FAQ: Non-Performing Loans
04 Oct 2021
We wanted to guide our lender community on the annual tax filing implications of being a lender on a non-performing loan.
We have put together the following FAQs to guide you.
Want to learn more about the taxation aspect of peer to peer lending? Check out our blog and webinar, P2P Lending & Taxation.
1. Does the interest income received prior to Fundkiss receiving its P2P Lending license from the FSC (01st April 2021) qualify for the tax exemption and incentives for P2P lending?
The tax incentives for interest income from P2P lending only apply to any interest income earned after 1st of April 2021, when Fundkiss received the P2P license from the FSC, irrespective of when the project was initially launched on the platform.
2. When is a loan considered bad debt?
Income Tax Act states a debt can be considered bad when it becomes irrecoverable. When the Fundkiss team is unable to recover the amount amicably, then a Mise en Demeure is served to the borrower. This is the first step in the legal recovery process.
Our interpretation is that a non-performing loan can be considered a bad debt when the legal recovery process begins.
3. In which financial year’s return should I declare the bad debts?
If you are a lender on a non-performing loan, and have not filed your returns for FY21, you may choose to declare them in FY21 returns.
4. Will I have to pay for the legal recovery and the associated costs?
No. Fundkiss and our legal team will take the initiative for the recovery process and cover all legal costs associated with the recovery.
5. What tax offsets am I eligible to in case of bad debts?
Note 6 on interest income from MRA describes it as follow:
“Any amount lent which has become bad may be deducted from the interest received through the P2P lending platform. Any debt on interest which cannot be fully relieved may be carried forward and set off against interest received on the same P2P platform in the succeeding income years”
In simpler words, in case of bad debts, the principal amount and interest that is proved to become bad may be set off against interest income from P2P lending. The excess balance is to be carried forward indefinitely and set off against future P2P interest income.
6. Where exactly on my MRA returns do I report my bad debts?
You would report that in section 4 of the form titled ‘INTEREST INCOME’. The exact field would be 4.2.3 ‘Bad debts from money lent’. See screenshots below from paper based as well as online form for reference.
7. Where do I find the outstanding amount figure that needs to go in the ‘Bad debts from money lent’ section?
In July 2021, as well as end of every financial year, you would receive a tax certificate and your annual investment summary from Fundkiss.
For the non-performing projects, use the amounts, or sum of amount in case of multiple non-performing loans, from the “TOTAL PRINCIPAL AMOUNT OUTSTANDING” column to populate your ‘Bad debts from money lent’ field on the MRA return form.
8. What amount can be considered bad debt?
Any amount consisting of principal that is irrecoverable would be considered bad debt.