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Is tds applicable?

SP (--) (23 Points)

25 September 2018

I have recently started a garment business from my own funds. Now I need some money for working capital for which I plan to borrow from my friend. I will pay interest on the borrowed money.

1) I want to know whether I will have to deduct TDS on the interest which I will pay to my friend. Or I donot have to deduct TDS since it is borrowing form an individual to an individual.

2) If yes, then is there any amount limit for applicability of TDS.

3) Also will the TDS be applicable also incase of borrowing from family member too?

Thanks.

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3 Replies

Deepak Gupta (CA Student) (15922 Points)
Replied 25 September 2018

Such transactions come u/s 194A for TDS purpose.

But not applicable in your case since it is a new business and there is no question of tax audit in the preceding financial year.

As per proviso to Sec. 194A(1), an individual is not liable to deduct TDS in the current FY, if he was not liable to tax audit in the preceding FY.

“Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section.”

SP (--) (23 Points)
Replied 25 September 2018

Ok. Understood. Thanks.

However in the future years, I will have to check if the business exceeds the turnover limits for audit purpose and accordingly I may have to dedcut TDS if it exceeds the turnover limit. Assuming that if it happens, what will be the TDS rate? I just want to keep things handy so that I can discuss the same with my lender friend.

Also is the same TDS clause applicable if I borrow from my blood relative?

CA Vibhor Kalamkar (Partner at Bhojwani Kalamkar & Co.) (186 Points)
Replied 28 September 2018

You will be required to deduct tax @ 10% u/s 194A on the amount of Interest paid/payable to the lender. The threshold limit is Rs. 5,000/- p.a. i.e. if the interest payment exceeds Rs. 5,000/- during the year, you will be required to deduct Tax on the entire amount paid as interest.

You will have to deduct tax even if you borrow from your blood relative as the Income Tax Act does not differentiate between your relatives and/or third parties for the purpose of Section 194A.