Consequences of Non-Deduction of TDS on Interest Paid to NBFCs (FY 2024-25 Onwards)

Consequences of Non-Deduction of TDS on Interest Paid to NBFCs (FY 2024-25 Onwards)

 

 

In the present financial landscape, Non-Banking Financial Companies (NBFCs) are a significant source of funding for businesses and individuals. However, many borrowers fail to appreciate the Tax Deduction at Source (TDS) implications on interest payments made to NBFCs.

 

For the Financial Year (FY) 2024-25 and onwards, the Income-tax Act, 1961 continues to mandate TDS on such payments. A common misconception is that NBFCs enjoy the same exemption from TDS as scheduled banks. This is incorrect. NBFCs are specifically covered under Section 194A, and interest payments to them attract TDS deduction obligations.

 

 

 

Legal Framework Applicable for FY 2024-25

 

 

• Section 194A, Income-tax Act, 1961

  Requires deduction of tax at source on interest (other than securities) paid to residents, where the aggregate interest exceeds threshold limits in a financial year.

   

  • For FY 2024-25, the threshold remains ₹40,000 for individuals/HUFs not subject to audit, and ₹50,000 for senior citizens.

  • NBFCs do not enjoy any blanket exemption under this provision.

   

• Section 40(a)(ia) – FY 2024-25 Disallowance Rule

  Where tax is deductible but not deducted (or deducted but not deposited), 30% of the interest expense is disallowed while computing income of the payer for that financial year.

• Section 201 & 201(1A)

  If TDS is not deducted or not deposited for FY 2024-25, the payer is deemed an assessee-in-default and becomes liable for interest.

• Section 271C

  Penalty provisions for non-deduction/non-payment continue to apply in FY 2024-25.

 

 

 

 

Consequences of Non-Deduction in FY 2024-25

 

Provision (FY 2024-25)	Default	Consequence
Section 40(a)(ia)	Interest paid to NBFC without TDS deduction in FY 2024-25	30% of such interest expense disallowed while computing taxable income of FY 2024-25.
Section 201(1A)	Failure to deduct or deposit TDS for FY 2024-25	- 1% per month (or part thereof) from due date till date of actual deduction.  - 1.5% per month (or part thereof) from date of deduction till date of deposit.
Section 201(1)	Non-deduction of TDS in FY 2024-25	Payer treated as “assessee in default” unless NBFC has paid tax on such income and Form 26A is furnished.
Section 271C	Non-deduction/ non-payment during FY 2024-25	Penalty equal to the TDS amount not deducted.

 

 

 

Practical Impact for FY 2024-25

 

 

1. Disallowance of Expenses in FY 2024-25 – increases the taxable profits and tax payable for that year.

2. Cash Flow Burden – Additional liability in form of interest and penalties.

3. Litigation Risk – Tax authorities frequently verify NBFC-related interest entries in audits and assessments.

 

 

 

 

Relief Mechanism

 

 

Even in FY 2024-25, relief is available where:

 

• The NBFC has already paid tax on such interest income, and

• The payer furnishes a CA certificate in Form 26A.

 

 

In such cases, the payer is not treated as an assessee-in-default under Section 201. However, interest under Section 201(1A) still remains payable.

 

 

 

Conclusion

 

 

For Financial Year 2024-25 and subsequent years, it is critical that businesses deduct and deposit TDS on all interest payments made to NBFCs under Section 194A.

 

Non-compliance results in:

 

• 30% disallowance of expense for FY 2024-25,

• Interest liability for the entire default period,

• Penalty exposure, and

• Unnecessary litigation.

 

 

Timely compliance ensures smooth claim of interest expenditure and avoids unnecessary tax costs in the current and future financial years.