Applicability of TDS Provisions on Interest or Processing fees payable to Bank, Co-operative society, PFI and NBFC.

In accordance with the Section 2 (28A) of Income Tax Act, 1961 Interest means interest payable in any manner in respect of any money borrowed or debt incurred (including a deposit, claims or other similar rights or obligation) and includes any service fee or other charge in respect of the money borrowed or debt incurred or in respect of any credit facility which has not been utilized.

Interpretation of the above definition

From the above definition it is being clarified that Interest and loan processing fee are same in the eyes of law (Income Tax Act, 1961). Hence, TDS compliances on both must be same.

If TDS is required to be deducted by any entity on interest then it must be deducted on loan processing fee or any other service fee.

Section 194A of Income Tax Act, 1961 – TDS on Interest (other than interest on securities) Section 194A explains that Any person, not being an individual or a Hindu Undivided Family who is responsible for paying to a resident any income by way of interest, other than interest on securities, is required to deduct income tax thereon at the rate of 10% at the time of credit of such income to the account of payee, or interest payable account or suspense account or at the time of payment thereof, in cash or by issue of a cheque or draft or by any other mode, whichever is earlier,

 However, this section also states some cases where provisions of this section are not applicable which includes:

TDS is not required to be deducted where interest is credited or paid to any banking company, co-operative societies engaged in banking business, public financial institutions, the Life Insurance Corporation, the unit Trust of India, a company or a co – operative society carrying on the business of insurance or notified institution. But this section does not provide any exemption from TDS to Non-Banking financial companies.

Conclusion: TDS is not required to be deducted on payment of interest (or any other service fee) if the payment is made to some Public financial Institutions, however need to comply with the TDS provisions under section 194A if payment is made to any Non – Banking financial Companies.