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Loan Waiver Not A Benefit, Banks Exempted From TDS: CBDT

NBFCs accepting deposit, systemically important non-deposit taking NBFCs, asset reconstruction companies and public companies providing long-term finance for the construction or purchase of houses in India for residential purposes, can also avail the exemption

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CBDT

The Central Board of Direct Tax (CBDT) instructed banks through a circular that they are not required to deduct Tax Deduction at Source (TDS) at the rate of 10 per cent on one-time settlement (OTS) or loan waivers.

Along with the haircut, banks will have to bear the additional cost of tax deduction and OTS on loan waiver will not be treated as a benefit or a perquisite and will witness no Tax Deduction at Source (TDS), said CBDT.

“It is true that waiver or settlement of loan by the bank may be an income to the person who had taken the loan. It is also true that subjecting such a transaction to tax deduction under section 194R of the Act would put extra cost on such bank, as this would require payment of tax by the deductor in addition to him taking a haircut already," the circular read.

All the public financial institutions, scheduled banks, cooperative banks, rural development banks, state financial corporations and state industrial investment corporations will enjoy such exemption from TDS.

Non-banking finance companies (NBFCs) accepting deposit, systemically important non-deposit taking NBFCs, asset reconstruction companies and public companies providing long-term finance for the construction or purchase of houses in India for residential purposes, can also avail the exemption.


Brief History 

A new section 194R in the Income Tax Act was introduced through the Finance Act, 2022. The section implies that TDS at 10 per cent of the amount would be deducted if the total value of the benefit or perquisite exceeds Rs 20,000 in a transaction where any individual is found responsible for providing any benefit or perquisite to a resident. 

"Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of 10 per cent. of the value or aggregate of value of such benefit or perquisite"

To cover certain cases which escaped tax on income under section 28(iv), section 194R was introduced.

Finance minister Nirmala Sitharaman during her Budget speech quoted that many businesses pass on their gains to their agents in order to promote their business as a strategic move. "Such benefits are taxable in the hands of the agent. In order to track such transactions, I propose to provide for tax deduction by the person giving tax benefits," Sitharaman had said.


Dispute

Word "benefit" or "perquisite" was not defined in the act.

Leading to an assumption that bankers are liable to TDS for OTS or loan waivers, benefits the customers. Hence, bankers approached the CBDT seeking clarity on the same.

On 13 September, the CBDT finally in a clarification exempted banks from TDS on OTS and said that loan waivers will not be contemplated as benefits.

Further the clarification said, "...the tax under section 194R of the Act is not required to be deducted on issuance of bonus or right shares by a company in which the public are substantially interested...where bonus shares are issued to all shareholders by such a company or right shares are offered to all shareholders by such a company, as the case may be."

Applying the same, on the issuance of bonus or right shares by listed entities too, provisions of TDS will not be attracted.


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