Maharajah INR Bonds: CBDT removes TDS on eligible interest

The Central Government has removed tax deduction at source on interest paid by the New Development Bank on its Maharajah INR Bonds to eligible holders. The Central Board of Direct Taxes (CBDT) issued Notification No. 136/2026 on 19 October 2026, covering interest payments during tax year 2026-27 and subsequent tax years. It took effect on publication in the Official Gazette on 19 October 2026. ^[1]

The notification covers resident holders and Foreign Institutional Investors referred to in Section 210(6) of the Income-tax Act, 2025. Its effect is specific: the bank must not deduct tax under the provisions identified in the notification when paying qualifying interest. The measure concerns withholding at the payment stage, rather than declaring the bondholders’ interest income exempt from income tax. ^[1]

Issued as S.O. 5694(E), the notification invokes Section 400(1) of the Act as the government’s authority to grant the relief. It also retains an information-reporting obligation for the New Development Bank. ^[1]

Which holders and payments qualify

The CBDT notification defines an eligible Maharajah INR Bond holder as either a resident or a Foreign Institutional Investor within the specified statutory provision. It does not extend the benefit to every non-resident investor merely because they hold the bonds. Eligibility follows the two categories set out in the notification. ^[1]

The payment must be interest paid by the New Development Bank on Maharajah INR Bonds issued by the bank. The notification is therefore tied to a named issuer, a named bond programme and a particular type of payment, rather than applying generally to rupee-denominated bonds. Its operative provision concerns interest, not proceeds from selling the bonds or repayment of their principal. ^[1]

The two withholding provisions it disapplies are Section 393(1), Table serial number 5, and Section 393(2), Table serial number 17, as applicable. These references identify the statutory entries under which tax would otherwise be deducted from the covered payments. ^[1]

The notification separately specifies its commencement date and the tax years it covers. It comes into force on Gazette publication, while its payment provision expressly refers to tax year 2026-27 and subsequent tax years. It sets no final tax year for the relief. ^[1]

No withholding is not a blanket income-tax exemption

Tax deducted at source, or TDS, is tax withheld by the payer when making or crediting a payment. The Income Tax Department’s Tax Payments FAQ describes TDS as one of the methods of paying income tax, alongside advance tax, self-assessment tax and regular assessment payments. ^[2]

That distinction matters here. The CBDT notification directs that no deduction be made under the specified entries of Section 393. It does not state that the interest is excluded from the recipient’s taxable income. Describing the measure as making Maharajah bonds tax-free would therefore go beyond its terms. ^[1]

The Income Tax Department explains that the Income-tax Act, 2025 consolidates TDS provisions into Sections 392 and 393. Section 392 deals with salaries, while Section 393 covers other payments through tables identifying the category of recipient, nature of payment, threshold, payer and deduction rate. ^[2]

According to the department’s FAQ, payments or credits on or after 1 April 2026 fall under the corresponding withholding provisions of the 2025 Act. Where deduction depends on the earlier of credit or payment, that earlier event determines which Act applies. This explains why the Maharajah bond notification uses the new Act’s section and table references rather than the earlier law’s separate TDS section numbers. ^[2]

The removal of deduction does not remove the bank’s reporting duty. Paragraph 3 of the notification requires the New Development Bank to furnish information under Schedule VII, Table serial number 49, of the Act and the Income-tax Rules, 2026. The notification thus separates relief from withholding from the obligation to report information. ^[1]

The bond programme and insurance investment rules

The Maharajah programme concerns onshore rupee bonds. The Hindu reported that the New Development Bank sought regulatory approval for a programme proposing to raise Rs 25,000 crore over five years. That figure describes the proposed fundraising programme, not an amount established as already raised. ^[3]

According to The Hindu’s account of an Insurance Regulatory and Development Authority of India (IRDAI) circular, the bank intended to use the proceeds for general corporate purposes, including financing or onward lending for sustainable development, sustainable infrastructure, green and social projects in India. ^[3]

That purpose fits the bank’s founding mandate. The Agreement on the New Development Bank, signed in Fortaleza on 15 July 2014, names Brazil, Russia, India, China and South Africa as its founding members. It provides for mobilising resources for infrastructure and sustainable development in BRICS and other emerging economies and developing countries, including support through loans, guarantees and equity participation. ^[4]

The Hindu reported that IRDAI permitted insurers to invest in Maharajah INR Bonds as approved investments, subject to conditions including applicable government norms and Securities and Exchange Board of India approval. That investment permission is separate from the CBDT’s treatment of interest payments: one concerns insurers’ permitted investments, while the other concerns tax deduction on payments to the specified holders. ^[1][3]

The insurance classification also depends on how the proceeds are used. According to The Hindu, IRDAI said the bonds would qualify as infrastructure investments where proceeds were invested in infrastructure subsectors included in the Finance Ministry’s Harmonized Master List. Insurers must also comply with Section 27E of the Insurance Act, 1938, which prohibits direct or indirect investment of policyholders’ funds outside India. ^[3]

References

^[1] Ministry of Finance, Department of Revenue, Central Board of Direct Taxes. Notification No. 136/2026, S.O. 5694(E), 19 October 2026. The Gazette of India. egazette.gov.in

^[2] Income Tax Department. Tax Payments Faq. incometax.gov.in

^[3] The Hindu. Report on IRDAI permission for insurers to invest in New Development Bank Maharajah INR Bonds. thehindu.com

^[4] New Development Bank. Agreement on the New Development Bank. Signed 15 July 2014. ndb.int