Income by way of interest from an Indian company [Section 194LC] under Deduction of Tax at Source :
(1) Interest paid by an Indian company or business trust1 to a foreign company or a noncorporate non-resident in respect of borrowing made in foreign currency from sources outside India between 1.7.2012 and 30.6.2017 would be subject to tax at a concessional rate of 5% on gross interest (as against the rate of 20% of gross interest applicable in respect of other interest received by a non-corporate non-resident or foreign company from Government or an Indian concern on money borrowed or debt incurred by it in foreign currency).
(2) To avail this concessional rate, the borrowing should be from a source outside India under a loan agreement at any time between 1.7.2012 and 30.6.2017 or by way of issue of long-term infrastructure bonds during the period between 1.7.2012 and 30.9.2014 or by way of issue of any long-term bond, including long-term infrastructure bonds during the period between 1.10.2014 and 30.6.2017 and approved by the Central Government in this behalf.
(3) The interest to the extent the same does not exceed the interest calculated at the rate approved by the Central Government, taking into consideration the terms of the loan or the bond and its repayment, will be subject to tax at a concessional rate of 5%.
(4) Such interest paid by an Indian company to a non-corporate non-resident or a foreign company would be subject to TDS@5% under section 194LC.
(5) Further, levy of higher rate of TDS@20% under section 206AA in the absence of PAN would not be attracted in respect of payment of interest on long-term bonds, as referred to in section 194LC, to a non-corporate non-resident or to a foreign company.
Approval of long-term bonds and rate of interest
Through Circular No.15/2014, dated 17-10-2014, the CBDT conveys the approval of Central Government for issue of long-term bonds including long-term infrastructure bonds by Indian companies which satisfy the following conditions:
(a) The bond shall be issued at any time on or after 1st October, 2014 but before 1st July, 2017.
(b) The bond issue shall comply the relevant provisions of Foreign Exchange Management Act, 1999, read with relevant ECB regulations, either under automatic route or approval route.
(c) The bond issue should have Loan Registration Number issued by Reserve Bank of India.
(d) The term “long term” means that the bond to be issued should have original maturity term of three years or more.
Further, the Central Government has also approved the interest rate for the purpose of section 194LC in respect of borrowing by way of issue of long term bond including long term infrastructure bond, as any rate of interest which is within the All -in-cost ceilings specified by the RBI under ECB regulations as is applicable to the borrowing through a long term bond issue having regard to the tenure thereof.
Any bond issue satisfying the above conditions would be treated as approved by the Central Government for the purpose of section 194LC. Further, it has also been clarified that consequent to the amendment to section 194LC, the approval of Central Government contained in Circular No. 7/2012, in so far as they apply to borrowings by way of a loan agreement, shall be valid for the borrowings made on or before 30/06/2017 instead of 30/06/2015 as mentioned in the said Circular.