Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Introduction

The deductibility of tax at source (TDS) on income in respect of units paid to non-residents has long been an integral part of India's withholding tax regime. Section 196A of the Income-tax Act, 1961, governs TDS on income in respect of units (primarily mutual fund units) paid to non-residents. The Income Tax Bill, 2025, proposes a comprehensive overhaul of the TDS framework, as encapsulated in Clause 393, which consolidates and rationalizes the provisions relating to deduction and collection at source. Two key sub-clauses are particularly relevant to the treatment of income in respect of units paid to non-residents:

• Clause 393(2)[Table: S.No. 10]: Governs TDS on income in respect of units of a Mutual Fund or specified company paid to non-residents (not being a company) or foreign companies.
• Clause 393(4)[Table: S.No. 15]: Provides for exemption from TDS in respect of income payable in respect of units of the Unit Trust of India (UTI) to specified non-residents, subject to prescribed conditions.

This commentary undertakes a detailed, item-wise analysis of these provisions, situates them in the broader context of the new TDS regime, and compares them with the existing Section 196A of the Income-tax Act, 1961, highlighting substantive changes, continuities, and potential implications.

Objective and Purpose

The legislative intent behind TDS provisions on income from units paid to non-residents is twofold:

• To ensure tax compliance and collection at the earliest point of time, given the challenges in enforcing tax recovery from non-residents, and
• To provide for a mechanism that accommodates specific policy objectives, such as incentivizing foreign investment, preventing double taxation, and ensuring administrative convenience.

Section 196A was originally introduced to address the unique features of mutual fund income, especially in the context of growing foreign portfolio investment. The Income Tax Bill, 2025, through Clause 393 and its tables, aims to consolidate, clarify, and modernize the TDS regime, while retaining certain established carve-outs and exemptions.

Detailed Analysis of Clause 393(2)[Table: S.No. 10] and Clause 393(4)[Table: S.No. 15] of the Income Tax Bill, 2025

1. Clause 393(2)[Table: S.No. 10]: TDS on Income in Respect of Units Paid to Non-Residents

Text of the Provision:

Any income- (a) in respect of units of a Mutual Fund specified under Schedule VII (Table: Sl. No. 20) or (Table: Sl. No. 21); or (b) from the specified company. Payee: Any non-resident (not being a company) or a foreign company. Payer: Any person. Rate: As per Note 2.

Key Features:

• Scope: Applies to income in respect of units of specified mutual funds and specified companies, paid to non-residents (not being a company) or foreign companies.
• Payer: Any person responsible for paying such income.
• Payee: Non-resident individuals, foreign companies.
• Rate: The applicable rate is to be determined as per Note 2 (which, though not reproduced in full, typically refers to the rate prescribed under the Act or as per Double Taxation Avoidance Agreements (DTAAs), whichever is beneficial to the assessee).
• Timing: Deduction is to be made at the time of credit or payment, whichever is earlier.

Interpretation and Issues:

• Wider Applicability: The provision covers both mutual funds and specified companies, aligning with the expanded scope under the amended Section 196A.
• Reference to Note 2: The reference to Note 2 is crucial, as it likely incorporates the DTAA override and provides for deduction at the beneficial rate, subject to the payee furnishing a tax residency certificate and other prescribed documents.
• Non-Resident Categories: The inclusion of both non-resident individuals and foreign companies ensures comprehensive coverage of foreign investors.
• Synchrony with Global Best Practices: The provision reflects India's commitment to international standards, particularly in recognizing the primacy of treaty provisions over domestic law in the matter of TDS rates.

2. Clause 393(4)[Table: S.No. 15]: Exemption from TDS on Income in Respect of Units of UTI Paid to Certain Non-Residents

Text of the Provision:

Income in respect of units of non-residents referred to in section 393(2)(Table: Sl. No. 10). Income payable in respect of units of the Unit Trust of India to a non-resident Indian or a non-resident Hindu undivided family, subject to prescribed conditions.

Key Features:

• Exemption Scope: Provides that no TDS shall be made on income payable in respect of units of the Unit Trust of India (UTI) to a non-resident Indian (NRI) or a non-resident Hindu undivided family (HUF), subject to prescribed conditions.
• Prescribed Conditions: While the Bill does not detail these conditions, they are expected to mirror those u/s 196A(2), i.e., that the units must have been acquired from UTI out of funds in a Non-resident (External) Account (NRE) maintained with a bank in India or by remittance in foreign currency, in accordance with FEMA and its rules.
• Legislative Continuity: This provision ensures continuity of the long-standing policy of exempting certain NRI investments in UTI units from TDS, in order to promote foreign investment and simplify compliance for genuine investments made through prescribed channels.

