In recent times, not some by all most everybody is buying products on every
month installment schemes. Even companies and business establishments opt of EMI
or Hire Purchase transaction instead of one-time payment to the vendors. However, people are unaware about the applicability of
TDS provisions on such transactions. Are TDS provisions applicable on EMIs and
Hire purchase? Do you need to deduct TDS? If
yes, to what extent?
Generally, there are two portions on such transactions. One would be the principal installment and the other interest on the outstanding amount. To understand this clearly let’s see how these transactions work.
Whenever we buy anything on EMI schemes, financial institutions come into the picture. On the buyers behalf the financial institutions makes full payment to the seller and then we deal with the financial institutions. The financial institutions charge interest on the principal amount from the buyer. This is when a question of TDS applicability comes in! The question of TDS on the principle amount does not arise as the financial institution does not earn the principal amount, it merely recovers it from the buyer. However, the interest portion is the income of the financial institutions. TDS on the interest portion needs to deducted under section 194A.
Note: Nationalized banks do not fall under the purview of section 194A. i.e. if the EMIs are paid to any of the nationalized banks then TDS provisions are not applicable. Other Non-Banking Financial Institutions like Reliance Capital, LIC Housing Finance etc. are not exempt from section 194A.
What about TDS on Hire Purchase Transactions?
In a hire-purchase contract the owner delivers goods to another person upon terms on which the hirer is to hire them at a fixed periodical rental. The hirer has also the option of purchasing the goods by paying the total amount of agreed hire at any time or of returning the same before the total amount is paid. It may be pointed out that part of the amount of the hire purchase price is towards the hire and part towards the payment of price. The agreed amount payable by the hirer in periodical installments cannot, therefore, be characterized as interest payable in any manner within the meaning of section 2 (28A) of the Income-tax Act, as it is not in respect of any money borrowed or debt incurred in this view of the matter it is clarified that the provisions of section 194A of the Income-tax Act are not attracted in such transactions.
Hence TDS does not apply in Hire Purchase transaction according to a circular issued by CBDT (Instruction No. 1425 F. No. 275/9/80 IT(B) dated 16-11-81).
yes, to what extent?
Generally, there are two portions on such transactions. One would be the principal installment and the other interest on the outstanding amount. To understand this clearly let’s see how these transactions work.
Whenever we buy anything on EMI schemes, financial institutions come into the picture. On the buyers behalf the financial institutions makes full payment to the seller and then we deal with the financial institutions. The financial institutions charge interest on the principal amount from the buyer. This is when a question of TDS applicability comes in! The question of TDS on the principle amount does not arise as the financial institution does not earn the principal amount, it merely recovers it from the buyer. However, the interest portion is the income of the financial institutions. TDS on the interest portion needs to deducted under section 194A.
Note: Nationalized banks do not fall under the purview of section 194A. i.e. if the EMIs are paid to any of the nationalized banks then TDS provisions are not applicable. Other Non-Banking Financial Institutions like Reliance Capital, LIC Housing Finance etc. are not exempt from section 194A.
What about TDS on Hire Purchase Transactions?
In a hire-purchase contract the owner delivers goods to another person upon terms on which the hirer is to hire them at a fixed periodical rental. The hirer has also the option of purchasing the goods by paying the total amount of agreed hire at any time or of returning the same before the total amount is paid. It may be pointed out that part of the amount of the hire purchase price is towards the hire and part towards the payment of price. The agreed amount payable by the hirer in periodical installments cannot, therefore, be characterized as interest payable in any manner within the meaning of section 2 (28A) of the Income-tax Act, as it is not in respect of any money borrowed or debt incurred in this view of the matter it is clarified that the provisions of section 194A of the Income-tax Act are not attracted in such transactions.
Hence TDS does not apply in Hire Purchase transaction according to a circular issued by CBDT (Instruction No. 1425 F. No. 275/9/80 IT(B) dated 16-11-81).
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