Loan waiver not a benefit, banks exempt from 10% TDS on OTS: CBDT clarifies

The Central Board of Direct Tax has clarified in a circular that the banks are not required to deduct 10% TDS on one-time settlement (OTS) or loan waivers.

The Central Board of Direct Tax (CBDT) has clarified in a circular that the banks are not required to deduct 10 per cent TDS on one-time settlement (OTS) or loan waivers.

CBDT said OTS on loan waiver by a bank will not be treated as a benefit or a perquisite and not face Tax Deduction at Source (TDS) as they would have to bear the additional cost of tax deduction along with the haircut.

"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 clarified.

This exemption from TDS includes public financial institutions, scheduled banks, cooperative banks, rural development banks, state financial corporations, and state industrial investment corporations.

It would also be available to deposit accepting non-banking finance companies (NBFCs), systemically important non-deposit taking NBFCs, and public companies engaged in providing long-term finance for the construction or purchase of houses in India for residential purposes and asset reconstruction companies.

Background

In the Union Budget 2022-23, the government introduced a new section 194R in the Income Tax Act by the Finance Act of 2022. The section stated that any individual responsible for providing any benefit or perquisite to a resident has to deduct TDS at 10 per cent if the total value of the benefit or perquisite exceeds Rs 20,000.

"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 perquisit"

The intention behind introducing section 194R was to cover cases where income under section 28(iv) escaped tax. 

Finance minister Nirmala Sitharaman, in her Budget speech, noted that businesses pass their benefits to their agents as a strategy to promote their business. "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

Conflict

The act did not define the word "benefit" or "perquisite". 

This led the bankers to assume that they are liable to TDS in case of OTS or loan waivers, which would be treated as benefits to customers. This made them approach the CBDT seeking clarity on the same.

On Tuesday, the CBDT finally clarified that loan waivers will not be considered as benefits and exempted banks from TDS on OTS.

The Board further clarified "...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."

Therefore, the TDS would also not be charged on the issuance of bonus or right shares by listed entities.