Section 194LBC of the Income Tax Act: Understanding TDS on Investment in Securitization Trusts
- Bhavika Rajput
- 35 minutes ago
- 7 min read
Certain transactions require the payer to deduct TDS (Tax Deducted at Source) in accordance with the Income Tax Act of 1961. Income from investments in a securitization trust is one example of such a transaction. The financial process of securitization is combining several forms of contractual debt, like loans or mortgages, and offering the associated cash flows as securities to outside investors. These securities give investors a new way to invest while enabling financial institutions to unload risk. The income from the pooled assets is disbursed to the trust's investors through a securitization trust, which is a special-purpose vehicle (SPV) established to hold the assets. The income tax deduction for payments made to investors on investments in a securitization trust is covered by Section 194LBC. Under this section, securitization trusts are required to deduct TDS on the income they distribute to investors.
Table of Contents
What is Section 194LBC?
Section 194LBC regulates how revenue distributed to unit holders by a securitization trust is subjected to taxation. Income disbursed by a securitization trust, a special purpose vehicle (SPV) established to securitise assets, is covered under this section. At the moment of distribution, the deduction takes place. The TDS rate differs for residents and non-residents depending on the source of income and the tax residency status of the unit holder. The securitization trust must accurately deduct and submit TDS in order to adhere to Section 194LBC. It is also in charge of providing unit holders with TDS certificates.
Applicability of Section 194LBC
Section 194LBC regulates how income given to unit holders by a securitization trust is taxed. The main points of its application are as follows:
Securitization Trust: Income disbursed by a securitization trust, a special purpose vehicle (SPV) established to securitise assets, is specifically covered by this section. Securities issued by these trusts are covered by cash flows from underlying assets.
Income Distribution: This is relevant when unit holders receive income from a securitization trust. Interest, dividends, and other profits from the trust's assets could be the sources of this revenue.
Tax Deduction at Source (TDS): When allocating income, the securitization trust is required to deduct taxes at the source. The type of income and the unit holder's tax residency status determine the TDS rate.
Reporting and Compliance: In order to ensure compliance with Section 194LBC, the trust is in charge of accurately deducting and depositing TDS as well as providing TDS certificates to unit holders.
Exemptions: Under Section 194LBC, some unit holders may not be required to pay TDS provided they fulfil certain requirements or receive the required certificates.
Compliance Requirements for Section 194LBC
Before paying any investor money, the payer—typically the trustee of the securitization trust or the organisation in charge of maintaining the trust—must deduct TDS. The money that has been withheld must then be deposited with the government within the allotted period, usually by the seventh day of the subsequent month. In order for the payee to claim credit on their income tax return, the payer must also provide them with a TDS certificate, which acts as evidence of the tax deduction.
Forms and Due Dates
Every quarter, the TDS withheld under Section 194LBC must be reported on Form 26Q for residents and Form 27Q for non-residents. The following are the due dates for submitting these forms:
Q1 (April to June): July 31
Q2 (July to September): October 31
Q3 (October to December): January 31
Q4 (January to March): May 31
What is a Unit Holder?
A unit holder is a person or organisation that owns units in a mutual fund, pooled investment vehicle, real estate investment trust, or collective investment plan.
Investment Scheme: Participants who own units in investment schemes do so by pooling their assets for investment objectives. Mutual funds, unit trusts, exchange-traded funds, and collective investment vehicles are some examples of these systems.
Ownership Interest: Depending on how many units they own, people and organisations have an ownership interest in the investment scheme's underlying assets.
Rights and Duties: Owners of units are entitled to dividends or other distributions, to vote on issues, and to sell or redeem their units.
Regulatory Framework: The laws governing the investment plan control the rights and responsibilities of unit holders. The prospectus, trust deed, partnership agreement, and other essential documents that outline the rights and obligations under the Income Tax Act are examples of legal provisions.
Distribution of Income: The securitization trust distributes income to unit holders. The rules and clauses of the Income Tax Act regulate the taxation of this income as well as the TDS.
TDS Provisions under Section 194LBC
Assessee
| TDS Rate (Before 1st April 2025)
| TDS Rate (From 1st April 2025)
|
Individual or HUF | 25% | 10% |
Domestic Company | 30% | 10% |
Foreign Company | 40% | 40% |
Non-Resident | 30% | 30% |
Resident Investors: The payer is required to deduct TDS at the following rates when a securitization trust pays out income to a resident investor:
25% for Hindu Undivided Families (HUFs) and individuals.
30% goes to other organisations like businesses, associations of people (AOPs), or firms.
To guarantee tax compliance prior to income being delivered to the investor, TDS is subtracted at the moment of credit or payment, whichever comes first. The budget for 2025 suggests lowering this rate from 25% and 30% to 10% for all individual categories. Beginning on April 1, 2025, the new rates will come into effect.
