TDS on Investment Fund Unit Income and Interest on Foreign Borrowings
The Income-tax law contains special withholding rules for income paid to unit holders of specified investment funds and for qualifying interest paid to non-residents or foreign companies on specified foreign-currency or rupee-denominated borrowings. From 1 April 2026, these rules are consolidated in Section 393 of the Income-tax Act, 2025.
Investment fund unit income
The investment-fund withholding rule applies to specified income payable to a unit holder in respect of units of an investment fund covered by the statutory pass-through regime. The character of the underlying income and the residence of the unit holder must be identified before applying TDS.
Resident unit holder
The current successor provision for qualifying investment-fund income paid to a resident unit holder is Section 393(1), Table Serial No. 4(iii). The legacy Section 194LBB rate for a resident payee was 10 percent. For a current payment, the applicable rate and any statutory exception should be checked under Section 393 and the Finance Act for the relevant tax year.
Non-resident unit holder
The corresponding current non-resident provision is Section 393(2), Table Serial No. 8. Under legacy Section 194LBB, deduction for a non-resident individual or foreign company was at the rates in force, and no deduction was required for income that was not chargeable to tax under the Act. Current payments should be tested under the 2025 Act, applicable rates in force and any treaty entitlement.
Meaning of unit and investment fund
Legacy Section 194LBB adopted the meaning of "unit" from the investment-fund provisions linked to Section 115UB. The investment fund itself was the fund specified under the statutory pass-through regime. Under the 2025 Act, the corresponding definitions and substantive investment-fund provisions should be used for current transactions.
Interest on specified foreign borrowings
Legacy Section 194LC provided a concessional withholding regime for specified interest payable by an Indian company or business trust to a non-resident or foreign company on qualifying borrowings from outside India. From 1 April 2026, the corresponding categories are placed in Section 393(2), Table Serial Nos. 2, 3 and 4.
Historical Section 194LC rates
The uploaded legacy provision records a general TDS rate of 5 percent for qualifying Section 194LC interest and a 4 percent rate for the specified category of interest on certain long-term bonds or rupee-denominated bonds listed only on a recognised stock exchange in an International Financial Services Centre. These rates relate to the statutory categories and issue windows prescribed under the 1961 Act.
Historical borrowing and bond windows
The legacy provision covered specified foreign-currency loan agreements and long-term bonds issued within prescribed periods. The uploaded text records, among other conditions, borrowing or issue windows ending before 1 July 2023 for several categories, as well as a separate category for qualifying long-term or rupee-denominated bonds issued on or after 1 April 2020 but before 1 July 2023 and listed only on a recognised stock exchange in an International Financial Services Centre.
Because these historical issue windows have expired, a current interest payment must be examined by reference to the original qualifying borrowing or bond and the saving or successor provisions under the Income-tax Act, 2025. A new borrowing should not be assumed to qualify merely because Section 194LC historically applied to similar instruments.
Interest ceiling condition
Legacy Section 194LC limited the qualifying interest to the amount calculated at the rate approved by the Central Government, having regard to the terms of the loan or bond and its repayment. The corresponding current statutory conditions should be verified for payments governed by the 2025 Act.
Important definitions under legacy Section 194LC
Foreign currency: had the meaning assigned in Section 2(m) of the Foreign Exchange Management Act, 1999.
Specified company: meant an Indian company.
International Financial Services Centre: had the meaning assigned in Section 2(q) of the Special Economic Zones Act, 2005.
Recognised stock exchange: had the meaning assigned by the provision through the relevant Income-tax Act definition.
When is TDS deducted?
Under both legacy Sections 194LBB and 194LC, deduction generally arose at the earlier of credit of the income to the payee or actual payment by cash, cheque, draft or another mode. Section 194LBB also treated a credit to a suspense account or another account in the payer's books as credit to the payee.
Transition to the Income-tax Act, 2025
| Legacy provision | Subject | Current mapping from 1 April 2026 |
|---|---|---|
| Section 194LBB | Investment fund income to resident unit holder | Section 393(1), Table Serial No. 4(iii) |
| Section 194LBB | Investment fund income to non-resident unit holder | Section 393(2), Table Serial No. 8 |
| Section 194LC | Specified interest to non-resident or foreign company | Section 393(2), Table Serial Nos. 2, 3 and 4 |
Income Tax Department guidance states that sums paid or credited on or before 31 March 2026 remain governed by the Income-tax Act, 1961, while sums paid or credited on or after 1 April 2026 are governed by the corresponding withholding provisions of the Income-tax Act, 2025. The relevant Section 393 table item should be quoted for current TDS reporting.
Legacy Section 194LBB of the Income-tax Act, 1961
Legacy Section 194LC of the Income-tax Act, 1961
Section 194LC applied to specified interest payable by an Indian company or business trust to a non-resident other than a company or to a foreign company. Its concessional rates depended on the type, date and conditions of the foreign borrowing or bond issue.
Practical compliance checklist
Identify the income: determine whether the payment is investment-fund pass-through income or interest on a qualifying foreign borrowing.
Confirm residence: Section 393 uses different table entries for resident and non-resident investment-fund unit holders.
For investment funds: identify the nature of underlying income and whether any portion is excluded or not chargeable to tax.
For foreign borrowings: verify the original loan or bond, issue date, currency, listing status, borrower and statutory qualifying conditions.
Check treaty entitlement: for a non-resident recipient, examine the applicable tax treaty, beneficial ownership and prescribed documentation where relevant.
Use the earlier event: determine TDS by the statutory credit/payment rule and any suspense-account deeming provision.
Report the current section: use the relevant Section 393 table item for transactions governed from 1 April 2026.
Related Income Tax provisions
Infrastructure debt fund and business trust income: legacy Sections 194LB and 194LBA
Income in respect of units: legacy Section 194K
Certain bond interest and other sums to non-residents: legacy Sections 194LD and 195
Income from units of non-residents: legacy Sections 196A and 196B
Lower or nil deduction: legacy Sections 197 and 197A
For a live payment, verify the current Section 393 table entry, recipient status, underlying income, original borrowing or bond conditions, rates in force and treaty documentation.