The money earned through investing on peer-to-peer (P2P) lending platforms, comes under taxation laws of the country. P2P is a fast-growing asset class, it is very important to understand the tax implications for a lender earning returns on his P2P loans. While some rules are pretty similar to the existing framework of extending loans, some regulations are unique to P2P. We list five aspects that every lender, and one aspect that every borrower needs to be aware about.

Nature of repayments

As with every form of loan, earnings from P2P are in the form of Equated Monthly Installment (EMI). EMI has two components – (a) the principal amount and (b) the interest amount that is dependent on the rate charged by the lender. Every loan extended to a borrower needs to be repaid in a manner that is similar to what you have in a bank loan. Repayments are received by lenders investing in P2P lending in the form of EMI, which is the sum total of Principal + Interest.

Do you need to pay tax?

Since P2P is relatively new, there is confusion on the taxability around such transactions. The law, however, is clear about how these transactions need to be taxed. The interest income component of the EMI that is received by lenders from the borrowers is taxable. No taxation is applicable on the principal component.

There is no definite or fixed rate of taxation, but instead the interest income gets added to the lenders total income. This means that the interest income is taxable as per the income tax rules/slabs applicable to the lender.

Tax Computation 

The interest income earned from P2P loans must be mentioned while filing tax returns under Section 56(2) of the Income Tax Act under “Income from other sources” under the column B3 in ITR1 and tax has to be paid according to the slab the lender would fall under. Currently, a lender cannot classify the P2P earnings as capital gains/loss.

Is TDS deducted on income earned?

It is important to understand that P2P firms are at the end of the day platforms that connect prospective lenders with relevant borrowers.  P2P lending platforms are simply facilitators, ensuring the flow of earnings from the borrower to the lender through the escrow account and hence do not deduct tax at source. Paying the applicable tax on income earned (EMIs in this case) is the responsibility of the lender and that it is left to the individual lender to declare their earnings. Currently banks deduct TDS on interest income from fixed deposits when interest from one FD or sum of all FDs with the bank is more than Rs 10,000 in a year. However, the same rule does not apply to P2P platforms, primarily because P2P platforms do not earn from the EMIs.

However, in some cases the borrower has to deduct TDS and it is very important to understand such a situation.  A P2P borrower can deduct TDS on the interest component of the EMI, if the same exceeds Rs. 5,000 per annum, payable per individual lender. This is applicable only to borrowers liable for Tax audit under Income Tax Act 1961, in the previous year.

Does the platform help in filing taxes?

P2P platforms have a large number of lenders and borrowers and it is not possible to individually help in filing taxes. Also, the law mandates that the lender takes responsibility of computing his taxable income. Having said that Faircent.com provides Annual Income Statement in the Reports section of the dashboard and lenders can easily download the same and use it for the purpose of calculating their taxable earnings.