Section 194A TDS on Interest to NBFCs: Compliance and Challenges

Non-Banking Financial Companies (NBFCs) play a vital role in the Indian financial sector by providing a wide range of financial products and services, including fixed deposits (FDs), recurring deposits (RDs), and loans. However, NBFCs are also subject to various tax regulations, including the requirement to deduct tax at source (TDS) on interest payments under Section 194A of the Income Tax Act, 1961.

What are Compliance requirements

Under Section 194A, any person (other than an individual or HUF) who is paying interest (other than interest on securities) to a resident is required to deduct TDS at the following rates:

10% if the PAN is furnished

20% if the PAN is not furnished

No surcharge, education cess, or SHEC is added to the above rates.

What are the Steps to follow when deducting TDS on interest payments:

Obtain the PAN of the recipient of the interest payment.

Deduct TDS at the prescribed rate on the interest payment.

Issue a Form 16A to the recipient of the interest payment.

Deposit the TDS deducted with the Income Tax Department within 7 days of the deduction.

Challenges

NBFCs may face some challenges in complying with the TDS requirements on interest payments. Some of the common challenges include:

Obtaining PAN of the recipient:

It may be difficult for NBFCs to obtain the PAN of all of their customers, especially those who are individuals or HUFs. This is because PAN is not mandatory for individuals and HUFs to open FDs or RDs with NBFCs.

Calculating TDS correctly:

NBFCs need to be careful to calculate the TDS correctly on interest payments. This is because the TDS rates vary depending on the PAN status of the recipient and the amount of interest paid.

Depositing TDS on time:

NBFCs need to ensure that the TDS deducted on interest payments is deposited with the Income Tax Department within 7 days of the deduction. Failure to do so can result in penalties.

Recommendations

NBFCs can take the following steps to improve their compliance with the TDS requirements on interest payments:

Develop a robust KYC process:

NBFCs should have a robust KYC process in place to ensure that they have the PAN of all of their customers.

Invest in TDS software:

NBFCs can invest in TDS software to help them calculate TDS correctly and on time.

Automate TDS deposit process:

NBFCs can automate the TDS deposit process to ensure that the TDS deducted on interest payments is deposited with the Income Tax Department within 7 days of the deduction.