified by the Central Government.

2. Who is the Deductor?

The person responsible for paying such income (e.g., the Indian company issuing the bonds/shares, or the entity responsible for distributing income from GDRs) is liable to deduct TDS.

3. Who is the Deductee?

A non-resident recipient of income from the specified foreign currency bonds or shares.

4. Income Covered:

The section covers two main types of income:

• Income by way of interest on bonds referred to in Section 115AC.
• Dividends on shares referred to in Section 115AC.

It's important to distinguish this from capital gains arising from the transfer of such instruments, which are dealt with separately under Section 115AC itself for their taxability, but their TDS might be under Section 195.

5. TDS Rate:

The TDS rate under Section 196C is **10%**.

• This rate applies **before** considering surcharge and cess at the TDS stage. The final tax liability for the non-resident will be determined at the time of assessment.
• 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 should provide 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:

For income covered under Section 196C, the prescribed TDS rate of **10%** is a flat rate. Surcharge and cess are generally **not added** at the TDS stage. The final tax liability for the non-resident will be computed when they file their income tax return, taking into account their overall income and applicable tax rates, surcharge, and cess.

8. No Threshold Limit:

Similar to other sections dealing with certain types of income for non-residents, Section 196C does not specify any threshold limit. TDS is deductible on all payments covered, regardless of the amount.

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 typically defaults to 20% or the rate specified in the Act, whichever is higher.

Significance for International Investments

Section 196C is a critical provision for foreign investors, particularly those investing in Indian companies through foreign currency denominated instruments like GDRs. It provides clarity on the TDS obligations related to interest and dividend income from these specific instruments. For non-resident investors and the entities making payments, a thorough understanding of this section is essential for compliance and efficient tax management, including leveraging benefits under applicable DTAAs.