Understanding Section 194JB of the Income Tax Act
Section 194JB of the Income Tax Act, 1961 is a relatively new section that was introduced in the Finance Act of 2016. The section deals with the payment of taxes on the income of individuals who are not residents of India, but have made investments in the country.
Here is a detailed guide to understanding Section 194JB of the Income Tax Act:
- Applicability:
Section 194JB applies to non-resident individuals or foreign companies who have made investments in India and have received income from such investments. The section applies to both equity-oriented and non-equity oriented funds.
- Rate of Tax:
The rate of tax under section 194JB is 10% of the income received by the non-resident individual or foreign company. This tax is applicable in addition to any other tax that may be applicable under the Income Tax Act.
- Threshold Limit:
There is no threshold limit under section 194JB, which means that the tax is applicable on the entire income received by the non-resident individual or foreign company.
- Time of Deduction:
The tax under section 194JB is required to be deducted at the time of payment or credit of income to the non-resident individual or foreign company.
- Exemption:
Section 194JB provides an exemption for income received by the non-resident individual or foreign company from units of a specified mutual fund. The specified mutual funds include those that are registered with the Securities and Exchange Board of India (SEBI) and have a minimum of 95% of their investments in the equity shares of domestic companies.
- Compliance:
The person responsible for making the payment or credit of income to the non-resident individual or foreign company is required to comply with the provisions of section 195 of the Income Tax Act, which deals with the deduction of tax at source. The person is required to obtain a tax identification number (TIN) and file the necessary returns with the income tax department.
- Impact on Non-Resident Investors:
Section 194JB has a significant impact on non-resident investors as they are required to pay an additional tax of 10% on their income from investments in India. This can increase the tax burden for non-resident investors and may affect their investment decisions in the country.
- Compliance for Indian Companies:
Indian companies that make payments to non-resident individuals or foreign companies are responsible for deducting the tax at source and complying with the provisions of section 195 of the Income Tax Act. Failure to comply with these provisions can result in penalties and legal consequences.
- Exemptions for NRIs:
Non-Resident Indians (NRIs) are exempt from the provisions of section 194JB if they are residents of a country with which India has a tax treaty. In such cases, the tax rate and threshold limit may be different based on the provisions of the tax treaty.
- Impact on the Indian Economy:
Section 194JB is an important provision that helps to ensure that non-resident investors pay their fair share of taxes on their income from investments in India. This helps to increase the revenue of the Indian government and can have a positive impact on the economy.
- Need for Professional Assistance:
Given the complex nature of the provisions of section 194JB, it is important for non-resident investors and Indian companies to seek professional assistance from tax experts to ensure compliance with the Income Tax Act. Professional assistance can help to ensure that the tax implications of investments in India are properly understood and managed.
- Clarifications Issued by the CBDT:
The Central Board of Direct Taxes (CBDT) has issued several clarifications regarding the applicability of section 194JB. One such clarification is that the section applies to non-resident individuals or foreign companies that are not eligible to claim benefits under the provisions of section 115AD of the Income Tax Act. Another clarification is that the section does not apply to income received by non-resident investors from Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs).
- Impact on Mutual Funds:
Section 194JB has a significant impact on mutual funds as it requires them to deduct tax at source on the income received by non-resident investors. This can increase the tax burden for mutual funds and may affect their investment strategies. To mitigate the impact of this provision, mutual funds may have to make changes to their investment policies and portfolios.
- Need for Further Clarity:
Despite the clarifications issued by the CBDT, there is still some ambiguity regarding the applicability of section 194JB. There is a need for further clarity on issues such as the treatment of income received by non-resident investors from hybrid mutual funds and the impact of the provision on foreign portfolio investors.
Conclusion
In conclusion, Section 194JB of the Income Tax Act is an important provision that applies to non-resident individuals or foreign companies who have made investments in India. The tax under this section is required to be deducted at the time of payment or credit of income and is applicable on the entire income received. The section provides an exemption for income received from specified mutual funds and requires compliance with the provisions of section 195 of the Income Tax Act. It is important for individuals and companies to understand the provisions of this section to ensure compliance with the income tax laws in India.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
Who is liable to pay tax under section 194JB?
Non-resident individuals or foreign companies who have made investments in India and have income from such investments are liable to pay tax under section 194JB.
What is the tax rate under section 194JB?
The tax rate under section 194JB is 10% of the income from investments in India.
Is there a threshold limit for tax liability under section 194JB?
Yes, the threshold limit for tax liability under section 194JB is Rs. 1 crore. If the income from investments in India is less than Rs. 1 crore, the tax liability does not apply.
Are NRIs exempt from tax liability under section 194JB?
NRIs are exempt from tax liability under section 194JB if they are residents of a country with which India has a tax treaty. In such cases, the tax rate and threshold limit may be different based on the provisions of the tax treaty.
What is the impact of section 194JB on Indian companies?
Indian companies that make payments to non-resident individuals or foreign companies are responsible for deducting the tax at source and complying with the provisions of section 195 of the Income Tax Act.
Are InvITs and REITs exempt from tax liability under section 194JB?
Yes, income received by non-resident investors from InvITs and REITs is exempt from tax liability under section 194JB.
Are hybrid mutual funds covered under section 194JB?
There is some ambiguity regarding the treatment of income received by non-resident investors from hybrid mutual funds. Further clarity is needed on this issue.
Can non-resident investors claim credit for the tax paid under section 194JB in their home country?
Non-resident investors may be able to claim credit for the tax paid under section 194JB in their home country if India has a tax treaty with that country.
What is the penalty for non-compliance with section 194JB?
Non-compliance with section 194JB can result in penalties and legal consequences for Indian companies that make payments to non-resident individuals or foreign companies.
How can individuals and companies ensure compliance with section 194JB?
Individuals and companies can ensure compliance with section 194JB by seeking professional assistance from tax experts and properly managing the tax implications of their investments in India.
