Many Small and Medium Enterprises (SME) borrow money (unsecured loans) from Non-Banking Financial Companies (NBFC). Whether interest paid on such loan attracts TDS provisions is a question frequently asked by the accountants. Here is the answer.
As per Section 194A of the Income Tax Act, 1961 a business enterprise (proprietary concern covered u/s Section 44AB, company, firm, etc) has to deduct tax (TDS) on the interest payable towards the loan from NBFCs.
Why this provision may miss the attention of the companies?
The repayment of NBFC loan is done on Equated Monthly Installments (EMI) basis. The institutions will either collect post dated cheques or get the mandate signed for Electronic Clearing Service (ECS) from the bank. So, the borrower will have no opportunity to deduct tax and pay the balance interest to the financial institution. Obviously, this provision of TDS misses the attention of the company and thus violates the Section 194A of Income Tax.
What will happen if TDS is done?
Suppose, you have to pay an annual interest of Rs.1,00,000 to a NBFC (say, Cholamandalam Finance), deduct tax at 10% and deposit to the government account. If it is not done, 30% of interest i.e., Rs.30,000 will be disallowed from your expenditure u/s 40(a) (ia).
In case of EMI, how to deduct Tax?
This is a common problem faced by all companies. As I have already mentioned, the interest is paid as EMI and the company will not have any option of deducting tax and paying the balance interest.
In such cases, the borrower has to pay TDS at the applicable rate (currently it is 10%) and remit it to the government. On quarterly basis, file ETDS return and issue Form 16A to NBFC.
While submitting Form 16A, make a covering letter asking them to refund TDS amount. Maybe with a little perseverance, you will get your money back.
Exemptions from deduction of TDS: The Income Tax department provides certain exemptions from TDS u/s 194A and some of them are –
- Interest paid on loans from banks, co-operate societies, LIC or Public financial institutions (such as State Finance Corporation), Insurance company or UTI
- Interest paid by the firm to its partners
- If the interest paid during the financial year is less than Rs.5000
Thought for the day
You have to follow rules not because you want to, but because you have to.