Tds on ecb loan interest
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
12 December 2014
Dear All,
We are the pvt ltd co. taking the ECB loan from an NRI in the year 2010 US $ 11500 so far we are payeing the interest and deduct 20% TDS on the interest under section 195 is write the right section of income tax an is the % of TDS is correct?
Please do the needful
Regards
Sunil
We are the pvt ltd co. taking the ECB loan from an NRI in the year 2010 US $ 11500 so far we are payeing the interest and deduct 20% TDS on the interest under section 195 is write the right section of income tax an is the % of TDS is correct?
Please do the needful
Regards
Sunil
12 December 2014
the ans is yes ur correct............
Querist : Anonymous
Querist :
Anonymous
(Querist)
12 December 2014
Then what is the section 194LC of Income tax and Circular No 07/2012 Dt. 21.9.2012
Regards
Sunil
Regards
Sunil
27 July 2025
The situation you described involves a **ECB (External Commercial Borrowing)** loan from an **NRI** where interest is being paid and TDS is being deducted under **Section 195** of the Income Tax Act. Let’s address your questions one by one, including the reference to **Section 194LC** and **Circular No. 7/2012**.
### **1. TDS on ECB Loan Interest under Section 195:**
* **Section 195** deals with **TDS on payments to non-residents** (including NRIs and foreign entities) for various types of income. In your case, the **interest on an ECB loan** paid to an NRI is subject to TDS under **Section 195**.
* The **TDS rate under Section 195** for **interest paid to non-residents** is generally **20%** (plus applicable surcharge and cess) as per the **Income Tax Act**.
* Since you are deducting **20% TDS**, that is the **correct rate**, assuming that the interest payment is **not in the nature of interest on loans** provided by an Indian company to a non-resident.
* The rate of **20%** applies to foreign **interest payments** and is typically **not subject to any lower rates** unless there is a **Double Taxation Avoidance Agreement (DTAA)** between India and the country of the NRI lender.
---
### **2. What is Section 194LC of the Income Tax Act?**
**Section 194LC** was introduced to encourage **external borrowings at lower rates** by Indian companies. It applies to the **interest paid by Indian companies on external borrowings** (including bonds and loans) where:
* The borrowing is from **foreign lenders**.
* The loan/bond is issued at a **lower interest rate** as per the **government’s schemes**.
Specifically, under **Section 194LC**:
* The Indian company can **deduct TDS at a lower rate** on the interest paid to **foreign lenders** (e.g., banks, financial institutions, or other entities) for loans/bonds issued in **foreign currency**.
* The rate of TDS under Section 194LC is typically **5%** (plus surcharge and cess) if the borrowing is eligible for this scheme.
### **3. Circular No. 7/2012 Dt. 21.09.2012:**
* **Circular No. 7/2012** issued by the **CBDT** provides clarification on the applicability of **Section 194LC** and its implementation, specifically for loans or borrowings under certain **external commercial borrowing schemes**.
* The circular specifically mentions that **interest payments** made by Indian companies to foreign lenders, **under the ECB scheme**, will be subject to the **5% TDS** rate **under Section 194LC**, provided the conditions outlined in the circular are met.
* This **lower rate of 5%** under Section 194LC is applicable for **loans** and **bonds issued by foreign entities** and subscribed to by the Indian company **in foreign currency**.
* It is **not applicable to general loans** or **interest payments made outside of this structure**.
---
### **Key Points Regarding Your Case:**
* Since your company is taking an **ECB loan from an NRI** and paying interest, **Section 195** applies to the interest payments.
* The **correct TDS rate is 20%** (plus applicable surcharge and cess) under **Section 195**, assuming there is no DTAA with the country of the NRI.
* If the **loan is eligible under Section 194LC** (i.e., if the terms of the loan qualify for the lower rate), you might be able to benefit from the **5% TDS rate** under that section. However, **Section 194LC** typically applies to loans **from foreign institutional investors or foreign financial institutions**, not individual NRIs.