Non-Resident Investors: TDS is withheld at the current rates for non-resident investors, including international corporations; these rates may differ depending on India's tax treaties with the investor's nation. The deduction is based on the same premise as for resident investors: credit or payment, whichever comes first. Under applicable tax treaties, non-resident investors can take advantage of reduced withholding tax rates, promoting transparency and international tax compliance.
Exemptions under Section 194LBC
Certain businesses and transactions are excluded under Section 194LBC of the Income Tax Act of 1961. These consist of:
Hindu Undivided Families (HUFs) and Resident Individuals: Under certain circumstances, income given to resident individuals or HUFs via a securitization trust may be exempt from TDS.
Non-Individual Residents: If they fulfil the requirements, domestic corporations, businesses, associations of persons (AOPs), and bodies of individuals (BOIs) may also be eligible for TDS exemption.
Governmental Organisations: According to Section 194LBC, income given to the federal government, state governments, or local governments is exempt from TDS.
Tax Residency Certificate (TRC): By presenting a TRC issued by their tax authority, non-resident receivers from nations with which India has a Double Taxation Avoidance Agreement (DTAA) may be eligible to receive benefits under the DTAA. They might be able to take advantage of lower tax rates or exemptions as a result.
Consequences of Non-Compliance with Section 194LBC
The securitization trust and its unit holders may face a number of repercussions if Section 194LBC of the Income Tax Act, 1961 is broken. These consist of:
Fines: Depending on the degree and length of non-compliance, the securitization trust may be subject to fines if it neglects to deduct or deposit TDS on time.
Interest Charges: From the date of the deduction until the actual payment, the trust is required to pay interest on the outstanding TDS amount.
Disallowance of Expenses: If the trust does not deduct or deposit TDS as required, expenses associated with income subject to TDS may be disallowed for calculating taxable income.
Legal Action: To recoup unpaid taxes, fines, and interest, tax authorities may start legal actions, such as audits and assessments.
Loss of Tax Benefits: Failure to comply may result in the trust and its unit holders losing certain tax advantages or exemptions for which they would otherwise qualify.
Reputational Risk: The securitization trust's credibility with stakeholders and investors may be impacted by tax law violation
Conclusion
In order to guarantee that income received from investments in securitization trusts is taxable, Section 194LBC of the Income Tax Act, 1961 is essential. This clause protects government revenue while making tax compliance easier for investors by requiring TDS at the source. To properly manage their tax obligations, investors must comprehend the ramifications of Section 194LBC. Even if the TDS rules simplify the tax process, there are drawbacks, especially when it comes to increased tax rates and the effect on cash flow. With possible revisions and clarifications anticipated in the future, Section 194LBC is anticipated to continue to be a crucial component in the taxation of securitization trusts as the financial landscape changes.
Frequently Asked Questions
What is a securitization trust?
A special purpose vehicle (SPV) that combines financial assets, like loans or receivables, and turns them into marketable securities is called a securitization trust. Investors purchase these securities, and they receive a portion of the profits from the assets.
What is Section 194LBC?
The tax on revenue distributed to unit holders by securitization trusts is governed under Section 194LBC.
Who is required to deduct TDS under Section 194LBC?
When distributing income to their unit holders, securitization trusts are required to deduct Tax at Source (TDS).
What rate of TDS is applicable under Section 194LBC?
The usual TDS rate under Section 194LBC is 25% on the income that securitization trusts pay out to unit holders. Under Double Taxation Avoidance Agreements (DTAA), however, reduced rates can be applicable.
When is TDS deducted under Section 194LBC?
The TDS should be subtracted at the time of payment or when the revenue is entered in the books, whichever comes first.
Are there any exemptions from TDS under Section 194LBC?
Yes, under certain circumstances, some unit holder may be eligible for TDS exemptions. These include resident persons and Hindu Undivided Families (HUFs).
What are the implications of Section 194LBC for investors?
TDS is applied to investors' income from securitization trusts at the rates under Section 194LBC. When submitting their income tax returns, they can claim the deducted tax as a credit and any excess TDS as a refund. Investors are less burdened with paying taxes at the end of the fiscal year thanks to the TDS regulations, which guarantee that income is taxed at the source. To claim the credit, investors must be careful to make sure they get their TDS certificates from the payer.
What is the compliance procedure for Section 194LBC?
The securitization trust must collect TDS from unit holders during payments, deposit it with the government, submit TDS returns, and provide TDS certificates to unit holders.
Can non-resident unit holders claim benefits under DTAA?
Yes, non-resident unit holders who receive a Tax Residency Certificate (TRC) from their home country are eligible to benefit from Double Taxation Avoidance Agreements (DTAA).
What are the repercussions of non-compliance with Section 194LBC?
Penalties, interest charges, expense disallowance, and legal action by tax authorities may follow noncompliance with Section 194LBC.
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