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TDS on Loan Interest

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TDS on Loan Interest

Postby Sandhyamukunda » Mon Jul 16, 2007 3:01 pm

Hi All,

Have one doubt.

Is tds applicable on the payment of interest on loan taken from a bank? Have got the letter from bank to deduct @ 5.61%

Thanks

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Postby Amit Khandelia » Mon Jul 16, 2007 3:54 pm

Yes TDS on interest will deducted by bank.

In case your annual interest is more than Rs 2500 then only TDS can be deducted by bank.

Do remember to collect TDS certificate from bank.
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Postby DSR » Mon Jul 16, 2007 4:18 pm

HI Sandhya,

r u saying u have taken loan from bank and u pay interest to bank
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TDS on Loan Interest

Postby Sandhyamukunda » Mon Jul 16, 2007 5:02 pm

Yes, Loan has been taken. On that we are paying quarterly interest after deducting TDS.

My doubt is, could anybody specify the clause or section which says TDS has to be deducted on payment of interest on loan.

Thanks
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Postby Amit Khandelia » Mon Jul 16, 2007 5:20 pm

Just visit this link you will get your answer :

In case your company has taken loan from bank, you need to deduct interest on that based on the limits specified.

http://www.eminds.in/forum/viewtopic.php?t=6561

I was of the view that you are getting interest from bank. In such case bank will deduct TDS before paying any interest to you.
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Postby DSR » Tue Jul 17, 2007 11:25 am

Section 194A

(3) The provisions of sub-section (1) shall not apply—

(iii) to such income credited or paid to

(a) any banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies, or any co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank), or


Then how come bank does ask customer to deduct TDS while paying interest amont to BAnk.
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Postby Amit Khandelia » Tue Jul 17, 2007 11:36 am

Clarification regarding extension of applicability to interest on time deposits with banks*

1. According to the provisions of section 194A of the Income-tax Act, 1961, any person, not being an individual or HUF, who is responsible for paying to a resident (for non-residents, the provisions are different and are contained in section 195) any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. These provisions are, however, subject to the exceptions provided in the said section.

2. One such exception, contained in clause (vii) of sub-section (3) of section 194A, hitherto related to interest income credited or paid in respect of deposits with, (i) a banking company to which the Banking Regulation Act, 1949 applies, or (ii) a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).

The exemption is available only for deposits and not for loans.
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Postby DSR » Tue Jul 17, 2007 12:22 pm

Dear Amit,

I think issue is: (please correct if wrong)

XYZ Ltd. took term loan/working capital demand loan from say ICICI bank. It is paying monthly interest say Rs 100000.

Now the issue- whether XYZ Ltd. is required to deduct TDS say 5% from interest pay Rs 100000.

In my opinion according section 194A(3)(iii)(a) TDS is not required to be deducted when company is paying interest to Bank.
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Postby Amit Khandelia » Tue Jul 17, 2007 12:53 pm

Dear Dhanesh,

Just went through ready reckoner.

As said by you it exempts for deduction of TDS on payment of interest to Banking Company..........

But then what about the clarification given below on the exemptions being only applicable to deposits

2. One such exception, contained in clause (vii) of sub-section (3) of section 194A, hitherto related to interest income credited or paid in respect of deposits with, (i) a banking company to which the Banking Regulation Act, 1949 applies, or (ii) a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank).

I am really confused. Will this clarification overrule the provision ?

Please help me out.

Great learning process.
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Postby DSR » Tue Jul 17, 2007 1:17 pm

Thanks amit.

Act is always supreme. Clarification is secondary.
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Postby Amit Khandelia » Tue Jul 17, 2007 2:00 pm

Thanks Dhanesh.
Regards,
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Clarification Vs Provision

Postby jagjeetgulati » Mon Aug 06, 2007 5:56 pm

Dear Amit,

I think the clarification is always with regards to the Provision of the act and if it is issued after enactment of particular provision it is clarifying the position.

Will this means that clarification is related to a particular provision and will overrule wrong interpretation of provision.


Just a opinion..
please reply..

