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Tax Provision, a Lenders should know about their investments (lending) on P2P Lending platforms

Many Lenders have questions in their mind regarding Tax treatment of their Income earned through investment on P2P lending Platforms. Income earned by Lenders through investing on P2P lending platforms are subject to Indian Income Tax like any other taxable interest on their deposits / loans with banks or other institutions / individuals. We have classified the Taxation related questions in 4 parts that every Lender should know about.


What will be treatment of Income earned from P2P?
As we all know that any EMI from the borrower to the lender has two components in it, i.e. a. Principal Repayment and b. Interest. As per the provisions of Indian Income Tax, only the Interest portion of EMI is taxable, not the Principal. As per sec. 56(2) of Income Tax Act, 1961 Interest income will be shown under the head "Income from other sources".


There is no fixed rate of taxation on the interest so this will be added to lenders Total Income and taxed as per income tax slab rate applicable to lender.


(At www.omlp2p.com, to facilitate the lenders to account for their interest earnings for the year, the dashboard of the platform provide detail Account statement report to the Lenders with various information like - investment details along with EMI received, Principal, Interest, and other charges received or being charged for the respective Financial year. Lenders can download Account statement from the dashboard, so while filing the Income tax return Lenders need not to calculate Interest amount for the financial year separately.)


Whether TDS Deducted on income earned from OMLp2p?
First, we will talk about Interest on Loan. "TDS on Interest other than Interest on securities" provision is given under section 194A of Income Tax Act, 1961. As per Section 194A If Borrower is Individual and Liable for Tax Audit in the previous year (whose total sales, gross receipt or turnover from the business or profession carried by him exceeds Rs. One crore in case of business or fifty lakh rupees in case of profession) TDS is to be deducted by the borrower if Interest amount payable to any lender exceeds Rs. 5,000 in a financial year.


Here it is to be noted that Rs. 5,000 limit will be checked on lender wise interest payment by borrower. e.g. if a Borrower pays EMI to a Lender and Interest portion in that EMI to a lender exceeds Rs. 5,000 then only Borrower will be liable to deduct TDS if Tax Audit is applicable on Borrower.


Now It is important to understand that OMLp2p provides lending platform that connect Lenders and Borrowers. Here OMLp2p lending platform ensure the flow of EMI from Borrowers to Lenders hence OMLp2p does not deduct TDS. If provision applies to Borrower, then it is responsibility of Borrower to deduct the TDS.


Secondly, some of us may think that why TDS is not deducted like banks deduct the TDS on interest from FDs. So, the answer will be that these P2P lending platforms are only authorized to act as platform provider. It is the borrower who avail the loan and who is liable to comply with the provisions of the TDS to deduct or not to deduct the tax. Interestingly, most of the borrowers at OMLp2p.com are either individual or MSMEs; and it has been observed that most of the cases there is no deduction of TDS as per law.


What will be the treatment of Principal in case of Loan default by Borrower?
Many of us may have question that whether in case of default by Borrower Principal amount can be claimed as Capital gain loss. As per the provision of Income Tax Act, 1961 Loan Principal loss is not allowed to be claimed as Capital Gain loss.


GST Applicability?
GST provision related to Lenders on Investment in P2P is summarized below:

  • As per the GST Provisions, Loan Interest income is exempt from GST.
  • On every investment in Loan, lenders are charged a small amount of processing to facilitate the transactions. GST is applicable on the processing fee charged by P2P lending platform. In case any Lenders desire, they may claim GST Input credit by providing their GST No. to P2P lending platform during registration.
  • GST is also charged on Lender Registration fee. Lenders can also claim the GST Input credit on this by providing GST No. to P2P lending platform.

In this blog, we have covered the basic income tax provisions related to P2P lending interest income that you should know as a lender. You should seek the services of a qualified tax professional for your detail quarry, who will help you to calculate your income tax obligations precisely and to file your income tax return.


The author is Finance Controller of www.omlp2p.com. The article written by him is in his personal capacity and educational in nature. All the views are his personal views. Omlp2p.com, the peer to peer lending platform has placed (promoted) the articles to benefit the general borrowers and lenders. You may write to author for your quarries at customer.support@omlp2p.com referring the article name and your details.


www.omlp2p.com is India's leading RBI (Reserve Bank of India) registered NBFC-P2P, providing technology enabled e-commerce platform to it's Lenders and Borrowers to avail their loan at a highly competitive Rate of Interest, in a hassle free manner without much of documents; at the same time it provides its Lenders Higher return on their capital by providing opportunities to lend to good quality, well assessed borrowers.


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