No TDS Deduction us 197A1D by IFSC Banking Units IBUs on deposits by non-resident on or after 01-04-2005. CBDT Circular 26/2016

Circular No 26/2016

F.No. 275/26/2016-IT(B)
Government of India
Ministry of Finance
Department  of  Revenue
Central Board of Direct Taxes

North Block, New Delhi
4th July, 2016

Subject: Applicability of Section 197A(1D) and Section 10(15)(viii) of the Income-tax Act, 1961 to interest paid by IFSC Banking Units (IBUs)- Clarification regarding

Section 197A  of the Income-tax  Act,  196 1  provides  the  circumstances  in  which  deduction  of tax at source is not required to be made under  Chapter XVII  of  the Act.  Sub-section  (1D)  of this section  provides  that  deduction  is not required  to be  made  by  an  Offshore  Banking  Unit on interest paid on deposit made on or after  1.4.2005  by a non-resident or a person not ordinarily resident in India, or on borrowing on or after 1.4.2005 from such  persons. Clause (viii) of sub-section  (15) of section  10 provides that such  interest will  not be included  in the total  income. Offshore  Banking  Unit  is defined in clause (u) of section 2 of the Special Economic Zones Act, 2005 as a branch of a  bank located in a Special Economic Zone, which  has  obtained  the  permission  under  clause  (a)  of  sub­ section (1) of section  23 of the  Banking  Regulation  Act,  1949.

2. Representations have been received by the Central Board of Direct Taxes for clarifying the applicability of Section 197A(1D) and Section 10(15)(viii) of the Income-tax 1961 in respect of interest received from IFSC Banking Units (IBUs) set up in the Special Economic Zones. The matter has been examined, and it is observed that IBUs are branches of Indian Banks or Foreign Banks having presence in India, which arc established in accordance with the RBI Scheme dated 1.4.2015, in the International Finance Service Centers that are set up in within the Special Economic Zones, as per Section 18 of the Special Economic Zone Act, 2005. Thus, the IBUs fulfil the necessary criteria for being considered Offshore Banking Units as defined in clause (u) of section 2 of the Special Economic Zones Act , 2005.

3. In view of the above, the Board hereby clarifies that in accordance with the provisions of Section 197A (1D) of the Income-tax Act, 1961, tax is not required to be deducted on interest paid by such IBUs, on deposit made on or after 1.4.2005 by a non-resident or a person who is not ordinarily resident  in India, or on borrowing s made on or after 1.4.2005 from such persons.

(Sandeep Singh)
Under Secretary to the Govt. of India
Tel: 23094182
E-mail: sandeep.singh68@nic.in