Taxation of Interest Income of Non-Residents
A non-resident is taxed in India on interest income that accrues, arises, or is deemed to accrue or arise in India. Interest received in India is also taxable. While interest is generally taxed at normal rates, certain categories of interest income are subject to concessional tax rates on a gross basis.
Taxability of Interest Income
- Interest from Indian Sources: Always taxable in India.
- Interest from Foreign Sources: Taxable in India only if received in India.
- DTAA Applicability: Provisions of the Double Taxation Avoidance Agreement (DTAA) apply if they are more beneficial.
The source of interest income is treated in India if it is payable by:
- The Government of India.
- A resident, unless the loan is for a business/profession or income source outside India.
- A non-resident, if the loan is for a business/profession in India.
Recognition of Interest Income
- Mercantile Accounting: Taxable on an accrual basis.
- Cash Accounting: Taxable on a receipt basis.
Taxation and Deductions
- Taxable under “Income from Other Sources”unless classified as business income.
- Deductions: Generally, expenses related to earning interest income are allowed. However, non-residents are taxed on a gross basis underSections 115A, 115AC, and 115AD, with no deductions allowed.
- Chapter VI-A Deductions: Not allowed except for IFSC units underSection 80LA.
Applicable Tax Rates
|
Section |
Assessee |
Particulars |
Tax Rate |
|
Section 115A |
Non-resident or Foreign Co. |
Interest on monies borrowed or debt incurred by Government or Indian concern in foreign currency |
20% |
|
Non-resident or Foreign Co. |
Interest received from notified Infrastructure Debt Fund as referred to in Section 10(47) |
5% |
|
|
Non-resident or Foreign Co. |
Interest received from an Indian Co. or business trust in respect of: (a) Monies borrowed in foreign currency; (b) Long-term Infrastructure Bonds; or (c) Rupee Denominated Bonds. (If the borrowing is made or bonds are issued during the period specified under Section 194LC) |
• Interest payable in respect of long-term bond or rupee denominated bonds listed on a recognised stock exchange in IFSC- 4% if bonds are issued before 01-07-2023 and 9% if bonds are issued on or after 01-07-2023[1] ; • In any other case 5% |
|
|
FPI or QFI |
Interest on Rupee Denominated Bonds of an Indian Co. or Government Securities or Municipal Debt Securities as referred to in Section 194LD |
5% |
|
|
Non-resident or Foreign Co. |
Interest income distributed by business trust to its unit holders as referred to in Section 194LBA. |
5% |
|
|
Section 115AC |
Non-resident |
Interest on bonds of an Indian Company or Public Sector Company (PSU) purchased in foreign currency |
10% |
|
Section 115AD |
FPI |
Interest from securities |
• 5%- Rupee Denominated Bonds of an Indian Company or Government Securities or Municipal Debt Securities; • 20%- In any other case |
|
Section 115E |
Non-resident Indian |
Interest on debentures or deposits of public company or Government security purchase in foreign currency |
20% |
Note: If DTAA provides a lower tax rate, it prevails.
Minimum Alternate Tax (MAT) on Interest Income
- Applicable to foreign companies with a Permanent Establishment (PE) in India.
- Adjustments to book profit for interest income apply only when taxed at a lower rate than MAT.
Exemptions from Tax on Interest Income
- Interest on certain securities (e.g., National Defence Loans) [Section 10(4)(i)].
- Interest on Non-Resident External (NRE) accounts [Section 10(4)(ii)].
- Interest on Rupee Denominated Bonds issued between 17-09-2018 and 31-03-2019 [Section 10(4C)].
- Interest from aircraft/ship leasing to IFSC units [Section 10(4F)].
- Interest on certain securities or deposits [Section 10(15)].
- Interest income of European Economic Community [Section 10(23BBB)]
- Income from the specified fund defined underSection 10(4D)[Section 10(23FBC)]
- Interest income of wholly owned subsidiary of ADIA or Sovereign wealth fund or pension fund from investment in Indian infrastructure entities [Section 10(23FE)]
TDS on Interest Payments to Non-Residents
Tax is deducted at source (TDS) under the following provisions:
- Section 195: General provision for tax deduction from interest payments to non-residents.
- Section 194LB: Interest from Infrastructure Debt Funds.
- Section 194LBA: Interest from Special Purpose Vehicles (SPVs) distributed by business trusts.
- Section 194LC: Interest on foreign currency loans, bonds, or Rupee Denominated Bonds.
- Section 194LD: Interest on Government/Municipal Debt Securities payable to FPIs.
- Section 196C: TDS on interest from Foreign Currency Convertible Bonds (FCCBs) issued by an Indian company or bonds of PSUs.
- Section 196D: Interest on securities held by FPIs.
Return Filing Requirements
A non-resident must file an income tax return if his income is taxable in India. However, return filing is not required if:
- The non-resident individual, AOP, or BOI has total income (before specified exemptions/deductions) below the basic exemption limit.
- The non-resident or foreign company earns only specified income (like dividend, interest) underSections 115A/ 115AC and TDS on such income is deducted at the rates not lower than the tax rates provided under such sections.
- An NRI opts for the special regime (Chapter XII-A) and earns only foreign exchange asset income, with TDS deducted.
- Income is only from investment in Category III AIF (specified fund underSection 10(4D)).