Section 196 of the Income-tax Act, 1961: TDS Exemption for Government, RBI, Corporations and Mutual Funds

Updated: 27 October 2026 | Includes the Income-tax Act, 2025

Section 196 of the Income-tax Act, 1961 provided that tax was not to be deducted at source (TDS) from specified sums payable to the Government, the Reserve Bank of India (RBI), certain tax-exempt statutory corporations and specified mutual funds. The provision applied to qualifying interest, dividends and other income accruing or arising to these recipients.

1. Meaning and scope of Section 196 under the 1961 Act

Section 196 was an overriding provision in Chapter XVII (Collection and Recovery of Tax). In substance, it prohibited a payer from deducting income tax from qualifying sums payable to the following recipients:

1. The Government.
2. The Reserve Bank of India.
3. A corporation established by or under a Central Act that was exempt from income tax on its income under the law then in force.
4. A mutual fund specified in section 10(23D) of the 1961 Act.

The protection covered interest or dividends relating to securities or shares owned by the recipient or in which it had full beneficial interest, and other income accruing or arising to the qualifying recipient. The recipient's legal status and the character of the payment had to be established.

2. Explanation of important legal expressions

Tax deducted at source (TDS)

TDS is a mechanism under which a person making a specified payment withholds income tax and remits it to the Central Government. Section 196 operated as an express exception for the qualifying recipients and income described in the provision.

Corporation established by or under a Central Act

This means an entity constituted under Central legislation. Merely being government-owned or incorporated under general company law does not, by itself, satisfy the additional statutory requirement that the corporation be exempt from income tax on its income.

Full beneficial interest

Beneficial interest refers to the substantive entitlement to the income or property, rather than mere custody or holding on behalf of someone else. The statutory wording should be considered alongside the ownership documents and the facts of the payment.

Mutual fund specified under section 10(23D)

Under the former Act, section 10(23D) identified specified categories of mutual funds whose income qualified for exemption, subject to applicable statutory conditions. The corresponding 2025 Act reference is to Schedule VII, Table serial numbers 20 and 21.

3. Current provision: Section 393(5) of the Income-tax Act, 2025

Section 393(5) continues the non-deduction rule for amounts payable to the Government, RBI, qualifying tax-exempt corporations established by or under a Central Act, and mutual funds covered by Schedule VII (Table, serial numbers 20 or 21). It applies to the specified interest, dividend and other accruing or arising income described in that subsection.

For the precise legislative wording, refer to the Income Tax Department's official section 393 text and the Income-tax Act, 2025 (official PDF).

4. Which Act applies to a payment around April 2026?

As clarified by the Income Tax Department, the applicable TDS law generally depends on the earlier of credit or payment. Where that event occurred on or before 31 March 2026, the 1961 Act governs the TDS obligation. Where it occurs on or after 1 April 2026, the 2025 Act applies. Special rules for particular payment categories should also be checked.

Example: If interest was credited to a qualifying recipient on 28 March 2026 and paid on 10 April 2026, the relevant TDS event ordinarily arose under the 1961 Act. If the first relevant event occurred on 10 April 2026, section 393(5) of the 2025 Act should be considered.

5. Practical compliance checklist

• Confirm the payee's identity and statutory status.
• For a statutory corporation, verify both its Central Act basis and its applicable income-tax exemption.
• For a mutual fund, check its eligibility under the relevant Act and schedule.
• Determine whether the interest, dividend or other income falls within the statutory wording.
• Record the date of credit or payment and apply the appropriate Act.
• Keep documentary support for the decision not to deduct TDS.

The provision should not be treated as a general TDS exemption for every public-sector undertaking, government-controlled company or mutual fund investor.

6. Legislative history

Section 196 was substituted with effect from 1 April 1988 by the Direct Tax Laws (Amendment) Act, 1987; an earlier substitution took effect on 1 April 1967 under the Finance (No. 2) Act, 1967. Its subject matter is now addressed by section 393(5) of the Income-tax Act, 2025.

7. Frequently asked questions

Is TDS deductible on interest paid to the RBI?

For an amount covered by the statutory non-deduction rule, no. For events on or after 1 April 2026, consult section 393(5) of the 2025 Act.

Are all government companies exempt from TDS?

No. A company is not automatically covered merely because the Government owns its shares. The exact statutory category and any required income-tax exemption must be verified.

Is section 196 of the 2025 Act the replacement for old section 196?

No. The relevant successor provision is section 393(5). Section 196 of the 2025 Act addresses taxation of certain short-term capital gains.

8. Official legislation and guidance

• Section 196, Income-tax Act, 1961 - official historical text
• Section 393, Income-tax Act, 2025 - official text
• Income-tax Act, 2025 - official statute
• Income Tax Department - TDS compliance and transition guidance

This article is general legal information. For a particular payment, verify the current statutory text, amendments and the recipient's eligibility.