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An NBFC earns interest from two flows: contractual interest on its loan portfolio and treasury interest on its own investments. Both are subject to TDS deduction by the payer under Section 393(1) Sl. 12 payment code 1002 (the Income Tax Act 2025 successor to legacy Section 194A) at 10% for residents. The NBFC must reconcile its interest income register against inward TDS on both flows, tie every deduction back to Form 26AS, and file Form 26Q claims that recover the full deducted tax. Any break in this chain leaves TDS unclaimed and inflates the effective tax rate on the interest book.
Segregate interest income into two ledgers — loan book (borrower interest) and treasury (investment interest). For each ledger, capture the accrual entry, the deductor identity (borrower TAN or bank TAN), the deducted amount, the payment code (1002), the section reference (legacy 194A / Sl. 12), and the assessment year. Reconcile against Form 16A certificates from TRACES and against the consolidated Form 26AS. Investigate every mismatch: missing Form 26AS entries where the NBFC recognised interest income; Form 26AS entries against the NBFC's TAN for interest the Treasury does not recognise; and timing gaps between accrual year and deductor's remittance year.
Ledger structure — borrower interest income register keyed by loan account + deductor TAN; treasury interest income register keyed by investment ID + bank TAN. Deductor master — every corporate borrower's TAN, name, and audit-threshold flag; every treasury counterparty's TAN. Payment code map — 1002 for interest other than securities, 1003 for interest on securities. Form 16A intake channel — quarterly TRACES download by TAN. Assessment year mapping rule — deferred credit claim vs current-year claim policy.
A quarter-end interest-TDS reconciliation pack: interest income by ledger tied to Form 26AS credits; a break register listing every unmatched deduction with owner, root cause, and resolution status; a Form 26Q filing extract; and an audit trail from every claim in the ITR back to a specific deductor's remittance and the underlying interest income entry.
An NBFC’s income statement is dominated by two lines: interest earned from lending and treasury income from its own investments. Both lines are subject to tax deduction at source at the payer end, and the resulting TDS credits flow back to the NBFC through Form 26AS. Recovering that TDS in full requires a reconciliation discipline that connects the accounting general ledger, the deductor’s remittance file, and the tax return. The mapping between legacy Section 194A and the Income Tax Act 2025’s Section 393(1) Sl. 12 code 1002 adds a schedule-reference migration on top of an already busy chain.
The reconciliation in one paragraph
Every time a corporate borrower pays interest to the NBFC on a term loan, or a scheduled bank pays interest to the NBFC on a treasury fixed deposit, the payer is the deductor and the NBFC is the deductee. The deductor withholds 10% of the interest under Section 393(1) Sl. 12 payment code 1002 (the successor to the erstwhile Section 194A), remits the balance, and files Form 26Q populating the NBFC’s TAN and the deducted amount. The credit appears in the NBFC’s Form 26AS within the next reporting window. The NBFC’s reconciliation must tie: the interest income accrual in its books → the deductor’s Form 16A certificate → the Form 26AS credit → the eventual claim in the ITR. A break anywhere in this chain leaves TDS unclaimed against final tax liability — a genuine cost, not a paperwork inconvenience.
What the interest-income TDS chain looks like in India
The Indian NBFC sector operates two very different interest-earning flows, and both attract TDS but in different volumes.
Borrower-side inward TDS (loan book). A gold loan NBFC such as Muthoot Finance or Muthoot Fincorp holds a large book of retail gold loans where borrowers are individual jewellery owners below the audit threshold. Those borrowers are not required to deduct TDS on the interest they pay. So on the retail gold loan book, borrower-side inward TDS is negligible. The story changes on the corporate SME term-loan book and on secured MSME working-capital loans. An IIFL Gold Loan corporate SME borrower — an audited proprietorship or a private limited company — deducts 10% under code 1002 on the interest paid. On a corporate portfolio of, say, ₹1,200 crore under this construction, the NBFC absorbs a monthly borrower-side inward TDS in the ₹5–8 lakh range (illustrative). The NBFC’s borrower-side inward TDS register keys every entry by borrower TAN and loan account.
Treasury-side inward TDS (investment book). Every NBFC parks liquid surplus in scheduled bank fixed deposits and short-tenor corporate bonds. Federal Bank Gold and SBI Gold Loan divisions (as bank arms) are exempt payees under the banking-company clause of the legacy Section 194A(3)(iii)(a) — that exemption is preserved in the Income Tax Act 2025 for banking-company payees but is not extended to NBFCs. An NBFC that holds a fixed deposit with HDFC Bank sees HDFC deduct TDS at 10% on the quarterly accrued interest. On an NBFC treasury book earning, say, ₹40 crore of interest income annually across FDs and bonds (illustrative), inward TDS at 10% totals ₹4 crore — a very material claim that must be reconciled with the deductor’s Form 26Q filings.
