Section 194A TDS on Interest to NBFCs: Compliance Requirements and Challenges Tax Deducted at Source (TDS) is among the core measures under the Income Tax Act, 1961 to effectuate timely tax collection. Section 194A exclusively addresses deduction of TDS on interest (interest other than interest on securities), and its application was brought into force in NBFCs for strengthening tax compliance. With the changing financial scenario and growing dependence on NBFCs for deposits and loans, it has become essential to understand the effects of Section 194A. This blog delves into the compliance needs, practical issues, and how individuals and companies can effectively navigate this provision. What is Section 194A of the Income Tax Act? Section 194A requires deduction of TDS on interest (except interest on securities) payable to residents. The said section mainly comes into operation in the event of interest being paid by banks, financial institutions, or specific individuals and HUFs liable for tax audit.
Until recently, NBFCs were beyond the ambit of this section. This has come within their ambit through amendments, placing interest payments made to NBFCs under the scanner of TDS liability. It is therefore essential for borrowers and corporate entities to comply when they are making payments to NBFCs.
Applicability of Section 194A on Interest Paid to NBFCs Key Applicability Highlights: Particulars Applicability Payer Individual, HUFs (subject to audit), companies, firm, etc. Payee NBFCs registered with RBI Type of Income Intereste (excluding securities) such as loans, deposits Threshold limit ₹5,000 for individuals; ₹10,000 for banks; ₹40,000 (₹50,000 for senior citizens) for certain financial institutions TDS Rate 10% (if PAN available), 20% (if no PAN) Section Exemption Interest paid by individuals not subject to audit or when the interest is under the threshold limit
NBFCs, though previously exempt, are now considered eligible recipients under Section 194A. Therefore, entities paying interest to NBFCs above the prescribed limits must deduct TDS accordingly.
Why Was Section 194A Extended to NBFCs? NBFCs have grown to be significant players in the Indian lending market thanks to their loans in a range of sectors, such as personal finance, MSMEs, housing, and more. However, NBFCs were exempt from source taxation on a significant amount of their interest income. The government expanded the application of Section 194A to include NBFCs in an effort to close this gap and improve tax transparency.
The action is a component of a larger plan to increase compliance, improve the traceability of high-value transactions, and stop tax evasion.
Know more about - Section 194I of Income Tax Act - TDS on Rent
Compliance Requirements Under Section 194A To stay compliant with Section 194A when dealing with NBFCs, the following steps are critical:
1. TAN Registration
Ensure your entity has a valid Tax Deduction and Collection Account Number (TAN) before initiating TDS deduction.
2. Accurate Interest Calculation
Identify interest amounts exceeding threshold limits, especially when paid cumulatively across multiple payments or accounts.
3. Timely Deduction
TDS must be deducted at the time of credit or payment, whichever is earlier.
4. Timely Deposit
Deducted TDS must be deposited to the government by the 7th of the next month.
5. Filing TDS Returns
File TDS returns (Form 26Q) on a quarterly basis to reflect payments made to NBFCs.
6. Issuance of TDS Certificates
Issue TDS certificates (Form 16A) to NBFCs quarterly, enabling them to claim tax credits.
Common Challenges Faced by Payers and Borrowers Despite clarity in the law, taxpayers often face operational and regulatory challenges when complying with Section 194A.
1. Identifying Eligible NBFCs Many payers find it difficult to determine whether the lender is a registered NBFC with the Reserve Bank of India. In such cases, incorrect classification can lead to TDS defaults.
You can verify NBFC registration .
2. Interest Breakups and Accounting Errors Misclassification between principal and interest leads to under or over-deduction of TDS. Businesses must maintain accurate ledgers and documentation.
3. Late Filing Penalties Failure to deduct or deposit TDS in time can result in interest and penalties under Sections 201(1A) and 234E of the Income Tax Act.
4. NBFCs Objecting to TDS Some NBFCs may argue against TDS deduction, especially if their internal policies expect full payment without deductions. Educating them about tax credit provisions is necessary.
Learn more about - Section 194A of Income Tax Act - TDS on Interest
Top Strategies for Companies Working with NBFCs Businesses should implement the following best practices to reduce compliance risks and preserve their good standing with tax authorities:
Maintain updated records of all loans and interest payments made to NBFCs.
Verify the lender’s PAN and NBFC registration status.
Use accounting software that auto-detects TDS thresholds and generates compliance reports.
Set up automated TDS reminders to ensure timely deductions and deposits.
Reconcile TDS reports with Form 26AS to prevent discrepancies.
Real-Life Example Case Study: A medium-sized enterprise availed a ₹50 lakh business loan from an NBFC at 12% annual interest. Monthly interest = ₹50,000.
Annual Interest = ₹6,00,000
TDS at 10% = ₹60,000
If the company fails to deduct TDS, it may face:
Penalty of ₹60,000 (under Section 201)
Interest @1% or 1.5% per month (till payment)
Disallowance of interest expenses under Section 40(a)(ia)
Thus, non-compliance not only leads to financial penalties but also affects the company’s income tax deductions.
Government Initiatives to Ease TDS Compliance The Income Tax Department has digitized the TDS ecosystem with platforms like TRACES and 26AS integration. It enables:
Real-time verification of PAN and TDS status
Auto-generated TDS certificates
Streamlined filing of quarterly returns
Explore the official TDS portal: click here
Read more- Section 194J - TDS on Professional Fees
Internal Resources for Further Reading For a complete guide on digital invoicing and GST compliance, visit:Swipe’s blog on GST Simplification
Conclusion Section 194A’s applicability to NBFCs is a progressive step towards expanding the tax net and improving compliance. While it does bring operational challenges, proper systems and awareness can help businesses adapt smoothly. With digitization and reliable support platforms like getswipe.in , managing TDS on interest paid to NBFCs has become more accessible than ever.
FAQs Q1. Is TDS applicable on interest paid to all NBFCs? Yes, if the interest exceeds the threshold and the NBFC is registered with RBI, TDS under Section 194A is applicable.
Q2. What is the TDS rate under Section 194A? It is 10% when the PAN is furnished, and 20% in its absence.
Q3. Can NBFCs object to TDS deduction? They may object, but TDS is mandatory. They can claim a refund while filing their income tax returns.
Q4. What happens if TDS is not deducted on interest to NBFCs? The taxpayer may face penalties, interest, and disallowance of expenses under the Income Tax Act.
Q5. How can I check if a company is an NBFC? Use the RBI’s NBFC list portal: https://rbi.org.in/Scripts/NBFCsList.aspx
People Also Ask Q1: Is TDS applicable on interest paid to NBFCs under Section 194A? Yes. TDS is mandatory on interest payments to NBFCs if the amount exceeds the prescribed threshold limit, provided the NBFC is registered with the RBI.
Q2: What is the TDS rate on interest paid to NBFCs? The standard TDS rate is 10% when the NBFC provides its PAN. If no PAN is furnished, TDS is deducted at 20% as per Section 206AA.
Q3: When should TDS on NBFC interest be deducted? TDS must be deducted at the time of credit or payment , whichever is earlier. Delay in deduction or deposit attracts interest and penalties under Sections 201(1A) and 234E.
Q4: How can businesses verify if a lender is a registered NBFC? Businesses can check the lender’s status on the RBI’s official NBFC list portal to ensure proper classification before deducting TDS.
Q5: What happens if TDS is not deducted on interest paid to NBFCs? Failure to deduct TDS leads to penalty equal to the TDS amount , interest up to 1.5% per month, and disallowance of interest expense under Section 40(a)(ia).
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