TDS on NBFC : Compliance Rules & Taxation Guide FY 2025–26

In India’s evolving financial landscape, Non-Banking Financial Companies (NBFCs) have emerged as crucial players, bridging the credit gap for individuals and businesses underserved by traditional banks. Their flexibility, reach and innovative lending models have made them indispensable to sectors like MSMEs, consumer finance and rural credit.
However, with this growing influence comes increased regulatory oversight, especially in the realm of taxation. One of the key areas of concern is the applicability of Tax Deducted at Source (TDS) on interest payments made to NBFCs. Unlike banks and certain financial institutions that enjoy exemptions under Section 194A of the Income Tax Act, NBFCs are squarely within the ambit of TDS provisions, making it mandatory for borrowers to deduct and deposit tax on interest payments.
This article delves into the legal framework, compliance requirements, practical challenges and recent updates surrounding TDS on NBFCs, offering a comprehensive guide for businesses, tax professionals and financial advisors navigating this complex terrain in FY 2025–26.

Legal Basis: Section 194A of the Income Tax Act

Section 194A mandates TDS on interest payments (excluding interest on securities) made to residents. While banks, insurance companies and certain institutions are exempt, NBFCs are not making them liable for TDS deduction at 10% on interest income received.

Key Applicability Highlights:

Particulars	Details
Payer	Individuals (subject to audit), HUFs, firms, companies
Payee	NBFCs registered with the RBI
Type of Income	Interest (excluding securities)
Threshold Limit	₹10,000 (general), ₹50,000 (senior citizens from banks), ₹40,000 (others from banks)
TDS Rate	10% (with PAN), 20% (without PAN)

2. Recent Updates (Effective April 1, 2025)

The Finance Act 2025 introduced revised threshold limits for TDS under Section 194A:

Senior Citizens: ₹1,00,000 (from banks, co-ops, post offices)
Others: ₹50,000 (from banks, co-ops, post offices)
General Payers (including NBFCs): ₹10,000

This change aims to simplify compliance and widen the tax base.

3. Compliance Requirements for Borrowers

Borrowers making interest payments to NBFCs must follow a structured process to ensure TDS compliance:

Step-by-Step Process:
- TAN Registration: Obtain a valid Tax Deduction and Collection Account Number.
- Interest Identification: Use loan amortization schedules to isolate the interest portion in EMIs.
- TDS Deduction: Calculate 10% on the interest amount and deduct it at the time of payment or credit.
- Deposit TDS: Pay to the government by the 7th of the following month.
- File Returns: Submit quarterly TDS returns (Form 26Q).
- Issue Certificates: Provide Form 16A to the NBFC for tax credit claims.

4. Challenges in Implementation

Despite clear legal mandates, businesses face practical hurdles:

EMI Payment Portals: Most NBFCs require full EMI payments, making it hard to deduct TDS on just the interest portion.
Cash Flow Impact: Borrowers often pay TDS from their own funds, increasing financial strain.
Accounting Errors: Misclassification between principal and interest can lead to incorrect TDS deductions.
NBFC Resistance: Some NBFCs object to TDS deductions, expecting full payments without reductions.

5. Consequences of Non-Compliance

Failure to deduct or deposit TDS can lead to:

Disallowance of Interest Expense: Up to 30% of the interest may be disallowed under Section 40(a)(ia).
Penalties & Interest: Under Sections 201(1A) and 234E.
Prosecution: In extreme cases of willful default.

6. Case Study: Business Loan from NBFC

Scenario: A company borrows ₹50 lakh at 12% interest.

Annual Interest: ₹6,00,000
TDS @10%: ₹60,000

If TDS is not deducted:

Penalty: ₹60,000
Interest: 1–1.5% per month
Disallowance: ₹6,00,000 may be disallowed, increasing tax liability

7. Government Measures for Ease of Compliance

To simplify TDS compliance, the government has:

Enhanced digital platforms like TRACESand Form 26AS
Allowed auto-generation of TDS certificates
Removed burdensome provisions like Sections 206AB & 206CCAfor non-filers.

Conclusion

The inclusion of NBFCs under Section 194A marks a significant shift in India’s tax landscape. While it promotes transparency and accountability, it also imposes operational challenges on borrowers. Businesses must adopt robust systems, stay updated with legal changes and proactively manage TDS obligations to avoid penalties and maintain tax compliance.