### **Conclusion:**
* **TDS under Section 195 at 20%** is **correct** for **interest on ECB loans** from NRIs.
* **Section 194LC** is a **separate provision** that offers a **5% TDS rate** for eligible **external borrowings**, usually applicable to **foreign institutional investors or foreign companies** that meet the requirements outlined in the scheme.
* If the loan from the NRI does not qualify under **Section 194LC**, you are correct in applying the **20% TDS** under **Section 195**.
If you need further clarification or have additional queries, feel free to ask!
### **1. TDS on ECB Loan Interest under Section 195:**
* **Section 195** deals with **TDS on payments to non-residents** (including NRIs and foreign entities) for various types of income. In your case, the **interest on an ECB loan** paid to an NRI is subject to TDS under **Section 195**.
* The **TDS rate under Section 195** for **interest paid to non-residents** is generally **20%** (plus applicable surcharge and cess) as per the **Income Tax Act**.
* Since you are deducting **20% TDS**, that is the **correct rate**, assuming that the interest payment is **not in the nature of interest on loans** provided by an Indian company to a non-resident.
* The rate of **20%** applies to foreign **interest payments** and is typically **not subject to any lower rates** unless there is a **Double Taxation Avoidance Agreement (DTAA)** between India and the country of the NRI lender.
---
### **2. What is Section 194LC of the Income Tax Act?**
**Section 194LC** was introduced to encourage **external borrowings at lower rates** by Indian companies. It applies to the **interest paid by Indian companies on external borrowings** (including bonds and loans) where:
* The borrowing is from **foreign lenders**.
* The loan/bond is issued at a **lower interest rate** as per the **government’s schemes**.
Specifically, under **Section 194LC**:
* The Indian company can **deduct TDS at a lower rate** on the interest paid to **foreign lenders** (e.g., banks, financial institutions, or other entities) for loans/bonds issued in **foreign currency**.
* The rate of TDS under Section 194LC is typically **5%** (plus surcharge and cess) if the borrowing is eligible for this scheme.
### **3. Circular No. 7/2012 Dt. 21.09.2012:**
* **Circular No. 7/2012** issued by the **CBDT** provides clarification on the applicability of **Section 194LC** and its implementation, specifically for loans or borrowings under certain **external commercial borrowing schemes**.
* The circular specifically mentions that **interest payments** made by Indian companies to foreign lenders, **under the ECB scheme**, will be subject to the **5% TDS** rate **under Section 194LC**, provided the conditions outlined in the circular are met.
* This **lower rate of 5%** under Section 194LC is applicable for **loans** and **bonds issued by foreign entities** and subscribed to by the Indian company **in foreign currency**.
* It is **not applicable to general loans** or **interest payments made outside of this structure**.
---
### **Key Points Regarding Your Case:**
* Since your company is taking an **ECB loan from an NRI** and paying interest, **Section 195** applies to the interest payments.
* The **correct TDS rate is 20%** (plus applicable surcharge and cess) under **Section 195**, assuming there is no DTAA with the country of the NRI.
* If the **loan is eligible under Section 194LC** (i.e., if the terms of the loan qualify for the lower rate), you might be able to benefit from the **5% TDS rate** under that section. However, **Section 194LC** typically applies to loans **from foreign institutional investors or foreign financial institutions**, not individual NRIs.
### **Conclusion:**
* **TDS under Section 195 at 20%** is **correct** for **interest on ECB loans** from NRIs.
* **Section 194LC** is a **separate provision** that offers a **5% TDS rate** for eligible **external borrowings**, usually applicable to **foreign institutional investors or foreign companies** that meet the requirements outlined in the scheme.
* If the loan from the NRI does not qualify under **Section 194LC**, you are correct in applying the **20% TDS** under **Section 195**.
If you need further clarification or have additional queries, feel free to ask!
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