The single most consequential detail: Section 194A(3)(iii)(a) exempts banking companies from being on the receiving end of interest TDS, but not NBFCs. So even where an NBFC is registered under Section 45IA and regulated by the RBI, its treasury interest suffers full TDS at 10%. This is the source of the largest inward TDS balance on most NBFC books.
The regulatory overlay
Three layers of law and regulation govern this reconciliation.
Income Tax Act 2025 — Section 393(1) Sl. 12 code 1002. The consolidated TDS section of the new Act replaces the erstwhile Section 194A. Substantively identical scope — “interest other than interest on securities” — at 10% for resident payees above the annual threshold. The change is procedural: Form 26Q now requires the payment code 1002 in the schedule field, not the section reference “194A”. Legacy loan-management systems that still write “194A” into TDS return metadata will fail TRACES validation.
Legacy Section 194A(3)(iii)(a) preserved. The banking-company payee exemption is carried forward in the 2025 Act. Interest paid to a scheduled commercial bank is not subject to TDS. Interest paid to an NBFC — even a systemically important one under RBI’s Scale Based Regulation (SBR) 2023 — is subject to full TDS. The distinction is a deliberate policy choice.
Section 43D — interest recognition for NBFCs. The successor provision (carried over from the erstwhile Section 43D) governs when an NBFC recognises interest income on non-performing accounts. For performing accounts, interest is recognised on accrual under Ind AS 109 and the RBI prudential norms. For non-performing accounts, recognition is on receipt basis. This creates a subtle reconciliation surface: the deductor’s Form 26Q reports the TDS in the year of payment, but the NBFC may have recognised the interest in an earlier year on accrual, or is recognising it now on receipt because the account is NPA. The claim year and the income year may diverge.
RBI Master Direction — SBR 2023 (as amended). Registration under Section 45IA, capital adequacy, and prudential norms all reference the interest income recognition rules and the reporting cadence to RBI. The Master Direction on Loan Against Gold Ornaments and Jewellery — with its 75% LTV cap, its assay-and-appraisal procedure, and its auction protocol (seven-day notice, reserve price 85% of assay, mandatory return of auction surplus over dues to the borrower) — does not add TDS-specific rules but shapes the composition of the NBFC’s interest book and, therefore, the reconciliation volume.
A worked example — illustrative numbers only
Take a mid-scale gold and personal loan NBFC operating during FY 2026-27.
Loan book: term-loan and working-capital portfolio to audited SME borrowers of ₹1,200 crore. Blended contractual yield 14%, so monthly interest income on this segment is ~₹9 crore (₹1,200 crore × 14% ÷ 12 × 0.643 for the corporate-borrower share). Corporate SME borrowers deduct 10% TDS under Section 393(1) Sl. 12 code 1002 on the interest they pay. Monthly borrower-side inward TDS on this segment: ₹5–8 lakh, depending on the mix of the month’s collections.
Treasury book: fixed deposits at HDFC, ICICI, and Kotak Mahindra totalling ₹350 crore. Blended yield 7.2%. Annual treasury interest income: ~₹25 crore across HDFC-side FDs and bonds. Corporate bond coupons on a further ~₹200 crore book at 7.8% blended yield: ~₹15 crore. Total treasury interest income: ~₹40 crore. Inward TDS at 10%: ~₹4 crore annually.
Reconciliation output at year-end:
| Ledger | Interest income recognised | Inward TDS at 10% | Form 26AS credit | Break |
|---|---|---|---|---|
| Corporate SME loan book | ₹90 crore (illustrative) | ₹9 crore | ₹8.7 crore | ₹30 lakh unmatched — 8 deductors’ Q4 filings pending |
| Treasury (FD) | ₹25 crore | ₹2.5 crore | ₹2.5 crore | Nil |
| Treasury (corporate bonds) | ₹15 crore | ₹1.5 crore | ₹1.42 crore | ₹8 lakh — one issuer’s TAN typed incorrectly by the deductor |
| Total | ₹130 crore | ₹13 crore | ₹12.62 crore | ₹38 lakh unmatched — 2.9% of expected |
The ₹38 lakh unmatched sits in the year-end break register with owner assignments (Corporate Tax team for the 8 pending Q4 filings; Investor Relations for the TAN correction with the bond issuer). Every unresolved rupee is TDS the NBFC has effectively paid but cannot yet claim.
Common reconciliation breakages
Five patterns recur across NBFC interest-TDS reconciliations and account for the vast majority of open balances at year-end.
1. Deductor-side timing shift across financial years. A corporate borrower pays March interest in April and files it in the next assessment year’s Q1 Form 26Q. The NBFC accrued the interest income in March. The Form 26AS credit lands in AY 2027-28 while the income sits in AY 2026-27. Either the NBFC defers its credit claim, or claims in the accrual year and accepts a mismatch in the assessment order. Policy must be documented and applied consistently.
