Loan settlement does not attract TDS liability on banks: CBDT

  • The clarification is part of a set of guidelines issued by CBDT on the new TDS provision introduced in the Finance Act this year on benefits or perquisites

Gireesh Chandra Prasad
Updated13 Sep 2022, 09:58 PM IST
CBDT said that requiring a lender who has offered a loan waiver or settlement to pay TDS would be an additional cost in addition to the haircut already taken.
CBDT said that requiring a lender who has offered a loan waiver or settlement to pay TDS would be an additional cost in addition to the haircut already taken.

One time settlement or waiver of loan will not lead to a liability on the bank to deduct tax at source and pay to the government although such relief is in the nature of an income to the debtor, Central Board of Direct Taxes (CBDT) said on Tuesday. 

The clarification is part of a set of guidelines issued by CBDT on the new tax deducted at source (TDS) provision introduced in the Finance Act this year on benefits or perquisites.  

CBDT said that requiring a lender who has offered a loan waiver or settlement to pay TDS would be an additional cost in addition to the haircut already taken. Therefore, the requirement of TDS under section 194R would not apply in such cases. CBDT said that this relief is applicable to lenders including public financial institutions defined under the Companies Act, scheduled banks, cooperative banks, primary co-operative agricultural and rural development banks, state financial corporations, non-bank finance companies and asset reconstruction companies. 

It is clarified that one-time loan settlement with borrowers or waiver of loan granted on reaching settlement with the borrowers by these entities would not be subjected to tax deduction at source under section 194R of the Income Tax Act, CBDT said.  

However, the treatment of such settlement or waiver in the hands of the person who had got benefitted by such waiver would not be impacted by this clarification. Taxability of such settlement or waiver in the hands of the beneficiary will be governed by the relevant provisions of the Income Tax Act, the department said. For him, such relief would be in the nature of income. 

Section 194R mandates a person responsible for providing any benefit or perquisite to a resident, to deduct tax at source at the rate of 10% of the value of such benefit. This deduction is not required to be made, if the value of the benefit does not exceed 20,000. 

Similarly, a company in which public is substantially interested need not deduct tax at source while issuing bonus or right shares. “The implication of this clarification will be that a company in which a public is not substantially interested will be required to deduct tax at source while issuing bonus or right shares despite such receipt of bonus or right shares being not taxable in the hands of the shareholders,” explained Ved Jain, tax expert and former president of Institute of Chartered Accountants of India (ICAI). The reasoning given in this circular for exempting a company in which public is substantially interested in equally applies to a private company in which public is not substantially interested in.  

According to Sandeep Sehgal, partner- tax at AKM Global, a tax and consulting firm, the additional guidelines issued on Tuesday were expected since there were many representations before the government and the earlier circular kept room for wider interpretation. 

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First Published:13 Sep 2022, 09:58 PM IST
HomeIndustryBankingLoan settlement does not attract TDS liability on banks: CBDT

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