TaxTMI 
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TaxTMI 
Exemption from Tax Deduction at Source for Specified Entities (Government, RBI, Corporation and Mutul Fund) : Clause 393(5) of the Income Tax Bill, 2025 and Comparative Analysis with Section 196 of the Income-tax Act, 1961
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.... of TDS, ensuring that entities inherently exempt from income tax, or those for whom TDS would be redundant or administratively burdensome, do not suffer unnecessary withholding on receipts such as interest, dividends, or other sums. The legislative context of these provisions lies in the broader objective of the TDS regime: to facilitate the collection of tax at the source of income, thereby securing timely revenue for the exchequer and improving compliance. However, for certain entities-such as the Government and RBI-such collection is either unnecessary or contrary to the policy of tax neutrality. Over the years, these exemptions have been refined to reflect changes in the financial sector, the emergence of new investment vehicles (such ....
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....ach towards these objectives, with periodic amendments to accommodate new categories of exempt entities (such as mutual funds) and to clarify the scope of exempt payments. Detailed Analysis of Clause 393(5) of the Income Tax Bill, 2025 Irrespective of anything contained in this Chapter, the tax shall not be deducted by any person from any amount payable to- (a) the Government; or (b) the Reserve Bank of India; or (c) a corporation established by or under a Central Act which is, under any law in force, exempt from income-tax on its income; or (d) a Mutual fund as specified at Schedule VII (Table: Sl. No. 20 or 21), where such amount is payable to it by way of- (A) interest; or (B) dividend in respect of any securities or shares owned by it....
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....nts payable by way of: * Interest: This includes interest on securities, deposits, bonds, etc., owned by the exempt entity. * Dividend: Specifically, dividends in respect of securities or shares owned by or in which the entity has full beneficial interest. * Any Other Income: This is a catch-all category, ensuring that any income accruing or arising to these entities (not limited to interest or dividends) is exempt from TDS. d) Scope and Breadth The language "any other income accruing or arising" broadens the exemption to cover all forms of income, not merely interest or dividend. This is significant, as it precludes the possibility of TDS on miscellaneous receipts such as lease rentals, capital gains, or other forms of investment i....
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....ies to recover TDS erroneously deducted. * For Tax Administration: The provision reduces unnecessary administrative work for the tax department, as TDS collected from exempt entities would inevitably result in refund claims and additional workload. * For Financial Markets: The provision facilitates smoother transactions in government securities, bonds, and mutual fund units, as the flow of funds is not interrupted by TDS procedures. Potential compliance issues may arise if payers are unaware of the exempt status of the recipient, especially in cases where the status of a corporation or mutual fund is not clearly notified or updated. However, the explicit reference to Schedule VII and the requirement for exemption under "any law in forc....
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....)." This reflects a shift in the legislative drafting style under the new Bill, where Schedules are used to enumerate exempt entities, rather than referencing specific clauses of the Act. The substantive effect remains the same, provided the Schedule is kept up to date. c) Corporations Exempt under Central Act Both provisions cover corporations established by or under a Central Act and exempt from income tax under any law in force. There is no material difference in the scope of this exemption. d) Nature of Exempt Payments Both provisions cover sums payable by way of interest, dividends (on securities or shares owned or in which the entity has beneficial interest), and any other income accruing or arising to the entity. The use of the p....
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....t that the securities or shares be "owned by it or in which it has full beneficial interest" may necessitate inquiries into the legal and beneficial ownership structures, especially in the case of nominees or custodians. * Updating Schedules: The effectiveness of the provision for mutual funds depends on the timely updating of Schedule VII. If the Schedule is not updated to reflect new notifications or changes in status, there is a risk of erroneous TDS or denial of exemption. Comparative Perspective: Other Jurisdictions In many common law jurisdictions, similar exemptions exist for government entities and certain public institutions. For example: * United Kingdom: The UK tax regime exempts government and central bank entities from wi....