Section 196DA – TDS on Income of Specified Fund from Securitisation Trust

Introduction to Section 196DA

Section 196DA of the Income Tax Act, 1961, specifically deals with the deduction of Tax Deducted at Source (TDS) on income distributed by a securitisation trust to a Specified Fund. This section ensures that tax is collected at the source when income flows from these trusts to designated investment vehicles, maintaining compliance within the financial ecosystem.

Key Provisions of Section 196DA

1. Applicability:

Section 196DA applies when a securitisation trust distributes income to a Specified Fund.

• A Securitisation Trust, as defined under the Income Tax Act, is generally a trust that undertakes securitisation as per the SEBI (Public Offer of Securities) Regulations, 2007, or any regulations made by SEBI in this regard. This includes trusts involved in the securitisation of financial assets.
• A Specified Fund refers to certain categories of investment funds, such as a Category I or Category II Alternative Investment Fund (AIF) regulated under the SEBI (Alternative Investment Funds) Regulations, 2012, or a fund established in India under a trust or a society or any other body corporate formed for the purpose of promoting start-ups.

2. Who is the Deductor?

The securitisation trust responsible for distributing income to the Specified Fund is liable to deduct TDS.

3. Who is the Deductee?

The Specified Fund (e.g., a Category I or II AIF) receiving income distribution from the securitisation trust.

4. Income Covered:

Section 196DA specifically covers any income payable by a securitisation trust to a Specified Fund.

This typically refers to the income distributed by the trust, which could originate from various underlying assets it holds (e.g., interest from loans, proceeds from sold assets).

5. TDS Rate:

The TDS rate under Section 196DA is 25%.

• This rate is applied to the gross amount of income distributed by the securitisation trust to the Specified Fund.
• It's important to note that this rate is generally applicable to the Specified Fund as a domestic entity. If the Specified Fund has non-resident investors, their final tax liability might be subject to other provisions or DTAA benefits at their level, but the TDS at the trust level for distributions to the Specified Fund remains as per this section.

6. When TDS is Deducted:

TDS is to be deducted at the time of credit of such income to the account of the payee (Specified Fund) 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:

Similar to certain other TDS sections dealing with specific types of funds or non-residents, the rates specified under Section 196DA are generally inclusive of surcharge and cess at the TDS stage. This means the deductor applies the straight 25% rate without adding surcharge and cess on top. The final tax liability, considering all applicable taxes, is typically computed at the time of assessment for the Specified Fund.

8. No Threshold Limit:

There is no specified threshold limit under Section 196DA. TDS is deductible on all payments of the specified income, regardless of the amount.

9. PAN Requirement:

As with most TDS provisions, furnishing a valid Permanent Account Number (PAN) by the deductee (Specified Fund) is crucial. If the PAN is not furnished, higher TDS rates as per Section 206AA or 206AB might apply, which would be 20% or the applicable rate, whichever is higher, in case of a specified person.

Importance of Section 196DA

Section 196DA plays a vital role in the tax administration related to investment funds and securitisation activities in India. It ensures that income distributed by securitisation trusts to specified investment vehicles is brought under the tax net at an early stage. This provision helps in maintaining the transparency and integrity of the tax system in the financial markets, especially concerning structured finance products and alternative investment avenues.