Interest paid and Tds deducted compulsory

Question BankCategory: Income TaxInterest paid and Tds deducted compulsory
AvatarKollipara sundaraiah asked 6 months ago

A partnership firm audit clase sec 44ab(e) return filer gross receipts rs:95 lacs in f.y.19-20.if a partnership firm different unsecured loans from relatives and non relatives out standing opening balance rs:40 lacs as per books.
1.a partnership firm interest paid compulsory on un secured loans value:40 lacs.
2.if interest paid Rs:3,20,000/- on un secured loans Tds deducted and Tds return filed compulsory in fy:19-20 under I.t. act.

1 Answers
AvatarAbhinandan answered 6 months ago

Is it compulsory to pay interest on unsecured loans?
If I take interest free unsecured loan, it is acceptable under income tax? or notional interest will be taxed in the hands of loan provider?
What is the minimum and maximum interest rate for unsecured loans?
There are many such questions in the mind of common businessman, But let me clear there is no rule in income tax about minimum and maximum interest rate on unsecured loan. Interest terms of unsecured loans depends on mutual agreement between loan provider and loan taker.
Hence it is not compulsory for you to pay interest on unsecured loans. But be careful that if it is found to be fake transaction to avoid income tax liabilities that penalty may be imposed by income tax department. But if in real you are provided with interest free loan by your lender then there is not need to show the payment of any interest. 
Your second question is about TDS to be Deducted in on interest payment i.e. section 194A of Income tax Act
Section 194A i.e. TDS on payment of interest other than interest on securities. 
An individual, HUF (only those individual and HUF who are liable for audit u/s 44AB in the preceding year) and all other assessees like partnership firm, AOP, BOI & company etc. are required to deduct TDS @ 10% (only 7.5% from 14-5-2020 to  31-3-2021) at the time of payment of interest (including interest on unsecured loan but excluding interest on securities) if the amount of interest payment exceeds 10000 for banking company and Rs. 5000 in all other cases. 
Hence in your case, if partnership firm pays an interest of Rs. 320000/- on unsecured loans then tds is required to be deducted u/s 194A.
But No TDS is required to deducted u/s 194A in following cases:-

  1. When the amount of such interest paid in a financial year does not exceed Rs. 10,000 where the payer is a banking company and 5,000 in any other case.
  2. Interest credited or paid by a firm to a partner of the firm on partner’s capital.
  3. Interest is paid or credited to any banking company.
  4. Interest is paid by paid by a co-operative society (other than a co-operative bank) to a member.
  5. Interest is in relation to zero coupon bonds.
  6. Interest payment to a person who has submitted Form No. 15G/15H to the payer.


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