Tds On Finance Charges India

Tax Deducted at Source (TDS) on Finance Charges in India

In India, Tax Deducted at Source (TDS) is a mechanism where a person making specified payments is required to deduct tax at source and remit it to the government. This helps in tracking income and preventing tax evasion. Finance charges, which encompass various types of interest and fees related to loans and credit facilities, are also subject to TDS under certain circumstances.

Applicability of TDS on Finance Charges

The primary section governing TDS on finance charges is Section 194A of the Income Tax Act, 1961. This section mandates the deduction of tax at source on interest other than “interest on securities”. This includes interest paid on loans, deposits, and other credit facilities.

Key points to consider regarding applicability:

• Threshold Limit: TDS under Section 194A is applicable only if the aggregate amount of interest paid or credited during a financial year exceeds a specified threshold. This threshold is periodically revised. For instance, currently (in FY 2023-24), the threshold is ₹40,000 for payees who are senior citizens and ₹5,0000 for others.
• Deductor and Deductee: The deductor is the person making the payment (e.g., a borrower paying interest to a bank or a company). The deductee is the person receiving the payment (e.g., a bank, a financial institution, or an individual lender).
• Rate of TDS: The applicable TDS rate on interest under Section 194A is generally 10%. However, if the deductee does not furnish their Permanent Account Number (PAN) to the deductor, the TDS rate will be 20%. A surcharge and Health and Education Cess are also added to the basic rate.
• Exemptions: Certain payments are exempt from TDS under Section 194A. For example, interest paid to banks, financial institutions, and LIC is usually exempt. Interest paid by individuals and HUFs (Hindu Undivided Families) is also not subject to TDS if their turnover/gross receipts do not exceed the prescribed limit as per Section 44AB of the Income Tax Act.

Finance Charges Covered

TDS is applicable on a broad range of finance charges, including:

• Interest on Term Loans
• Interest on Working Capital Loans
• Interest on Overdraft Facilities
• Processing Fees treated as Interest
• Late Payment Charges treated as Interest

Compliance Requirements

Deductors are responsible for the following:

• Deducting TDS at the applicable rate.
• Obtaining a Tax Deduction and Collection Account Number (TAN).
• Depositing the deducted tax with the government within the prescribed time limits (typically within 7 days from the end of the month in which the deduction is made).
• Issuing a TDS certificate (Form 16A) to the deductee, specifying the amount of tax deducted.
• Filing TDS returns (Form 26Q) quarterly, providing details of the deductions made.

Consequences of Non-Compliance

Failure to comply with TDS provisions can result in penalties and interest. These include:

• Interest for delayed deduction or payment of TDS.
• Penalty for failure to deduct TDS.
• Disallowance of the expense (i.e., interest payment) for the purpose of calculating taxable income.

It is crucial for both deductors and deductees to understand and comply with the TDS provisions related to finance charges to avoid any potential penalties and ensure smooth financial transactions.