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Income Tax · TDS/TCSTDS defaults: short deduction, late deposit and interest calculation
A TDS default costs more than the tax itself – interest at up to 1.5% a month, disallowance of 30% of the expense, fees, penalties and, in serious cases, prosecution. Here is how each consequence works and how to calculate interest correctly.
TDS is the deductor's responsibility. If TDS is not deducted, deducted short, or deposited late, the deductor becomes an assessee in default (Section 201 of the 1961 Act; corresponding provisions in Sections 397–398 of the Income-tax Act, 2025) and faces several consequences.
The consequences at a glance
| Default | Consequence | 1961 Act | 2025 Act |
|---|---|---|---|
| Not deducted / short deducted | Interest 1% per month | 201(1A)(i) | 398(3) |
| Deducted but deposited late | Interest 1.5% per month | 201(1A)(ii) | 398(3) |
| Not deducted (resident payee) | 30% of expense disallowed | 40(a)(ia) | Corresponding provision |
| Not deducted (non-resident payee) | 100% of expense disallowed | 40(a)(i) | Corresponding provision |
| Statement filed late | Fee ₹200/day up to TDS | 234E | 427 |
| Statement not filed / incorrect | Penalty ₹10,000–₹1 lakh | 271H | 461 |
| Failure to deduct | Penalty up to amount of TDS | 271C | Corresponding provision |
| Failure to pay deducted TDS | Prosecution (3 months–7 years earlier; reduced by Budget 2026 to lower maximums, as reported) | 276B | Corresponding provision |
Interest calculation rules
- Interest is for every month or part of a month – a one-day delay into a new month counts as a full month.
- For late deduction, count from the date TDS was deductible to the date actually deducted.
- For late deposit, count from the date of deduction (not the due date) to the date of payment.
- Interest must be paid before filing the TDS statement.
Worked example 1: late deposit
Example: TDS of ₹50,000 on professional fees was deducted on 25 June 2026. The due date was 7 July 2026, but it was deposited on 10 August 2026.
- Months from 25 June to 10 August: June (part), July, August (part) = 3 months.
- Interest = 1.5% × 3 × ₹50,000 = ₹2,250.
Note: interest runs from the date of deduction (25 June), not from the due date (7 July).
Worked example 2: non-deduction
Example: A firm paid a contractor ₹4,00,000 on 15 September 2026 without TDS. It discovers this on 20 January 2027, deducts nothing (as payment is made) but pays ₹8,000 (2%) from its own funds on 25 January 2027.
- Interest for non-deduction: 15 September 2026 to 25 January 2027 (deemed deduction on payment) = Sept, Oct, Nov, Dec, Jan = 5 months × 1% × ₹8,000 = ₹400.
- As TDS is paid before the return due date, the 30% disallowance is avoided.
- A late statement/correction may attract the 234E fee.
Worked example 3: disallowance
Example: A trading company did not deduct TDS on ₹20,00,000 rent for FY 2025-26 and did not pay it by the return due date.
- 30% × ₹20,00,000 = ₹6,00,000 disallowed in FY 2025-26, adding about ₹1.5–1.9 lakh of tax depending on the company's rate.
- If TDS is paid in FY 2026-27, the ₹6,00,000 is allowed in that year.
- Interest under Section 201(1A) is payable in addition.
The Form 26A relief
If the payee has:
- included the payment in their return,
- paid tax on it, and
- a CA certifies this in Form 26A,
the deductor is not treated as in default for the tax (proviso to Section 201(1)). Interest at 1% per month is payable from the date of deductibility to the date the payee filed the return. The same relief applies to the 40(a)(ia) disallowance – the expense is allowed.
TRACES defaults and how to clear them
After processing a statement, TRACES issues an intimation under Section 200A showing short payment, short deduction, interest and fee. Clear it by:
- correcting data errors (PAN, challan) – see TDS return correction;
- paying interest and fee by challan and tagging it in a correction statement;
- obtaining Form 26A where the payee has paid tax.
Prevention checklist
- Maintain a vendor master with PAN, section and rate.
- Deduct on credit, including year-end provisions.
- Deposit by the 7th (30 April for March).
- Reconcile TDS ledger with challans and statements every quarter.
- Review TRACES justification reports after every filing.
Common mistakes
- Calculating interest from the due date instead of the date of deduction.
- Counting days instead of months.
- Ignoring the 30% disallowance in the tax audit (Form 3CD reports it).
- Not paying fee under 234E before filing.
Key takeaway
TDS defaults compound quickly: monthly interest, disallowance and fees. Deposit on time, pay interest correctly when late, and use Form 26A where payees have paid tax. Our TDS compliance team handles monthly TDS, quarterly statements and default resolution for businesses in Delhi.
Official references
Provisions discussed (summaries in our Law Library):
- Income-tax Act, 2025 – Section 398(3) (corresponds to 201(1A)): Interest on late deduction / payment of TDS
- Income-tax Act, 1961 – Section 201(1A) (corresponds to 398(3)): Interest on late deduction / payment of TDS
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
What is the interest for late payment of TDS?
1% per month or part of a month from the date TDS was deductible to the date of deduction, and 1.5% per month or part of a month from the date of deduction to the date of payment.
Is interest counted for a full month even if the delay is one day?
Yes. Interest is for every month or part of a month, so a delay of even one day into a new month counts as a full month.
What is the disallowance for not deducting TDS?
30% of the expense paid to a resident is disallowed until TDS is deducted and paid (old Section 40(a)(ia)). For payments to non-residents, 100% is disallowed (Section 40(a)(i)).
Can the deductor avoid being in default if the payee has paid tax?
Yes. If the payee has included the income in a return and paid tax, and a CA certifies this in Form 26A, the deductor is not treated as in default for the tax, though interest up to the date of the payee's return is payable.
Is interest on late TDS deductible as a business expense?
No. Interest under Section 201(1A) is compensatory but has been held not deductible as a business expense by several courts; it is generally disallowed.
Can the late fee under 234E be waived?
The fee is mandatory. Courts had held it could not be levied for periods before 1 June 2015 through processing; for later periods it applies.
Is prosecution common for TDS defaults?
Prosecution is generally initiated in cases of TDS deducted but not deposited, especially large amounts. Paying with interest promptly reduces risk.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
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