Section 393(2) of the Income Tax Act 2025: Complete TDS Guide

Introduction

Section 393(2) of the Income Tax Act 2025 provides the rules for deducting tax at source from specified income and sums paid or credited to non-residents, foreign companies and other specified non-resident payees. The applicable TDS rate depends on the nature of income, category of payee and person responsible for making the payment.

The provision covers specified interest income, business trust distributions, investment fund income, securitisation trust income, mutual fund income, offshore fund income, securities income and payments to non-resident sportspersons, entertainers and sports associations.

What is Section 393(2) of the Income Tax Act 2025?

Section 393(2) of the Income Tax Act 2025 requires the person responsible for paying specified income or sums to a non-resident to deduct income tax at source.

The provision applies where:

• The payment falls within the nature of income listed in the table;
• The recipient is a non-resident, foreign company, offshore fund, foreign institutional investor, specified fund, or another prescribed non-resident payee;
• The payment is made by the person specified in the relevant entry; and
• The tax is deducted at the rate prescribed for that payment.

A payment does not become subject to TDS merely because it is made or credited to a non-resident. The payment must fall within one of the specified entries under Section 393(2). In particular, serial number 17 applies only to other interest or any other sum, excluding salary, that is chargeable to tax in India. Therefore, where a payment is not chargeable to tax in India, TDS is not required under serial number 17.

When is TDS Deducted under Section 393(2)?

Tax must generally be deducted at the earlier of the following:

• At the time the income or sum is credited to the account of the payee; or
• At the time, the payment is made through cash, cheque, draft, or any other mode.

Therefore, the payer cannot postpone the TDS deduction until the amount is actually transferred if the income has already been credited to the non-resident’s account.

An exception applies to certain interest payments covered under serial number 17. Where the interest is payable by the Government, a public sector bank, or a specified public financial institution, TDS is deducted only at the time of actual payment.

Payments and TDS Rates under Section 393(2)

The following payments to non-residents are covered under Section 393(2) of the Income Tax Act 2025:

TDS on Payments to Non-Resident Sportspersons and Entertainers

Under Section 393(2) of the Income Tax Act 2025, income referred to in Section 211 and paid to a non-resident sportsperson, athlete, or entertainer who is not an Indian citizen is subject to TDS at 20%.

The same rate also applies where the payment is made to a non-resident sports association or institution.

The obligation to deduct tax is placed on any person making the covered payment.

TDS on Interest from Foreign Borrowings and Bonds

Section 393(2) of the Income Tax Act 2025 prescribes concessional TDS rates for certain interest payments made to non-residents and foreign companies.

A 5% TDS rate applies to interest on specified foreign currency borrowings, long-term infrastructure bonds, long-term bonds, and rupee-denominated bonds issued within the prescribed periods.

For certain bonds listed only on a recognised stock exchange located in an International Financial Services Centre, the applicable rates are:

• 4% where the bonds were issued on or after 1 April 2020 but before 1 July 2023
• 9% where the bonds were issued on or after 1 July 2023

These rates apply subject to the conditions specified in the relevant entries and Note 1.

Interest Paid by an Infrastructure Debt Fund

Interest paid by an eligible infrastructure debt fund to a non-resident or foreign company is subject to TDS at 5% under Section 393(2) of the Income Tax Act 2025.
The infrastructure debt fund must be covered under Schedule VII, Table serial number 46.

Income Distributed by a Business Trust

A business trust distributing specified income under Section 223 to a non-resident unit holder or foreign company must deduct TDS.

Depending on the nature of distributed income under Schedule V, the applicable rate may be:

• 5%
• 10%
• Rates in force

The payer must identify the nature of the distribution before applying the TDS rate.

Income from Investment Funds and Securitisation Trusts

An investment fund specified under Section 224 must deduct TDS on taxable income paid to a non-resident unit holder or foreign company.

The proportion of income exempt under Schedule V is excluded. TDS on the remaining income is deducted at the rates in force.

Similarly, a securitisation trust specified under Section 221 must deduct tax at the rates in force when paying income to a non-resident investor or foreign company.

TDS on Mutual Fund Income

Income from specified mutual fund units or units of a specified company paid to a non-resident or foreign company is covered under Section 393(2) of the Income Tax Act 2025.

