Income tax / Tax deducted at source
Section 194LC: TDS on Interest from Indian Companies and Business Trusts
Section 194LC of the Income-tax Act, 1961 provided concessional withholding on specified interest paid to non-residents on foreign borrowings and eligible bonds. The corresponding rules now appear in Section 393(2) of the Income-tax Act, 2025.
Updated 27 October 2026. Historical provisions and current-law correspondence are distinguished below.
1. Scope of Section 194LC
Section 194LC was introduced with effect from 1 July 2012 to provide a concessional tax-deduction regime for interest on specified overseas borrowings. It applied where an Indian company or business trust paid qualifying interest to a non-resident individual or other non-resident person (not being a company), or a foreign company.
The provision did not apply automatically to all interest paid abroad. Eligibility depended on the borrowing instrument, issue or agreement date, overseas source, applicable approval and interest-rate conditions. Where its conditions were not met, the payer had to consider the otherwise applicable non-resident withholding provisions and treaty relief.
2. TDS rates and qualifying borrowings
| Borrowing or bond category | Relevant period and conditions | Concessional rate |
|---|---|---|
| Foreign-currency borrowing under a loan agreement or eligible long-term infrastructure bond | Loan agreement or issue from 1 July 2012 and before 1 July 2023, subject to statutory conditions | 5% |
| Other qualifying long-term bonds, including infrastructure bonds | Issue on or after 1 October 2014 but before 1 July 2023; required approval and interest restrictions apply | 5% |
| Rupee-denominated bonds issued to borrow from an overseas source | Issued before 1 July 2023, subject to applicable conditions | 5% |
| Long-term or rupee-denominated bonds listed only on a recognised IFSC stock exchange | Issued on or after 1 April 2020 but before 1 July 2023 | 4% |
| Long-term or rupee-denominated bonds listed only on a recognised IFSC stock exchange | Issued on or after 1 July 2023 | 9% |
The above rates describe the specified withholding categories, not a blanket rate for all non-resident interest income. Applicable surcharge and health and education cess, statutory relief and tax treaties must be considered where relevant.
3. Statutory definitions and conditions
Specified company
Under the explanation to former Section 194LC, a specified company means an Indian company. A business trust is also an eligible payer where the relevant statutory conditions are satisfied.
Foreign currency
The former provision refers to the meaning assigned by Section 2(m) of the Foreign Exchange Management Act, 1999.
International Financial Services Centre (IFSC)
The former provision refers to Section 2(q) of the Special Economic Zones Act, 2005. The special 4% and 9% rates require the prescribed exclusive listing on a recognised stock exchange located in an IFSC.
Approved interest ceiling
For the relevant borrowing categories, the concessional treatment is limited to interest not exceeding the amount calculated at the rate approved by the Central Government, having regard to the borrowing terms and repayment. The applicable approval and ceiling conditions should be checked instrument by instrument.
4. When to deduct TDS and how to comply
The deductor must withhold at the earlier of credit to the payee's account or actual payment, whether by cash, cheque, draft, electronic transfer or another mode. Crediting a payable to a suspense or similarly named account does not necessarily defer the withholding obligation.
Identify the beneficial recipient, tax residence, nature of interest, borrowing date and instrument, IFSC listing status and applicable approval before selecting the rate. Maintain supporting agreements and issue documents. Apply the operative law, prescribed deposit and reporting rules and any applicable tax-treaty documentation. For historical periods governed by the 1961 Act, non-resident TDS reporting generally used Form 27Q and relevant TDS certificates; do not assume legacy forms apply unchanged to periods governed by the 2025 Act.
There is no separate minimum interest-payment threshold in the concessional Section 194LC provision. If the interest is not chargeable in India or a treaty provides relief, the payer should evaluate the statutory procedures for applying an appropriate lower or nil deduction.
5. Illustrative TDS calculations
Example A - 5%: An eligible Indian company pays Rs. 10,00,000 qualifying interest on a foreign-currency loan entered into during the eligible period. Basic TDS at 5% is Rs. 50,000.
Example B - 4%: A qualifying IFSC-only-listed long-term bond issued in June 2022 generates Rs. 10,00,000 interest. Basic TDS at 4% is Rs. 40,000.
Example C - 9%: A qualifying IFSC-only-listed rupee-denominated bond issued in August 2023 generates Rs. 10,00,000 interest. Basic TDS at 9% is Rs. 90,000.
Examples show base statutory percentages only; surcharge, cess, treaty relief and case-specific adjustments are excluded.
6. Income-tax Act, 2025: Corresponding provision from 1 April 2026
The Income-tax Act, 2025 took effect on 1 April 2026. Its Section 393(2), Table serial numbers 2, 3 and 4 contains the corresponding non-resident withholding categories previously found in Section 194LC:
- Serial no. 2: specified foreign-currency loan agreements and long-term bond borrowings - 5%.
- Serial no. 3: specified rupee-denominated bonds issued before 1 July 2023 - 5%.
- Serial no. 4: qualifying IFSC-only-listed long-term or rupee-denominated bonds - 4% for issues from 1 April 2020 to 30 June 2023, and 9% for issues from 1 July 2023.
For deductions on or after 1 April 2026, consult the actual text of Section 393 and the relevant 2025 Act rules. Section 194LC remains important for historical transactions, records, assessments and understanding the origin of these categories.
7. Frequently asked questions
What is the TDS rate under Section 194LC?
The applicable statutory rate is generally 5% for qualifying foreign borrowings, 4% for eligible IFSC-listed bonds issued from 1 April 2020 to 30 June 2023, and 9% for qualifying IFSC-listed bonds issued on or after 1 July 2023.
Does Section 194LC apply to resident lenders?
No. The provision covers qualifying interest payable to a non-resident other than a company, or to a foreign company.
Is there a minimum payment threshold?
No monetary exemption threshold is specified for the covered interest payments.
When is TDS deducted?
At the earlier of credit of the interest to the payee account or payment by any mode.
What is the corresponding provision in the Income-tax Act, 2025?
Section 393(2), Table serial numbers 2, 3 and 4, governs the corresponding categories from 1 April 2026.
8. Official legal sources
- Income Tax Department - Section 194LC (1961 Act)
- Income Tax Department - Section 393, Income-tax Act, 2025
- Income Tax Department - statutory section correspondence navigator
- Income Tax e-Filing Portal
- India Code - legislation including FEMA and the SEZ Act
This article is educational information. Verify the current statute, relevant notifications and treaty provisions for each actual payment.