2. Wrong payment code in Form 26Q. Some corporate borrowers still populate Form 26Q with the legacy section reference “194A” rather than payment code 1002. The credit still reaches Form 26AS but the schedule reconciliation between the deductor’s return and the NBFC’s ITR shows a schedule mismatch. Where the intake channel classifies by code, the entries look like credits under a legacy heading.
3. TAN mismatch. An NBFC operates multiple TANs across states for regional interest income remittance. Deductors sometimes remit to the wrong TAN — the NBFC’s head office TAN instead of the regional TAN referenced in the loan agreement. The credit lands in Form 26AS under the wrong TAN; recovery requires either a deductor-side correction filing or an internal reassignment.
4. Non-performing account interest. For an NPA gold loan account, Ind AS 109 requires stage-3 classification and expected credit loss allowance; the erstwhile Section 43D (successor provision in the 2025 Act) requires interest recognition on receipt basis. The deductor — if there is one — may or may not deduct TDS depending on whether interest was actually credited. On a borrower’s book, an NPA gold loan is often auctioned before any interest is credited; on the treasury side, an NPA bond may reset to zero recognition until a haircut settlement lands. The interest income register must tag NPA accounts and align the TDS expectation with the recognition rule.
5. Bank arm vs NBFC arm confusion. Some financial groups run a bank arm (Federal Bank, SBI) alongside an NBFC arm or a gold loan subsidiary. Payers who see a shared brand may deduct TDS wrongly on payments to the bank arm (banks are exempt payees under 194A(3)(iii)(a)), and the wrong TAN captures the credit. Correcting this requires the deductor to file a Form 26Q correction.
How a reconciliation platform handles this
An engine built for NBFC interest-TDS reconciliation configures the workflow as a two-ledger surface with a shared reconciliation model.
Ledger 1 — Borrower interest. Loan-management system emits the interest income accrual per loan account per period. A deductor master keyed by borrower TAN, name, and audit-threshold flag identifies which borrowers are expected to deduct TDS. The engine expects a Form 16A per deductor per quarter and reconciles the expected inward TDS against the received Form 26AS. Unmatched deductors become tasks assigned to the collections team.
Ledger 2 — Treasury interest. Treasury system emits the interest income accrual per investment ID per period. A counterparty TAN master (banks and bond issuers) is loaded once and rarely changes. Every quarter, the engine polls the TRACES download by TAN, ingests the Form 16A files, matches against the accrual register, and books the TDS receivable.
Consolidated ITR extract. At year-end the engine produces the Form 26Q filing extract, the ITR schedule for the TDS credit claim, and the break register for unmatched deductions with owner and resolution notes. Every claim traces back to a specific deductor’s TAN, an interest income entry, a payment code 1002 marker, and a Form 26AS line.
Ind AS 109 and Section 43D overlay. NPA accounts are tagged in the loan management system with the RBI Master Direction on SBR 2023 stage classification. The engine applies the interest recognition rule (accrual for performing, receipt basis for NPA) and cross-checks against the ECL model output.
Legacy section vs new code parallel run. During the transition year, the engine accepts Form 26Q filings that use either the payment code 1002 or the legacy section reference “194A” and normalises both into a single reconciliation view. Downstream ITR export always emits the new payment code.
For NBFCs running gold loan books, personal loan books, and corporate SME books in parallel, this reconciliation is one of five or six that must close cleanly at every quarter-end. The engine also handles the collections side of that portfolio — see NBFC collection reconciliation under co-lending — and the corporate tax filing side, where the inward TDS balance feeds the advance-tax computation covered in NBFC corporate tax under Section 115BA. The consolidated view is what makes an NBFC’s audit close on time with no material unmatched TDS carried forward.
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
- ▸ Income Tax Act 2025 — Section 393(1) Sl. 12 — Payment code 1002 — Interest other than interest on securities; deduction at 10% for resident payees above the annual threshold
- ▸ Income Tax Act 2025 — Section 194A(3)(iii)(a) legacy exemption — Exemption from interest TDS available where the payee is a banking company; the exemption is not available to NBFCs, which continue to suffer TDS on their inward interest
- ▸ RBI Master Direction — Non-Banking Financial Company Scale Based Regulation (SBR) 2023, as amended — Governs NBFC registration, capital requirements, and prudential norms including income recognition on gold loan and term loan books
- ▸ Income Tax Act 2025 — Section 43D (successor provision) — Interest recognition rules for NBFCs — accrual basis subject to prudential norms for NPA accounts; carried forward from the erstwhile Section 43D
- ▸ Ind AS 109 — Financial Instruments (Impairment) — Expected credit loss (ECL) model for financial assets — governs how interest income and its impairment are recognised on the NBFC's books