Section 194LB of the Income Tax Act: TDS on Interest from Infrastructure Debt Fund (IDF)

Section 194LB of the Income Tax Act, 1961, mandates the deduction of Tax Deducted at Source (TDS) on income paid by way of interest from an Infrastructure Debt Fund (IDF) to certain categories of non-resident payees. This provision aims to simplify the tax collection process for investments made by foreign entities in India's infrastructure sector.

Applicability of Section 194LB

Section 194LB applies under the following conditions:

• Payer (Deductor): Any person responsible for paying income by way of interest. This payer must be an Infrastructure Debt Fund (IDF) referred to in clause (47) of Section 10 of the Income Tax Act.
• Payee (Recipient): The recipient of the interest income must be a non-resident (not being a company) or a foreign company.
• Nature of Payment: The payment must exclusively be "income by way of interest."

What is an Infrastructure Debt Fund (IDF)?
An IDF is a non-banking financial company (NBFC) or a mutual fund that facilitates the flow of long-term debt into infrastructure projects. They are specifically regulated to invest primarily in infrastructure projects.

TDS Rate under Section 194LB

The rate of TDS under Section 194LB is **5%**.

• This rate is **inclusive** of applicable surcharge and Health and Education Cess.
• Higher Rate for Non-PAN: If the payee (non-resident or foreign company) does not provide a Permanent Account Number (PAN), the TDS rate will be **20%** as per Section 206AA of the Income Tax Act, unless specific conditions are met for non-residents.
• No Lower Deduction Certificate: The provisions of Section 197 (for obtaining a certificate for lower or nil TDS) are generally **not applicable** to payments under Section 194LB.
• Impact of DTAA: If there is a Double Taxation Avoidance Agreement (DTAA) between India and the payee's country of residence, and the DTAA provides for a lower rate of tax on interest income, the lower rate stipulated in the DTAA will apply, provided the payee furnishes the necessary documents (Tax Residency Certificate, Form 10F, etc.).

Threshold Limit for TDS Deduction

Unlike some other TDS sections, there is **no specific threshold limit** prescribed under Section 194LB. TDS is deductible irrespective of the amount of interest paid, provided the conditions for applicability are met.

Time of Tax Deduction

The TDS under Section 194LB must be deducted at the earliest of the following two events:

• At the time of credit of such income to the account of the payee.
• At the time of payment of such income in cash or by the issue of a cheque, draft, or any other mode.

Responsibilities of the Deductor

The Infrastructure Debt Fund (IDF) or the person making the interest payment has the following compliance obligations:

• Obtain TAN: Obtain a Tax Deduction and Collection Account Number (TAN).
• Verify Payee's PAN: Ensure the payee provides their PAN (or relevant documentation for non-residents if DTAA benefit is claimed).
• Deduct Tax: Deduct TDS at the applicable rate (5% or DTAA rate, or 20% for non-PAN cases).
• Deposit Tax: Deposit the deducted TDS to the Central Government's account within the prescribed due dates.
• File TDS Returns: File quarterly TDS returns in Form 27Q (for non-resident payments).
• Issue TDS Certificates: Issue TDS certificates in Form 16A to the payee within the stipulated timelines.

Penalties for Non-Compliance: Non-compliance with Section 194LB provisions can lead to penalties and interest under various sections of the Income Tax Act, similar to other TDS defaults, including:

• Interest for delay in deduction or payment (Section 201(1A)).
• Penalty for failure to deduct or pay tax (Section 271C).
• Late filing fees for TDS returns (Section 234E).

Taxability for the Non-Resident/Foreign Company (Payee)

The interest income received by the non-resident or foreign company from an IDF is taxable in India. The TDS deducted under Section 194LB can be claimed as a credit against their final tax liability in India when they file their Income Tax Return (ITR) (if required) or seek a refund. This credit can be verified against Form 26AS.

Conclusion

Section 194LB plays a crucial role in regulating foreign investment into India's infrastructure sector by ensuring appropriate tax deduction at source on interest payments from Infrastructure Debt Funds. Compliance with its provisions is essential for both IDFs and non-resident investors to ensure smooth financial operations and adherence to Indian income tax laws. Understanding the nuances of the TDS rate, applicability, and compliance requirements is vital for all parties involved.