Non-Banking Financial Companies (NBFCs) play a crucial role in providing financial support to businesses.
However, what many payers may not realize is that there are Tax Deducted at Source (TDS) obligations associated with interest payments made to NBFCs. This article explores Section 194A of the Income Tax Act, shedding light on the TDS requirements and the challenges businesses face in complying with them.
Section 194A of the Income Tax Act mandates that the payer must deduct a 10% tax on interest payments made to residents who are not classified as Banks, Insurance companies, or other specified exceptions. Interestingly, NBFCs do not fall into the exception category, which means that businesses are obligated to deduct a 10% tax on interest payments to NBFCs.
Failing to deduct the required tax can lead to significant consequences. In such cases, the interest amount can face a 30% disallowance in the hands of the payer. This, in turn, could result in up to 30% tax on the disallowed amount, translating into a 9% tax cost for businesses. Furthermore, non-compliance may trigger penalties and prosecution by the tax department.
Complying with TDS on interest payments to NBFCs is not without its challenges. One significant hurdle is the practical difficulty in deducting tax during the payment of Equated Monthly Installments (EMIs) to NBFCs. Payment portals may not accept payments less than the full EMI amount, making it impossible for businesses to deduct tax on the interest component of EMIs.