TDS on interest paid on Loan from a non-Banking finance Company

In my view, interest paid to an NBFC is generally liable for TDS under Section 194A, because the exemption available to banking companies etc. does not normally extend to NBFCs. TDS should be deducted only on the interest component of the EMI and not on the principal repayment.

If the borrower has deducted and deposited TDS @ 10% on the interest component using the correct PAN of the NBFC and has filed the TDS return properly, then the NBFC should give credit/adjustment for such TDS. The amount deducted as TDS is deemed to be tax paid on behalf of the NBFC and will appear in the NBFC’s Form 26AS/AIS. Therefore, the NBFC should not treat that portion as unpaid interest, unless there is a specific gross-up or tax-bearing clause in the loan agreement.

Practically, the borrower should provide the NBFC with TDS challans, Form 16A, TDS return details, and request adjustment in the loan account. If they still refuse, the issue should be escalated through their grievance channel.

@ M.Amin 

You should have deducted the TDS from the interest component while paying the EMI to the NBFC. 

In that case, there would have been no issue of the NBFC shrugging off and creating headache for your company. And the NBFC would have been running after you to get the TDS payment certificate, instead of the opposite.

TDS on interest to an NBFC is required:

• Sec 194A(3)(iii) exempts interest paid to banking companies, co-operative banks, LIC, UTI, insurance companies and notified institutions. NBFCs are not exempt as a class (only specific notified entities are). So 10% TDS under Sec 194A applies on the interest component, if your total interest to that NBFC exceeds Rs 5,000 a year (Rs 10,000 from 1 April 2025).

• Deduct TDS on interest at the time of credit or payment of each EMI (or at least at year-end accrual). Do not deduct on the principal.

• Where the full EMI was paid and TDS deposited separately from your own funds, you now have a receivable from the NBFC equal to the TDS. Share Form 16A. The NBFC claims the TDS credit in its return and should refund the amount or adjust it against future EMIs. Most NBFCs have a "TDS refund" process on submission of Form 16A.

• If TDS is not deducted, 30% of the interest is disallowed (Sec 40(a)(ia)), plus interest under Sec 201(1A).

• From 1 April 2026: Sec 393 of the Income-tax Act, 2025.

Thanks for your reply. Most of the NBFC more correct saying all  while disbursing a loan send a computation of monthly EMI and interest without taking cognigance of TDS. Borrower's EMI goes from Bank on standing  instruction full EMI withaout TDS.  We are aready on with them for this. 

The NBFC’s refusal is generally not correct if you deducted and deposited TDS under section 194A on interest actually paid or credited to it. The TDS is deducted from the interest component—not from the principal component—and should be reported against the NBFC’s PAN. The NBFC should receive credit for the tax deducted, subject to the TDS being correctly reported and appearing in its tax records.

• Check the loan statement and EMI breakup, and reconcile the interest amount with your TDS return, challan and Form 16A. TDS on principal repayment is not applicable under section 194A.
• If the deduction was deposited or reported against an incorrect PAN, or the return/challan details do not match, the NBFC’s credit may not appear; correct the relevant TDS filing particulars.
• Ask the NBFC to verify its tax-credit records and, if needed, provide the relevant TDS certificate and filing details. If the TDS is correctly reported but credit remains absent, the issue is one of reconciliation rather than a basis to deny the credit.

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Thanks for your reply.  Where in need will sure get in touch with you.