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Understanding TDS on Interest in Loan Products

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When offering loan products, it’s essential for financial institutions to manage tax compliance with precision. Among the various tax obligations, one of the most critical is TDS (Tax Deducted at Source) on Interest. This ensures that tax is withheld before paying out interest earnings and remitted to the appropriate authorities in a timely and accurate manner.

This blog explores how TDS on Interest works, how it’s configured within CloudBankin’s lending platform, and how it reflects in the loan schedule and transactions.

What is TDS on Interest?

TDS on Interest refers to the portion of tax that must be deducted from the interest component of a loan repayment before it is paid to the lender. According to Indian tax regulations, if the total interest earned crosses a predefined annual threshold (e.g., ₹5,000 or ₹10,000 in certain cases), lenders are required to deduct a percentage (usually 10%) as TDS and deposit it with the government.

This is applicable across various types of loans, personal loans, business loans, and even loans against property, especially when the lender is a registered financial institution or NBFC.

How TDS is Configured in the Product

In CloudBankin’s loan product configuration, TDS on Interest can be seamlessly enabled during setup. This ensures that tax deduction is handled automatically without the need for manual intervention at every repayment cycle.

Here’s how you can configure it:

1) Create a Tax Group

Before enabling TDS, the relevant tax group must be created.

  • Navigate to: Master Configuration → Tax Group
  • Create a new Tax Group with:
    • Tax Type: Choose either TDS on Interest or TDS on Penalty
    • Applicable On: Select Interest or Penalty, depending on your use case
    • Tax Rate: For example, 10%

You may create multiple tax groups for different regulatory jurisdictions or loan types, depending on business needs.

2) Map the Tax Group to the Loan Product

Once the tax group is defined:

  • Open the Product Setup
  • Go to the Interest Configuration section
  • Toggle “Enable Tax on Interest”
  • Select the appropriate Tax Group from the dropdown

Once mapped, this configuration ensures that the tax is automatically applied at the repayment level based on interest calculations.

TDS in the Loan Schedule

You can refer to the embedded Google Sheet below for a detailed view of the TDS calculation and how it integrates into the repayment workflow.

Once TDS is enabled and configured, the loan schedule will automatically calculate and show the deducted tax for each repayment. Here’s a breakdown using an actual example:

  • Loan Amount: ₹100,000
  • Tenure: 24 months
  • Interest Rate: 12% p.a. (calculated daily)
  • TDS Rate on Interest: 10%

In the repayment schedule, the system shows the calculated interest and the deducted TDS on each EMI. For instance:

  • On 1 July 2025, the interest for the month is ₹11,898.48
  • The TDS deducted on this interest is ₹1,189.85
  • This amount is reflected in the transaction section under “TDS on Interest”

Benefits of Automated TDS Tracking

Automating TDS tracking as part of your lending workflow brings significant advantages:

1) Compliance-Ready
 TDS is deducted as per regulatory requirements and stored systematically, reducing the risk of errors or omissions.

2) Audit Trail
 Each TDS deduction is linked to a repayment and transaction, making internal and external audits smooth and traceable.

3) Borrower Transparency
 Borrowers get complete clarity on how interest is calculated and what portion is deducted as tax.

4) Integration-Ready
 The deducted TDS values can be synced with external accounting systems, tax reporting tools, or even directly pushed to GST/TDS filing systems via APIs.

5) Operational Efficiency
 Instead of handling TDS manually at every EMI, the system handles calculations, deductions, and record-keeping in real-time.

Summary

TDS on Interest is more than a regulatory formality it’s a critical component in building a trustworthy and transparent lending ecosystem. With CloudBankin’s powerful configuration engine, setting up and managing TDS becomes an automated, audit-proof, and scalable process.

Whether you’re disbursing small ticket loans or handling high-value secured lending, our system ensures that TDS is accurately calculated, deducted, and reflected in both loan schedules and transaction records. This not only enhances operational efficiency but also builds trust with borrowers and regulators alike.

By enabling Tax on Interest, choosing the correct Tax Group, and allowing the system to take care of the rest, you save time, reduce manual errors, and stay fully compliant every single time.

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