Failure to deduct or deposit TDS attracts interest under Section 201(1A), disallowance of 30% of the expense under Section 40(a)(ia), penalty under Section 271C, and treatment as an 'assessee-in-default'. The disallowance is restored when the TDS is later paid, and a deductor is spared default if the payee has paid tax and certifies it.
The four consequences
| Default | Consequence |
|---|---|
| Late deduction | Interest 1% per month (Section 201(1A)(i)) |
| Late deposit after deduction | Interest 1.5% per month (Section 201(1A)(ii)) |
| Non-deduction on resident payment | 30% of expense disallowed (Section 40(a)(ia)) |
| Failure to deduct/pay | Penalty equal to the tax (Section 271C); assessee-in-default (Section 201) |
The 30% disallowance and its reversal
For payments to residents, 30% of the expense is disallowed under Section 40(a)(ia) if TDS is not deducted or not paid by the return due date. The disallowed 30% is allowed in the year the TDS is finally paid. For payments to non-residents (Section 40(a)(i)), the disallowance is 100%.
The payee-paid-tax relief
Under the first proviso to Section 201(1), a deductor is not treated as in default if the resident payee has (a) filed a return, (b) included the income, and (c) paid the tax, and the deductor obtains a certificate (Form 26A) from an accountant to this effect. Interest under 201(1A) still runs up to the date the payee paid the tax.
Avoiding the defaults
- Deduct at credit or payment, whichever is earlier.
- Deposit by the 7th of the next month (April for March).
- Use the TDS Interest Calculator to quantify exposure.
- Where TDS was genuinely missed, pay it to restore the disallowed expense.
Key takeaways
- Interest: 1% (late deduction) / 1.5% (late deposit) per month.
- 30% expense disallowance for residents (100% for non-residents).
- Penalty equal to tax under Section 271C; assessee-in-default.
- Disallowance reverses when TDS is later paid; Form 26A relief.