Section 194LD: TDS on Interest from Bonds and Government Securities
Section 194LD of the Income-tax Act, 1961 provided a concessional tax-deduction-at-source (TDS) regime for specified interest earned by eligible foreign portfolio investors on rupee-denominated corporate bonds and Government securities. The concession is conditional: the identity of the investor, nature of the security and statutory payment period all matter.
Section 194LD at a glance
1. Who and what does Section 194LD cover?
Under subsection (1), a person responsible for paying specified interest to a Foreign Institutional Investor (FII) or Qualified Foreign Investor (QFI) was required to deduct income-tax at 5% where the conditions in subsection (2) were satisfied. The provision concerns:
- Interest on a rupee-denominated bond of an Indian company, subject to the prescribed/notified interest-rate ceiling; and
- Interest on a Government security, as statutorily defined.
The provision does not extend the concessional rate to all foreign investors or all interest instruments merely because they are Indian investments.
2. Applicable period and later amendments
The original provision covered specified interest payable from 1 June 2013, with the closing date amended over time. The source webpage reproduces an earlier version referring to payments before 1 July 2020. Subsequent legislation extended the concession for eligible interest payments to before 1 July 2023. Accordingly, the older 2020 cut-off must not be presented as the final amended position.
For payments after that window, examine the applicable withholding law rather than automatically applying the former 5% concession. This is especially important for payments falling under the Income-tax Act, 2025.
3. Statutory definitions
Foreign Institutional Investor
For the 1961 Act, the expression is linked to the meaning assigned in the Explanation to Section 115AD. Modern investment arrangements may use the regulatory term Foreign Portfolio Investor (FPI); tax eligibility must be tested against the precise applicable statutory wording.
Government security
Section 194LD refers to the definition in Section 2(b) of the Securities Contracts (Regulation) Act, 1956. The classification of the particular security should be checked rather than inferred from its issuer or marketing description.
Qualified Foreign Investor
The provision refers to SEBI Circular CIR/IMD/DF/14/2011 dated 9 August 2011, as amended. Regulatory changes over time can affect how legacy terminology is interpreted.
4. When is TDS deducted?
Deduction under the historical provision was required at the earlier of credit of interest to the payee's account or actual payment, including payment by electronic transfer, cheque or another mode. The payer must identify the relevant tax year and applicable law before calculating withholding.
5. Practical illustration
Assume an eligible foreign investor received Rs. 8,00,000 of qualifying interest within the statutory concession period. At the base 5% rate, the TDS calculation is Rs. 8,00,000 × 5% = Rs. 40,000, before considering any legally applicable surcharge or cess. This example illustrates the historical concession; it does not establish the rate for a payment in 2026.
6. Related withholding provisions
Section 194LC concerns specified interest on eligible borrowings or bonds of Indian companies and business trusts; Section 194LB addresses interest from infrastructure debt funds. Section 195 may be relevant to other payments to non-residents. The provisions have different qualifying conditions and should not be treated as interchangeable.
7. Income-tax Act, 2025 and transition
From 1 April 2026, withholding obligations must be determined under the Income-tax Act, 2025 and its applicable schedules, rules and transitional provisions. Section 393 deals with deduction at source under the new Act. A payment made in a current tax year should be checked against the new Act and any continuing relief or special provisions; the historical Section 194LD wording alone is insufficient.
8. Payer compliance checklist
- Verify investor status, tax residence and beneficial ownership documentation.
- Identify the exact bond or Government security and its eligibility.
- Check the interest credit/payment date and applicable statutory cut-off.
- Determine the operative withholding provision and any treaty entitlement, including supporting documentation.
- Deduct, deposit, report and issue withholding certificates in the prescribed manner for the relevant tax period.
9. Official statutory and regulatory resources
- Income Tax Department - Acts, rules and tax guidance
- Income Tax e-Filing Portal - TDS compliance
- India Code - central legislation and statutory texts
- SEBI - foreign portfolio investor regulations and circulars
Editorial note: The page explains the historical 1961 Act provision and flags the transition to the 2025 Act. For a specific transaction, confirm the consolidated legislation, notifications and treaty position effective on the payment date.
Frequently asked questions
What is the concessional TDS rate under Section 194LD?
The historical concessional withholding rate is 5% for interest satisfying the statutory eligibility and date conditions.
Who can receive interest covered by Section 194LD?
Specified foreign institutional investors and qualified foreign investors as defined by the provision, subject to applicable investment and regulatory rules.
Does the 5% rate apply automatically to all government securities?
No. The payment must meet the specified investor, security and statutory time-window requirements.
When is tax deducted?
At the earlier of credit of qualifying interest to the payee account or payment.
Does Section 194LD cover ordinary interest paid to any non-resident?
No. Other interest payments require assessment under the applicable withholding provision and any treaty relief.