No TDS on one time settlement of loans: CBDT

Tags: National Economy/Finance

The Central Board of Direct Tax (CBDT) has clarified in a circular issued on 13 September 2022 that the banks are not required to deduct 10 per cent Tax Deduction at Source (TDS) on one-time settlement (OTS) or loan waivers.

• The 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. 

IMPORTANT FACTS -

Who will benefit ?

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

Others who are exempted from TDS :

• The CBDT also clarified that the TDS provisions will not apply to the issuance of bonus/rights shares issued by a company ,where bonus/rights shares are issued to all shareholders of such a company. 

Concept clearing :

One time Settlement :

• It is a scheme which is offered to the defaulters who are unable to repay their loans and does not seem in foreseeable future to generate enough resources to pay back the loans. 
• In these types of loan settlements banks often take Haircuts on the loan.

Haircut on loan settlement :

• Haircut simply means that banks are willing to accept less than what is their due. For example if the person owes Rs 100 to the bank the bank accepts Rs 80 from the borrower and closes the loan. Here the bank is taking a haircut of 20%. 

Tax Deduction at Source (TDS) :

• It was introduced under the Income Tax Act 1961 to stop tax evasion. The concept of TDS was introduced with an aim to collect tax from the very source of income. 
• As per this concept, a person (deductor) who is liable to make payment of specified nature to any other person (deductee) shall deduct tax at source and remit the same into the account of the Central Government.
• The deductee from whose income tax has been deducted at source would be entitled to get credit of the amount so deducted on the basis of Form 26AS for TDS certificate issued by the deductor.
• For example a person opens a fixed deposit with a bank and deposits an amount. If the interest income on the deposit is more than Rs 5000 per year then the bank will deduct 10% TDS on the interest amount. So if the interest income is Rs 6000 per year then the bank will deduct 1000x10%= Rs 100. 
• Here the bank is the deductor while the depositor is the deductee.

The TDS rates are different for different financial transactions.

Bonus issues :

• When a company issues new shares of the company to its existing shareholder in the form of dividend then it is called as Bonus issues.

Right Issue :

• When a company issues new shares to its existing shareholders at a price, it is called Right Issues.

ADDITIONAL INFORMATION -

Central Board of Direct Taxes (CBDT) :

• The Central Board of Direct Taxes is a statutory authority functioning under the Central Board of Revenue Act, 1963.
• The CBDT is a part of the Department of Revenue in the Ministry of Finance.
•  On one hand, CBDT provides essential inputs for policy and planning of direct taxes in India, at the same time it is also responsible for administration of direct tax laws through the Income Tax Department.
• Chairperson: Nitin Gupta