ITR FY2024: P2P lending, often known as peer-to-peer lending, is one of the most promising and and well-known ways to generate passive income. P2P lending, often known as social lending, is a novel financial concept that has experienced rapid development in recent years. This method offers individuals an alternate technique of acquiring finances without the need of traditional banks or financial organizations. Furthermore, it allows lenders to possibly earn better returns on their investments.
P2P lending is a significant achievement in alternative finance, as internet platforms enable direct contacts between lenders and borrowers. These digital markets allow people to get loans without the participation of traditional financial intermediaries like banks.
This novel strategy has significant advantages, particularly for borrowers who experience difficulties obtaining loans through traditional channels, such as those with low credit scores or limited credit histories. By using P2P lending platforms, these borrowers may obtain finance from individual lenders who are willing to take on some risks in exchange for the possibility of larger returns.
Tax Implications for Peer-to-Peer Lending
India's Reserve Bank regulates peer-to-peer lending. Under P2P lending, investors earn interest on the funds they lend. Interest income from peer-to-peer lending, like interest from other financial instruments such as fixed deposits (FDs), is taxed.
This interest income is classed as 'Income from Other Sources.' As a result, it is combined with the lender's overall income and taxed based on their tax rate. For example, an individual in the 30% tax bracket will be required to pay 30% tax on the interest collected from P2P lending activity.
How to Report P2P Lending Income in the ITR?
Components of P2P lending revenue that people must declare in their ITR
When filing your ITR for P2Plending revenue, make sure to record all required components accurately. To begin, you should painstakingly record the gross income received from P2P lending activity. This revenue is categorized as 'revenue from Other Sources' on your tax return. The importance of not ignoring any interest collected, since even modest sums can add up over time and affect your tax burden. The relevance of reporting any Tax Deducted at Source (TDS) on your interest income. In some situations, P2P lending services may take TDS from lenders' interest income. This TDS amount is an advance tax paid on your behalf and must be properly accounted for in your ITR," says Bhuvan Rustagi, Co-Founder and COO of Per Annum.
Common misunderstandings about the income from peer-to-peer lending
Some of the usual errors include:
> Make careful to disclose all interest income, separate extra fees, and properly classify income on tax returns.
> Misreporting can result in underreporting or inaccurate classification, thereby triggering audits by tax authorities.
"It is critical to account for loan origination, servicing, and late payment costs separately from interest revenue. Furthermore, misclassifying income on a tax return under the improper headings creates a considerable risk. Income from peer-to-peer lending is often reported as Income from Other Sources or Interest Income. The significance of precise reporting in ensuring compliance with tax rules and regulations. Ensure that all kinds of revenue from P2P lending are appropriately recorded.
Documents and documents required for ITR
The P2P lending platform provides interest revenue statements and detailed transaction logs.
> Platform account statements summarizing income and fees > Receipts and invoices for any additional expenses paid throughout the loan process
> Bank statements to confirm reported income matches actual deposits > Keeping records of Tax Deducted at Source (TDS) certificates or Form 26AS to enable correct claim of TDS credits
"TDS certificates show how much tax the P2P lending platform deducted from interest revenue. Lenders can avoid possible difficulties with tax authorities by maintaining these certificates and citing Form 26AS when claiming TDS credits on their tax returns. By keeping detailed records of all P2P lending activity, lenders may reduce the likelihood of errors and establish transparency in tax reporting. This proactive strategy not only promotes proper tax filing but also shields against any audits or questions from tax authorities," said Rustagi.