According to Note 2, TDS must generally be deducted at 20%. However, a lower rate under an applicable tax treaty referred to in Section 159(1) or Section 159(2) may apply where the treaty provides a more beneficial rate.

To claim the lower treaty rate, the non-resident should furnish a valid Tax Residency Certificate and the prescribed information through Form 41, where applicable. The payer should verify these documents before applying the treaty rate.

TDS on Offshore Fund Income

Payments made to an offshore fund in respect of units referred to in Section 208 are subject to TDS at 10%.

Where the offshore fund earns long-term capital gains from the transfer of those units, TDS is deducted at 12.5%.

The payer must distinguish between regular income from the units and long-term capital gains from their transfer.

The tax treatment may also depend on whether the receipt is regular investment income or a capital gain. Read more about capital gains taxation for non-residents.

TDS on Bonds and Global Depository Receipts

Interest or dividend income paid to a non-resident in respect of bonds or Global Depository Receipts referred to in Section 209 is subject to TDS at 10%.

Long-term capital gains arising from the transfer of such bonds or Global Depository Receipts are subject to TDS at 12.5%.

TDS on Securities Income of FIIs and Specified Funds

Income from securities referred to in Section 210(1) and paid to a Foreign Institutional Investor is generally subject to TDS at 20%.

However, a lower treaty rate may apply where the applicable agreement under Section 159 provides a more beneficial rate and the payee furnishes a valid Tax Residency Certificate and the prescribed information and documents, including Form 41, where applicable.

Where the recipient is a specified fund referred to in Schedule VI, the applicable TDS rate is 10%.

To reference the complete table of payments and TDS rates under Section 393(2), please refer the PDF.

Important Notes under Section 393(2)

Note 1: Approved Interest Rate

For payments covered under serial numbers 2, 3, and 4, the concessional treatment applies only to the extent the interest does not exceed the amount calculated at the rate approved by the Central Government.

The approval may consider the terms of the loan or bond and its repayment conditions.

Note 2: Lower Treaty Rate

For mutual fund income under serial number 10 and FII securities income under serial number 15, the applicable TDS rate is 20%.

However, a lower treaty rate may apply where the relevant agreement under Section 159 provides a more beneficial rate and the payee furnishes a valid Tax Residency Certificate and the prescribed information and documents, including Form 41 where applicable.

Note 3: Special Rules for Other Interest and Taxable Sums

Where interest under serial number 17 is payable by the Government, a public sector bank, or a specified public financial institution, tax is deducted only when the payment is actually made.

The TDS obligation under this entry applies to both resident and non-resident payers, regardless of whether the non-resident has any physical or business presence in India.

Lower or Nil Deduction under Section 395

Where eligible, the payee may apply to the Assessing Officer for a certificate authorising deduction at a lower rate or without deduction under Section 395(1). In cases involving a payment covered by serial number 17, the payer may also apply under the applicable provisions of Section 395 for determination of the appropriate proportion of the sum chargeable to tax in India. The payer should apply a reduced or nil rate only after receiving and verifying a valid certificate or order and should follow its conditions, rate and validity period.

TDS Return Filing with Ebizfiling

Section 393(2) creates the TDS deduction obligation for specified payments. Form 144 is the prescribed quarterly statement for reporting non-salary payments to non-residents or foreign companies. It should include payment, rate, tax, challan, and payee details.

Ebizfiling Can Assist With:

• Identifying the applicable TDS rate
• Reviewing the nature and taxability of the payment
• Verifying challan and payment details
• Preparing and filing Form 144
• Correcting the TDS statement, where required

Get professional assistance with TDS return filing for payments made to non-residents and foreign companies through Ebizfiling.

Deductors should also monitor the applicable TDS return due dates for each quarter.

Conclusion

Section 393(2) of the Income Tax Act 2025 creates a detailed TDS framework for payments made to non-residents and foreign companies. The applicable rate depends on the nature of income, the category of the payee, the payer, and any applicable treaty benefit. Before making a payment, the payer should identify the correct entry, determine whether tax is deductible at a fixed rate or at the rates in force, and verify whether a lower treaty rate is available. Correct classification and timely deduction can help the payer comply with the non-resident TDS provisions.

Frequently Asked Questions