Practical Implications

1. For Non-Resident Investors

• Withholding Obligations: Non-resident investors in mutual funds or specified companies will continue to be subject to TDS on income from units, ensuring upfront tax collection and reducing the risk of tax leakage.
• DTAA Benefits: The ability to avail of beneficial DTAA rates remains, provided the investor submits the TRC and other prescribed documents. This is especially relevant for investors from countries with which India has entered into favorable tax treaties.
• UTI Units Exemption: NRIs and non-resident HUFs investing in UTI units through NRE accounts or foreign currency remittance enjoy a continued exemption from TDS, subject to compliance with prescribed conditions. This facilitates ease of investment and repatriation.

2. For Payers (Mutual Funds/Trusts/Companies)

• Compliance Burden: Payers must ensure correct identification of the payee's residential status, obtain necessary declarations and documentation (including TRCs for DTAA benefits), and apply the correct TDS rate.
• Exemption Administration: For UTI units, payers must verify that the conditions for exemption are satisfied, including the source of funds and compliance with FEMA.
• Documentation: Maintenance of records, including evidence of NRE account funding or foreign currency remittance, is essential to defend the non-deduction of TDS in case of scrutiny.

3 For the Tax Administration

• Enforcement and Monitoring: The consolidated TDS regime under Clause 393 enables streamlined enforcement and easier monitoring of compliance, reducing interpretational disputes and administrative complexity.
• Policy Objectives: The retention of the UTI exemption for NRIs serves the policy objective of attracting stable foreign investment, while the general TDS requirement ensures the integrity of the tax base.

Comparative Analysis with Section 196A of the Income-tax Act, 1961

1. Substantive Parity

Both the new Bill and the existing Section 196A are fundamentally aligned in their approach:

• Both require TDS on income in respect of units paid to non-residents (individuals and foreign companies).
• Both provide for DTAA override, subject to documentation.
• Both contain an exemption for UTI units held by NRIs/non-resident HUFs, subject to funding and FEMA compliance.

2. Differences and Rationalizations

• Structural Changes: The Bill consolidates TDS provisions into a single, tabular format, enhancing clarity and ease of reference, as opposed to the scattered, section-wise approach of the 1961 Act.
• Reference to "Note 2": The Bill refers to Note 2 for the applicable rate, which likely incorporates both the statutory rate and the DTAA override, whereas Section 196A specifies the 20% rate and then the DTAA override explicitly.
• Wider Scope: The Bill's language is broader, explicitly covering both mutual funds and specified companies, and ensuring that all categories of non-resident payees are covered.
• Exemption Conditions: While Section 196A(2) spells out the exemption conditions in detail, the Bill refers to "prescribed conditions," which are expected to be detailed in subordinate legislation or rules. This allows for greater flexibility and administrative efficiency in updating conditions as needed.
• Integration with FEMA: Both provisions require compliance with FEMA for the exemption, but the Bill's reliance on "prescribed conditions" may allow for easier harmonization with evolving FEMA regulations.
• Procedural Provisions: The Bill's Clause 393 includes general procedural rules for timing of deduction, treatment of credits to suspense accounts, and precedence of certain exemptions, which are consistent with the approach of Section 196A but are now part of a unified framework.

3. Ambiguities and Potential Issues

• Prescribed Conditions: The lack of explicit detail in the Bill regarding the exemption conditions for UTI units introduces some uncertainty, but this is likely to be addressed through rules or notifications.
• Interpretation of "Specified Company": The Bill refers to "specified company," which must be read in conjunction with the relevant schedules and definitions. Care must be taken to ensure that this term is consistently interpreted with reference to the legacy provisions.
• Overlap with Other Provisions: The Bill's integrated approach may raise questions regarding the interplay with other TDS provisions, but the inclusion of precedence and overriding clauses should mitigate most conflicts.

Conclusion

Clause 393(2)[Table: S.No. 10] and Clause 393(4)[Table: S.No. 15] of the Income Tax Bill, 2025, represent a modernization and rationalization of the TDS regime for income in respect of units paid to non-residents, building on the foundation laid by Section 196A of the Income-tax Act, 1961. The core policy objectives-ensuring tax collection, facilitating foreign investment, and harmonizing with international standards-remain unchanged. The new Bill's tabular and consolidated structure enhances clarity, administrative efficiency, and adaptability, while retaining essential substantive features such as the DTAA override and the UTI exemption for NRIs. The shift to "prescribed conditions" for exemptions provides flexibility, though it requires vigilance to ensure that subordinate legislation preserves the intended policy outcomes. For stakeholders, the changes are largely evolutionary rather than revolutionary, and the transition to the new regime should be manageable, provided that the rules and notifications under the Bill are promptly and clearly issued. The comparative analysis reveals that the new provisions are substantively in line with the existing law, but with improved structure and potential for more responsive administration.

Full Text:

Clause 393 Tax to be deducted at source.