The Finance Act, 2012 has introduced Section 194LC in the Income Tax Act, 1961 which provides for a lower withholding tax rate of 5% on interest payable in respect of any loan under a ‘loan agreement’ or an ‘infrastructure bond’ which is approved by the Central Government for this purpose. The Central Government has, under a circular dated 21 September, 2012, extended this concessional rate to the following:

  • foreign currency loans that are compliant with the ECB Regulations and which have a loan registration number issued by the RBI; and
  • long-term infrastructure bonds compliant with the ECB Regulations, and which have a loan registration number issued by the RBI.

The lower rate of withholding tax is available for monies borrowed or bonds issued from 1 July 2012 to 30 June 2015. It was also clarified that the borrowing should not be pursuant to the restructuring of an existing loan, if the sole aim of such restructuring is to avail the benefit of the reduced withholding tax rate.