Government grants withholding tax relief on qualifying interest payments by the New Development Bank, providing clarity for investors and financial institutions under the Income-tax Act, 2025.
The Central Government has notified an important exemption from Tax Deducted at Source (TDS) on specified interest payments made by the New Development Bank (NDB) to eligible holders of Maharajah INR Bonds. The exemption has been notified vide Notification No. 136/2026 dated 19 October 2026 and is applicable to qualifying bonds issued during Tax Year 2026-27 and subsequent tax years.
This development is significant for investors, financial institutions and tax professionals dealing with interest income arising from specified debt instruments. The exemption seeks to provide withholding tax relief on eligible interest payments while prescribing reporting obligations for the New Development Bank.
Key Highlights of the Notification
The notification provides relief from TDS on qualifying interest payments made by the New Development Bank to eligible holders of Maharajah INR Bonds.
The important features are discussed below:
1. Exemption from TDS on Interest Payments
Under the notified provisions, interest payments made by the New Development Bank to eligible holders of Maharajah INR Bonds are exempt from TDS, subject to fulfilment of the prescribed conditions.
Accordingly, qualifying interest payments will not require deduction of tax at source by the New Development Bank.
2. Coverage of Eligible Investors
The exemption covers specified categories of eligible investors, including:
- Resident holders of Maharajah INR Bonds.
- Eligible Foreign Institutional Investors (FIIs).
The availability of the exemption will depend upon the investor satisfying the prescribed eligibility conditions.
3. Applicability to Specified Tax Years
The exemption applies to qualifying Maharajah INR Bonds issued during Tax Year 2026-27 and subsequent tax years.
This provides clarity regarding the applicability of withholding tax provisions to interest payments arising from the specified bond issuances.
4. Reporting Obligations of New Development Bank
Although the notification provides TDS relief, it also requires the New Development Bank to furnish prescribed information in accordance with Schedule VII.
This reporting requirement is intended to ensure appropriate disclosure and monitoring of interest payments made under the exempt category.
Impact on Investors and Financial Institutions
The exemption is an important development for investors holding Maharajah INR Bonds, particularly those receiving interest income through international financial arrangements.
The removal of TDS on qualifying interest payments can simplify withholding tax compliance and improve the efficiency of interest payment processing.
For resident investors, the exemption reduces the requirement for tax deduction at the payment stage. Similarly, eligible foreign institutional investors may benefit from simplified withholding procedures, subject to the applicable conditions.
However, it is important to understand that exemption from TDS does not automatically mean that the interest income is exempt from income tax in the hands of every investor. The ultimate taxability of such income must be examined independently under the applicable provisions of the Income-tax Act, 2025.
Practical Considerations for Chartered Accountants and Tax Professionals
Chartered Accountants and tax professionals advising investors and financial institutions should consider the following aspects:
1. Verify Investor Eligibility: Confirm whether the bondholder falls within the eligible categories specified in the notification.
2. Examine Bond Issuance Details: Verify that the Maharajah INR Bonds satisfy the prescribed issuance and applicability conditions.
3. Review TDS Compliance: Ensure that qualifying interest payments are appropriately classified while determining withholding tax obligations.
4. Maintain Supporting Documentation: Preserve bondholding statements, investor declarations and relevant payment records to substantiate the applicability of the exemption.
5. Ensure Reporting Compliance: Review the reporting obligations of the New Development Bank under Schedule VII and ensure that the prescribed information is furnished within the applicable timelines.
Conclusion
The TDS exemption notified vide Notification No. 136/2026 is a significant step towards simplifying withholding tax compliance for qualifying interest payments made by the New Development Bank to holders of Maharajah INR Bonds.
By extending the benefit to eligible resident investors and Foreign Institutional Investors, the Government has provided relief from tax deduction at source while retaining prescribed reporting obligations to ensure transparency.
For investors, financial institutions and Chartered Accountants, the key priority should be to verify eligibility, examine the applicable conditions and ensure proper documentation and reporting. A clear understanding of the distinction between exemption from TDS and final income-tax liability will remain essential while implementing this notification.
