Union Budget 2025 Expectations: Lenders Seek TDS Relief To Cut Operational Burden In Talks

With an aim to reduce operational burden for lenders, the Indian Banking Association and Finance Industry Development Council have suggested certain taxation reforms to the government at a pre-Budget consultation, three people in the know told NDTV Profit.

IBA is a key representative body for banks, while FIDC represents non-banking financial companies. The Union Budget for 2025-26 is slated for Feb. 1.

The banking industry body has asked the government to exclude banks from the ambit of paying tax deducted at source or TDS on certain transactions, a person aware of the matter said. This is because banks are already subjected to audits, regulations as they estimate their income and making advance tax payments.

While interest payments are exempted from TDS, other transactions such as commissions and exchanges among others are subject to TDS.

In order to ensure harmonisation and remove the ambiguity in co-lending partnerships with banks, the FIDC has suggested there is an urgent need to exempt NBFCs from TDS deduction.

Currently, NBFCs are subject to 10% TDS on interest payments and FIDC has argued that the 10% TDS deduction creates cash flow constraints for NBFCs, which operate with narrower margins.

"Due to enormous transactions running into thousands, NBFCs have to face severe administrative hardship," the FIDC said at a pre-Budget consultation with the financial sector and capital markets stakeholders.

In co-lending arrangements, a single borrower makes repayments including the interest by way of EMIs to an escrow account from where the amounts shall be credited to the bank and NBFC in respective proportion.

Since, the borrower will not be in a position to split the EMI and determine the exact interest component of the NBFC portion, it is important to bring both bank and NBFC at par on the TDS provisions, the FIDC statement said.

Another request that the FIDC has put forth in front of the government is to the reduce the loan amount threshold for enforcing security interest under the SARFAESI Act, from Rs 20 lakh to Rs 1 lakh.

The Rs 20 lakh limit leads to abnormally longer time for resolution of stressed accounts, taking up to five years, which increases the number of non-performing assets on NBFCs' balance sheets and their legal costs.

Further, the NBFC body has also asked to set up a dedicated refinance window, which would ease financial pressure. Funds raised through this mechanism may be exclusively used to finance MSMEs, priority sector and green initiatives.

"DFIs like SIDBI should provide refinance to NBFCs for on-lending to the MSME and the priority sector, with special fund allocation from the government. During our interaction, the management at SIDBI have conveyed their willingness to take up this role," the FIDC statement said.