Section 196C Income Tax Act: TDS on Foreign Currency Bonds and GDRs
Section 196C of the Income-tax Act, 1961 governed tax deduction at source (TDS) on specified interest, dividend and long-term capital gains paid to non-residents in relation to foreign-currency bonds and Global Depository Receipts (GDRs). The applicable rate for qualifying long-term capital gains changed from 23 July 2024. This guide explains the rule, its relationship with section 115AC and the transition to the Income-tax Act, 2025.
Meaning and scope of Section 196C
Section 196C applied where income was payable to a non-resident by way of interest or dividend on bonds or GDRs referred to in section 115AC, or by way of long-term capital gains on transfer of those instruments. The payer was required to deduct income-tax at the earlier of credit to the payee's account or actual payment by any mode.
Section 115AC is the special tax regime for specified income of non-residents from eligible bonds or GDRs of Indian companies or public-sector undertakings acquired in foreign currency, subject to its statutory conditions. A Global Depository Receipt is a depository instrument representing underlying shares and issued through an overseas depository arrangement. Eligibility depends on the precise statutory definition and issuance terms, not merely the description of a security.
TDS rates under Section 196C
| Type of income | Statutory base rate |
|---|---|
| Interest or dividends on qualifying bonds or GDRs | 10% |
| Long-term capital gains on qualifying transfers before 23 July 2024 | 10% |
| Long-term capital gains on qualifying transfers on or after 23 July 2024 | 12.5% |
The 12.5% rate was introduced by section 64 of the Finance (No. 2) Act, 2024, with effect from 23 July 2024. These are base rates; actual withholding may be affected by applicable surcharge, cess, treaty relief and other legal requirements. The nature and taxability of the payment must be established before deducting tax.
Practical illustration
If a qualifying non-resident receives Rs. 2,00,000 of interest covered by section 196C, the base TDS at 10% is Rs. 20,000. If qualifying long-term capital gains of Rs. 2,00,000 arise from a transfer made on 1 August 2024, the base rate is 12.5%, producing Rs. 25,000 before any applicable additions or treaty adjustment. The payer should verify whether the sum represents taxable gains and whether this special provision applies.
Position under the Income-tax Act, 2025
The Income-tax Act, 2025 applies from 1 April 2026. For current payments, refer to the corresponding provisions of the new Act, including its section 393 on deduction at source and section 209 dealing with the special taxation of certain non-resident income from foreign-currency bonds and GDRs. The section numbers in the 1961 Act should not be assumed to carry over unchanged. Check the current statutory text and Finance Act amendments before withholding.
Treaty relief and compliance
Where an applicable Double Taxation Avoidance Agreement (DTAA) offers a more beneficial rate, relief may be available subject to the treaty, section 90 or 90A requirements, tax-residency documentation and other conditions. The payer should assess the recipient's residency, beneficial entitlement, nature of income, PAN and documentation, and applicable reporting or remittance requirements. A lower rate is not automatic merely because the payee is non-resident.
Legislative history
Section 196C was inserted by the Finance Act, 1992 with effect from 1 June 1992. It was amended by the Finance Act, 1993, and references to bonds or shares were revised by the Finance Act, 2001. Earlier versions contained a proviso referring to dividends under section 115-O, a historical provision associated with dividend distribution tax. That proviso should not be presented as a current general exemption from TDS on dividends. The Finance (No. 2) Act, 2024 subsequently distinguished the rates for income and capital gains.
Official legal references
- Section 196C, Income-tax Act, 1961 (historical text)
- Finance (No. 2) Act, 2024, section 64 (rate amendment)
- Section 115AC (special tax treatment)
- Income Tax Department: TDS rates
- Income-tax Act, 2025: special-case taxation guidance
- Income Tax e-Filing portal
Frequently asked questions
Does Section 196C apply to every foreign investor?
No. It concerns specified instruments and income referred to in section 115AC. Other payments to non-residents may fall under different withholding provisions.
Is the TDS rate still 10% for long-term capital gains?
For covered transfers on or after 23 July 2024, the statutory base rate became 12.5%. The earlier 10% rate applies to qualifying transfers before that date.
When must the payer deduct tax?
Under the 1961 Act's section 196C, the trigger was the earlier of credit to the payee's account or payment. For current transactions, check the corresponding 2025 Act provision.
This article provides general legal information. Apply the statute and rules relevant to the transaction date, recipient and instrument, and obtain professional advice where necessary.