TDS Accounting under finance lease contract

Hi Dhanraj,

Great question — this is a common area of confusion when it comes to accounting for leases under Ind AS 116 (not 117 — which is for insurance contracts). Let’s clarify everything step-by-step from an accounting and TDS (tax) perspective for a finance lease (as per Ind AS 116):

📘 1. Understanding the Accounting Under Ind AS 116

When a lease qualifies as a finance lease (i.e., a Right-of-Use asset and corresponding lease liability are recorded):

✅ Initial Accounting:

• Dr. ROU Asset

• Cr. Lease Liability
  (For the present value of lease payments)

✅ Subsequent Accounting:

Each month:

1. Depreciation on ROU Asset

   • Dr. Depreciation Expense

   • Cr. Accumulated Depreciation on ROU Asset

2. Interest on Lease Liability

   • Dr. Interest Expense

   • Cr. Lease Liability

3. Payment of Lease Rental

   • Dr. Lease Liability

   • Cr. Bank

🧾 2. Treatment of Monthly Lease Rental Invoice

Even if the lessor continues issuing monthly lease rental invoices, you don't book lease rent expense directly in P&L.

Instead:

• You split the payment into:

  • Interest portion (goes to P&L as interest expense)

  • Principal portion (reduces the lease liability)

📌 So, lease rent is not booked as expense in P&L — only depreciation and interest are charged.

💸 3. TDS Implication on Lease Rent (Section 194-I of Income Tax Act)

Yes, TDS is still applicable, even under Ind AS 116.

• TDS u/s 194-I must be deducted on the total lease rent paid/payable as per agreement.

• It doesn't matter that for accounting you split it into interest & principal.

✅ Example:

If monthly rent = ₹1,00,000
Then:

• Deduct TDS on ₹1,00,000 @ applicable rate (typically 10% if plant/machinery, or 2% if equipment)

• Dr. Lease Liability (₹1,00,000)

• Cr. Bank (₹90,000)

• Cr. TDS Payable (₹10,000)

🧾 4. Journal Entry at Time of Payment with TDS

Dr. Lease Liability              ₹1,00,000  
     Cr. Bank (to Lessor)              ₹90,000  
     Cr. TDS Payable (194I)           ₹10,000

✔️ Summary:

Let me know if you need help with sample calculations or template entries in your accounting software (e.g., Tally, SAP, etc.).

Best regards,
Your Accounting Assistant