Two Distinct Interest Rates under Section 399(3)
Section 399(3) of the Income-tax Act 2025 imposes interest liability on a deductor in two separate scenarios, each with its own rate and calculation period, and both can apply cumulatively to the same default.
Late deduction: if tax was deductible but not deducted at the time payment was credited or paid (whichever is earlier), interest at 1% per month or part of a month is charged from the date the tax was deductible until the date it was actually deducted. Note that 'part of a month' is treated as a full month — even a one-day delay into a new calendar month adds an entire month's interest.
Late payment: once TDS has been deducted, it must be deposited to the government by the statutory due date (generally the 7th of the following month). Interest at 1.5% per month or part thereof is charged from the date of actual deduction until the date of actual payment to the government — again with part-months rounded up to a full month.
The two interest legs are computed independently and added together where both defaults occur on the same transaction — first a period of non-deduction, then a further period of delayed deposit after the (late) deduction finally happens. This is a common source of underestimated liability when businesses only calculate one leg of the interest.
Worked Example: Late Deduction Followed by Late Deposit
A payment of ₹5,00,000 professional fees was made on 5 April 2026 (TDS deductible on that date at 10% = ₹50,000), but TDS was actually deducted only on 20 May 2026, and deposited to the government on 15 June 2026 (statutory due date for May deduction was 7 June 2026).
Frequently Asked Questions (FAQs)
Why are there two different interest rates for TDS default?
The law distinguishes between failing to deduct tax at all (1% per month, treated as a more serious lapse since revenue collection was delayed from the start) and deducting correctly but failing to deposit it on time (1.5% per month, since the deductor is by then holding government money).
Is 'part of a month' rounded down or up for interest calculation?
Rounded up. Any part of a calendar month counts as a full month for both the late deduction and late payment interest legs — a delay of even one day into a new month adds a full additional month of interest.
Can both late deduction and late payment interest apply to the same TDS amount?
Yes. If tax was both deducted late and deposited late, both interest legs are computed and added — the periods do not overlap since the late-payment leg only starts running from the (delayed) actual date of deduction.
Is this interest deductible as a business expense?
No. Interest paid under Section 399(3) for TDS default is a penal interest and is generally treated as non-deductible while computing the deductor's own taxable business income, since it arises from the deductor's own default rather than being a normal business cost.
What is the due date for depositing TDS deducted in a given month?
Generally the 7th of the following month. TDS deducted in March has a relaxed due date of 30 April of the following financial year. Missing these dates starts the 1.5% per month late-payment interest clock under Section 399(3).