Tds on interest charged on latter of credit

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

05 August 2013 please tell me whether we required to deduct tds on interest charged on latter of credit, payment is mede to resident company.second company has raised debit note for interest charges and other charges.

CA PARAS BAFNA

CA PARAS BAFNA (Expert)
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05 August 2013 TDS IS REQUIRED TO BE DEDUCTED ON SUCH TRANSACTIONS.

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Querist : Anonymous

Querist : Anonymous (Querist)

06 August 2013 Thanks Sir, but can you please give me details provision or case study for clear idea...?

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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27 July 2025 Sure! Here's a detailed explanation on **TDS on interest charged on letter of credit (LC)** and debit notes:

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### Scenario:

* Company A pays interest charged by Company B on a **letter of credit (LC)**.
* The interest amount is billed via a **debit note**.
* Both companies are residents in India.

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### Is TDS deductible?

**Yes**, TDS is required to be deducted on interest payments made to resident companies.

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### Legal Provision:

* As per **Section 194A** of the Income Tax Act, **TDS is deductible on interest payments** (except interest on securities).
* Interest paid on delayed payments, or interest charged on LC or debit notes for delayed payment, also attracts TDS.
* The debit note for interest or other charges is treated as **payment of interest**.

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### Relevant points:

* **TDS rate:** Usually 10% on interest payments to residents.
* If the payee does not have PAN, TDS rate will be 20%.
* Even if interest is charged via debit note, it does not change the nature of the payment.
* Payment made to a resident company for interest should have TDS deducted under Section 194A.

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### Supporting Case Laws or Circulars:

* CBDT Circulars clarify that **interest payments on any dues, including delayed payment interest, are subject to TDS under Section 194A**.
* Interest charged on any form of credit or delayed payment — including via LC or debit notes — is considered interest income for the recipient and attracts TDS.

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### Summary:

| Transaction | TDS Applicability | Section | Rate |
| ------------------------------------ | ------------------------- | ------- | --------------- |
| Interest on letter of credit charges | Yes | 194A | 10% (residents) |
| Debit note interest charges | Yes (treated as interest) | 194A | 10% |

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If you want, I can help draft the exact TDS deduction entries or help with any specific scenarios!

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