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

The CBDT has said that a bank’s loan waiver OTS will not be treated as a benefit or favour and will not face tax deduction at source (TDS) as they will have to bear the additional cost of tax deduction along with the haircut.

“It is true that waiver or settlement of bank loan may be the income of the person who has taken the loan. It is also true that such transactions will incur additional expenses subject to tax deduction under section 194R of the Act. Such bank, because it will require tax payment by the deductor and already a haircut will be taken,” the notification clarified.

Those exempted from TDS include public financial institutions, term banks, cooperative banks, rural development banks, state-owned financial companies and industrial investment companies.

It also applies to deposit-taking non-banking financial companies (NBFCs), systemically important non-depository non-banking financial companies, listed companies providing long-term financing for the construction or purchase of residential properties in India, and asset restructuring companies.

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

“Any person responsible for providing a resident with any benefit or allowance (whether or not convertible into money) arising out of the resident’s business or occupation shall, before providing such benefit or allowance (as the case may be) to that resident, ensure that Tax has been deducted in respect of such benefits or allowances at a rate of 10% of the value or gross value of such benefits or allowances”.

Section 194R was introduced to cover income tax evasion cases under section 28(iv).