NBFC Credit Growth September 2026 – Tax & Compliance Impact

What Happened?

In September 2026, non-banking financial companies (NBFCs) and housing finance companies (HFCs) demonstrated robust credit expansion with year-on-year growth reaching 15.4 percent, up from 13.3 percent in September 2025. This sectoral credit data, compiled from major NBFCs and HFCs representing approximately 87 percent of total credit outstanding, shows divergent growth patterns across different economic segments—agriculture surged at 17.8 percent, retail accelerated to 21.9 percent, services moderated to 17.3 percent, while industry credit growth declined to 7.4 percent.

Background & Legal Context

Understanding the tax and compliance framework applicable to NBFC lending activities is critical under the Income Tax Act, 2025 (ITA 2025). NBFCs and HFCs operate as financial institutions and must adhere to specific taxation provisions, reporting requirements, and withholding obligations.

Key Applicable Sections of ITA 2025:

• Section 194A – Interest Income Withholding: Where an NBFC pays interest on deposits or borrowings, they must withhold tax at prescribed rates. For AY 2025-26 and AY 2026-27, different slab rates apply depending on recipient type (individual, HUF, or entity).
• Section 194B – Interest on Securities: Applies when NBFCs earn or distribute interest on government securities or approved securities.
• Section 194LA – Interest on Housing Loans: Critical for HFCs and NBFCs lending for residential property. Interest paid by individual borrowers is subject to TDS under this section, though relief is available for first-time homebuyers.
• Section 80EEA – Deduction for Housing Loan Interest: Individual borrowers availing housing loans can claim deduction up to ₹1.5 lakh per annum on interest paid, applicable for AY 2025-26 onwards for properties acquired on or after April 1, 2019.
• Section 44ADA – Income Computation for Loan Businesses: NBFCs must compute income from lending activities with specific provisions for provisions for bad debts, which under ITA 2025 are subject to stricter eligibility norms compared to older provisions.
• Section 36(1)(vii) – Bad Debt Deduction: NBFCs can claim deduction for bad debts only on actual write-off, with enhanced documentation requirements effective from AY 2025-26.

GST Implications: Interest income earned by NBFCs is exempt under GST (as per Schedule III of CGST Act), but advisory fees, processing fees, and other charges are taxable at 18 percent GST. HFCs must ensure proper GST classification and ITC management on their input costs.

What Does This Mean for You?

The September 2026 credit deployment data carries several practical implications for different stakeholder categories:

For NBFC and HFC Lenders:

• Interest Income Recognition: With credit growth accelerating, NBFCs will report significantly higher interest income in their accounts for FY 2026-27 (AY 2026-27). Under ITA 2025, interest income must be recognized on accrual basis, and provision for bad debts must be claimed only after actual write-off, creating cash flow challenges for growing portfolios.
• TDS Compliance Burden: The 21.9 percent growth in retail loans (housing, vehicle, and gold-backed loans) means exponential increase in TDS obligations under Sections 194A and 194LA. NBFCs must maintain robust TDS calculation and deposit mechanisms to avoid penalties under Section 271C (failure to deduct) and Section 271D (failure to deposit).
• Sectoral Risk Assessment: With industry credit declining (7.4%) versus agriculture surge (17.8%), NBFCs must reassess their Stress Test Reserve (STR) provisions under RBI guidelines, with corresponding impact on income recognition for tax purposes under Section 44ADA.
• GST on Loan Processing Fees: As credit volumes grow, processing fees, documentation charges, and prepayment penalties attract 18 percent GST. NBFCs must segregate GST-liable income from exempt interest income for separate accounting and return filing under GSTR-1 and GSTR-3B.

For Individual Borrowers:

• Housing Loan Interest Deduction (Section 80EEA): With housing loans showing accelerated growth, first-time homebuyers can claim deduction up to ₹1.5 lakh per annum on interest paid. For AY 2026-27, ensure your loan documentation and disbursement proof are in order to claim this benefit.
• TDS on Interest Paid: Individuals paying interest to HFCs and NBFCs on housing loans will face TDS under Section 194LA. Ensure proper Form 16A receipt to claim credit in your income tax return. Non-compliant lenders may issue incorrect TDS certificates, leading to mismatches.
• Vehicle and Gold Loan Interest: Interest paid on vehicle loans and loans against gold jewellery is NOT deductible under ITA 2025, but TDS under Section 194A still applies to interest income of lenders. Borrowers should verify TDS deducted and reconcile in their ITR.

For Service Sector Borrowers (17.3% growth):

• With commercial real estate and trade segments witnessing higher credit growth, businesses borrowing from NBFCs should track interest expense for deduction under Section 36(1)(iii) of ITA 2025. Ensure proper loan agreements and interest calculation records for audit scrutiny.

What Should You Do Now?

For NBFC/HFC Management:

• Audit Your TDS System: Verify that your TDS calculation engine is updated for AY 2026-27 rate changes. Run quarterly TDS audit reports to identify under-deduction or over-deduction instances.
• Update Interest Recognition Policy: Align income recognition policies with Section 44ADA requirements of ITA 2025. Ensure provisions for bad debts comply with the stricter 'actual write-off' norm introduced in the new act.
• Segregate GST Categories: Clearly bifurcate interest income (exempt) from processing fees, advisory charges, and penalties (taxable at 18% GST) in your accounting system for accurate GSTR-1 filing.
• Enhance Documentation: With TDS obligations increasing, maintain detailed borrower records including PAN, address proof, interest slabs, and TDS certificate issuance for audit compliance.
• Engage Compliance Partner: Given the complexity of multiple TDS sections, bad debt provisions, and GST interplay, engage a qualified CA for quarterly compliance reviews specific to your NBFC portfolio mix.

For Individual Borrowers:

• Collect all TDS certificates (Form 16A) issued by your NBFC/HFC by July 31, 2027 (for AY 2026-27). Cross-check amounts and PAN details before filing ITR.
• Preserve all loan disbursement documents and interest payment schedules to substantiate Section 80EEA deduction claims.
• If you are a first-time homebuyer taking a housing loan in FY 2026-27, ensure the property possession certificate is dated before the loan disbursement for deduction eligibility.

Key Takeaways

• Credit growth momentum: NBFC credit expanded 15.4% YoY in September 2026, with retail loans accelerating to 21.9%, directly increasing TDS compliance obligations for lenders under Sections 194A and 194LA of ITA 2025.
• Bad debt provision tightening: ITA 2025 now allows deduction for bad debts only on actual write-off (not provision basis), affecting NBFC income computation and cash flow for portfolios with rising credit volume.
• GST segregation critical: Growing loan volumes mean higher advisory and processing fees subject to 18% GST. NBFCs must separately account for exempt interest income versus taxable service charges to avoid ITC complications.
• Housing loan benefits available: Individual borrowers can claim up to ₹1.5 lakh annual deduction under Section 80EEA on housing loan interest for AY 2026-27, making proper TDS tracking and documentation essential.
• Sectoral risk awareness: Industry credit declining (7.4%) while agriculture and retail surge requires NBFCs to adjust stress reserves and tax provisions accordingly under Section 44ADA, affecting effective tax rate computations.

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