The Central Board of Direct Taxes (CBDT) has notified classes of Non-Banking Financial Companies (NBFCs) which will be eligible for provision of Income Tax Act related with certain deductions to be only on actual payment. This is a crucial notification concerning the payment of interest on loans to NBFCs.

Based on the changes made in the Finance Act 2023, new classification will come into effect from September 22.  “In exercise of the powers conferred by clause (da) of section 43B of the Income-tax Act, 1961, the Central Government, hereby, notifies the following classes of NBFCs, for the purpose of the said clause, namely, all NBFCs classified in the top layer, in the upper layer and in the middle layer,” the notification read.

Further, it read, “A deposit taking non-banking financial company or systemically important non-deposit taking non-banking financial company”, the words “such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf” shall be substituted.”

This change has now been made effective with the new notification.

Section 43, IT Act

Section 43 of the Income Tax Act prescribes deductions to be only on actual payment and clause (da) is related with any sum payable by the assessee as interest on any loan or borrowing from deposit taking certain class of NBFCs, in accordance with the terms and conditions of the agreement governing such loan or borrowing. Under this section, a taxpayer, in this case a NBFC, is only permitted to claim statutory expenses under the section only in the year of payment and not in the year of its accrual.

The notification also mentioned that definition of middle layer, the upper layer and the top layer as prescribed by RBI will be used. According to RBI circular, the middle layer consists of all deposit taking NBFCs (NBFC-Ds), irrespective of asset size, non-deposit taking NBFCs with asset size of ₹1,000 crore and above and NBFCs undertaking the activities such as standalone primary dealers (SPDs), infrastructure debt fund - non-banking financial companies (IDF-NBFCs), core investment companies (CICs), housing finance companies (HFCs) and infrastructure finance companies (NBFC-IFCs).

Similarly, the upper layer comprises of those NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor.

The RBI circular mentioned that he top layer will ideally remain empty. This layer can get populated if the RBI  is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the upper layer. Such NBFCs shall move to the top layer from the upper layer, it clarified.