Interest on rupee denominated bonds to attract 5% tax

New Delhi: The Revenue Department on Thursday said 5 percent witholding tax will be imposed on income from off- shore rupee denominated bonds issued by Indian corporates.

In order to provide additional source of funding, the Reserve Bank of India has recently permitted the corporates to issue rupee denominated bonds outside India.

In a press release, the Central Board of Direct Taxes (CBDT) said the matter of taxation of income from such bonds under Income-tax Act, 1961 has been considered by the government.

"In so far as taxation of interest income from these INR off-shore bonds in the case of non-resident investors is concerned, it is clarified that withholding tax at the rate of 5 percent, which is in the nature of final tax, would be applicable in the same way as it is applicable for off-shore dollar denominated bonds," it said.

The CBDT further said it has been decided that 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.

Legislative amendment in this regard will be proposed through the Finance Bill, 2016.

As per the RBI guidelines, a company can raise up to USD 750 million per annum under the automatic route through rupee denominated bonds (popularly known as masala bonds). To issue bonds beyond this, it will require to take prior approval of the RBI.