Regards

Jagjeet Singh
Jagjeet Singh
B Com(Hons), ACA , CS , AICWA
Manager Finance
JCB India Limited
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Postby Amit Khandelia » Tue Aug 07, 2007 10:00 am

Hi Jagjeet,

You are right when saying that clarifications are issued to prevent any misinterpretation of provisions. But at the same time it is also true that clarifications can never overrule any provisions of the act. Act stands above clarification.
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Postby DSR » Tue Aug 07, 2007 10:12 am

Circular cannot override provisions of the Act -

What section 119 has empowered is to issue orders, instructions or directions for the ‘proper administration’ of the Act or for such other purposes specified in section 119(2). Such an order, instruction or direction cannot override the provisions of the Act; that would be destructive of all the known principles of law as the same would really amount to giving power to a delegated authority to even amend the provisions of law enacted by the Parliament - Kerala Financial Corporation v. CIT [1994] 210 ITR 129 (SC).
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TDS on Loan interest

Postby Sandhyamukunda » Tue Aug 07, 2007 10:52 am

Hi All,

Thanks a lot for giving replies and opinions. But could anyone highlight me the bottom line of this TDS deduction. whether any section says so...

Thanks in advance
Sandhya
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Postby DSR » Tue Aug 07, 2007 10:56 am

No TDS on payment to bank for repayment of loan. We are not deducting TDS from re-payment to bank (Term Loan/Working Capital Loan)
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Postby srinivasaraghavan » Tue Aug 07, 2007 1:46 pm

Dear friends,

The bottom line of exemption regarding TDS covered by section 194A, as far as the interest received/ paid by Banking companies are concerned, can probably be illustrated as under:

Suppose we have XYZ Ltd. a company which has borrowed from ABC Bank; PQR Ltd. has Fixed deposits and Savings deposit with ABC Bank. The exemptions available to them are as under:

1. Interest payment by XYZ to ABC, on amount borrowed no deduction of tax at source required [section 194A(3)(iii)]
2. Interest payment by ABC to PQR on savings deosit, no deduction of tax at source [section 194A(3)(vii)]
3. Interest payment by ABC to PQR on Fixed deposit, no deduction of tax at source if amount of interest p.a is not more than Rs 5000. [section 194A(3)(i)]

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Postby Gauravbht » Tue Sep 04, 2007 10:01 pm

Dear all,

The bottom line is that Tds is reqd to be deducted u/s 194A only if payment is made to a person other than banking company and some other specified corporations as contained in rules & circulars issued from time to time.

But today most banks have created separate companies( knowns as NBFC) to take care of loans.These companies often operate as subsidiary of the banking company. In such a case, TDS is reqd to be deducted as per the provisions of S.194A of the Act.

Ragards
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Postby varungupta » Thu Nov 01, 2007 3:01 am

I agree with Mr Gaurav. the best eg. is sundaram finance. TDS needs to be deducted in this case. You plz quote name of the bank and then may be able to help you better.
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Re: TDS on Loan Interest

Postby Senthil Kumarq » Fri Feb 12, 2010 11:19 am

Dear Experts,

Am also agree in ur stand, if our term Loan & working Capital Interest are our expenses, so we don't want to deduct any amount to pay by the way of interest.


But my doubt different,

U/S 194A Interest Other than Interest on Securities.

if i opened Letter of credit for purchase of raw material, instead of utilising OCC amount.

my vendor raise BIll of Exchange for material cost & Seprate Debit note raise for lc interest for usance period, our lc having conditions interest for usance period beared by opener's a/c. so vendor discounting lc with our bank with provisional invoice (ex. 90days before).

At the time of LC fall due we have paid to bank full amount.
weather i should deduct tds u/s 194A for LC interest amount or not.

if it Yes or No, pls clarify with provisions & exmple.

regards
Senthil Kumar.
SBQ Steels Limited.
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Re: TDS on Loan Interest

Postby pca » Sat Feb 13, 2010 11:18 am

Yes, TDS will be applicable in this case since payment of interest is in fact being made to the vendor and not to the bank. Bank is just collecting agent. For the sake of clarity debit note raised by the vendor should disclose gross interest, TDS and net interest separately before discounting the documents from the bank. Bank will pay to the vendor only the net interest and not the gross interest.
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