Section 194LBC of Income Tax Act: TDS on Income in Respect of Investment in Securitization Trust

Under the Income Tax Act, 1961, certain transactions mandate the payer to deduct TDS (Tax Deducted at Source). One such transaction is income generated from investments in a securitisation trust.
Section 194LBC deals with the income tax deduction on payments made to investors with respect to investments in a securitisation trust. TDS is to be deducted at 10% for investors who are resident individuals and HUFs, domestic companies, foreign companies 40%, and non-residents 30%.
In this article, we will learn about TDS on income from investment in a securitisation trust.

What is Section 194LBC?

Section 194LBC provides that TDS must be deducted when the securitization trust distributes income to its unit holders. It states that when a securitization trust distributes income—such as interest or any other returns—among its unit holders, the trust must deduct TDS at the prescribed rate before making the payment. 

What is a Securitization Trust?

A securitization trust is a special purpose vehicle (SPV) that pools financial assets, such as loans or receivables, and converts them into marketable securities. These securities are sold to investors, and the income generated from the assets is distributed to them.

Applicability of Section 194LBC

The TDS under section 194LBC applies when a securitization trust distributes income to its unit holders. The income may be from any source, such as interest, dividends, or the trust's other profits.

TDS Rates Under Section 194LBC

The TDS rates under Section 19LBC are as under:

Time of Deducting TDS under Section 194LBC 

The trust should deduct the TDS either when the income is credited to the books of accounts or when payment is made, whichever is earlier.

Consequences of Non-Compliance With Section 194LBC

The consequences of non-compliance with section 194LBC are as follows:

Interest: Any individual required to deduct TDS but fails to do so or deducts the TDS but does not deposit to the government will be liable to pay interest. The interest rates are as follows:

Penalties: If the securitization trust fails to deduct or deposit TDS on time, penalties may be incurred depending on the extent and duration of the non-compliance.