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Interest on INR-denominated bonds to attract 5% tax

‘The legislative amendment to be proposed through the Finance Bill, 2016’

By: ENS Economic Bureau | New Delhi |
October 30, 2015 2:54:15 am

The income tax department on Thursday exempt the rupee-denominated bonds issued by corporates overseas from the capital gains tax. Further, the department also clarified that such bonds will attract a 5 per cent withholding tax.
“It has been decided that the capital gains, arising in case of appreciation of rupee between the date of issue and the date of redemption against the foreign currency in which the investment is made, would be exempted from capital gains tax,” the Central Board of Direct Taxes (CBDT) said in a statement.

The CBDT said that the legislative amendment in this regard will be proposed through the Finance Bill, 2016.

Further, interest income from these off-shore bonds, in the case of non-resident investors, will attract a withholding tax of 5 per cent, as is applicable for off-shore dollar denominated bonds. The clarification comes amid confusion about whether the withholding tax also applied to offshore debt. India had cut the tax for debt investments to the current rate from 20 per cent in 2013, which will remain in effect until July 2017.

In a bid to provide additional source of funding, the RBI last month allowed Indian Inc to raise funds from overseas market in rupee-denominated bonds having some limited end-use restrictions with a minimum maturity of five years.

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Any corporate, real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) are eligible to issue the bonds, also known as masala bonds, and raise up to $750 million per annum under the automatic roue.

To raise funds beyond this limit requires prior approval of the Reserve Bank of India. There is also a small negative list regarding use of proceeds, which include stock market operations, real estate activity and purchase of land.

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