Interest for failure to Collect/Deduct & for delayed TDS/TCS Payment

Interest under the Income-tax Act, 1961 is levied for various defaults relating to TDS, TCS and non-payment of tax demanded by the tax authorities. In relation to TDS, tax deducted during April to February must generally be deposited within seven days from the end of the month of deduction, while TDS deducted in March is payable by 30 April. Special provisions apply to deductions under Sections 194-IA, 194-IB, 194M and 194S, where payment is required within 30 days from the end of the month of deduction. Under Section 201(1A), interest is charged at 1% per month or part thereof for failure to deduct tax and at 1.5% per month or part thereof for delay in remitting tax after deduction. Even where the deductee has discharged the tax liability and prescribed conditions are satisfied, interest remains payable up to the date of filing of the deductee’s return.

The provisions governing TCS and tax demands similarly prescribe interest consequences for defaults. Under Section 206C(7), interest is payable for failure to collect TCS or delay in remittance, with rates effective from 1 April 2025 being 1% per month for delay in collection and 1.5% per month for delay in payment after collection. Relief from being treated as an assessee-in-default is available where the buyer or licensee has complied with specified conditions and furnished Form 27BA, although interest liability continues. Further, under Section 220(2), failure to pay tax specified in a demand notice issued under Section 156 within the prescribed period attracts simple interest at 1% per month or part thereof. The Finance Act, 2026 also introduced provisions postponing the levy of interest on penalties under Section 270A until disposal by specified appellate authorities in certain cases, while Section 220(2A) empowers designated commissioners to waive or reduce interest in deserving circumstances.

Interest For Delay in Payment of TDS/TCS And for Non-Payment of Tax Demanded

Introduction

A person is liable to pay interest for various delays/defaults like interest under section 234A for delay in filing the return of income, interest under section 234B for default in payment of advance tax, interest under section 234C for deferment of payment of individual instalment or instalments of advance tax, interest under section 234D for excess refund granted to the taxpayer, interest under section 201(1A) for failure to deduct tax at source/delay in payment of tax deducted at source and interest under section 206C(7) is levied for failure to collect tax at source/delay in payment of tax collected at source.

The provisions relating to interest under section 234A, section 234B, section 234C and section 234D have been discussed separately. In this part, you can gain knowledge of various provisions relating to interest under section 201(1A) for failure to deduct tax at source/delay in payment of tax deducted at source and interest under section 206C(7) for failure to collect tax at source/delay in payment of tax collected at source.

Basic provisions relating to due date of payment of TDS to the credit of Government

Before understanding the provisions relating to levy of interest for failure to deduct tax at source/delay in payment of TDS, it is important to first understand the provisions relating to the due date for payment of TDS to the credit of the Government account. Section 192 to 195 gives various items of payments on which tax is to be deducted by the payer. The tax deducted by the payer (i.e., a non-Government payer) is to be paid to the credit of the Government as follows:

♦ Tax deducted during the month of April to February should be paid to the credit of the Government on or before 7 days from the end of the month in which the deduction is made.

♦ Tax deducted during the month of March should be paid to the credit of the Government on or before 30th day of April.

Note:

Tax deducted under section 194-IA (i.e., on immovable property), Section 194-IB (i.e. on rent), Section 194M (i.e., on certain sum paid by an Individual/HUF) & section 194S (i.e., on transfer of virtual digital asset) should be paid to the credit of the Government on or before 30 days from the end of the month in which deduction is made.

Illustration

Essem Traders, a partnership firm has taken a loan from Mr. Kaushal (friend of one of its partners). It is paying interest on monthly basis. Monthly interest amounted to Rs. 2,000 and is paid on the last day of each month. The firm has deducted tax @ 10% from the monthly interest and paid the net interest to Mr. Kaushal. The tax deducted by the firm is deposited to the credit of Government by following dates:

Month	Date of deposit with the Government
Tax deducted during the month of April 2025	03/05/2025
Tax deducted during the month of May 2025	07/06/2025
Tax deducted during the month of June 2025	18/07/2025
Tax deducted during the month of July 2025	02/08/2025
Tax deducted during the month of August 2025	04/09/2025
Tax deducted during the month of September 2025	09/10/2025
Tax deducted during the month of October 2025	06/11/2025
Tax deducted during the month of November 2025	11/12/2025
Tax deducted during the month of December 2025	02/01/2026
Tax deducted during the month of January 2026	05/02/2026
Tax deducted during the month of February 2026	05/03/2026
Tax deducted during the month of March 2026	25/04/2026

Has the firm paid taxes to the credit of the Government within the prescribed time?

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Tax deducted during the month of April to February should be paid to the credit of the Government on or before 7 days from the end of the month in which the deduction is made and tax deducted during the month of March should be paid to the credit of the Government on or before 30th day of April. Thus, the due dates for payment of tax to the credit of the Government and the comparison of the due dates with actual dates of payment will be as per the following table :

TDS for the Month of	Due date of deposit of TDS with Government	Actual Date of deposit of TDS with Government	Whether deposited within the due date?
April, 2025	07/05/2025	03/05/2025	Yes
May, 2025	07/06/2025	07/06/2025	Yes
June, 2025	07/07/2025	18/07/2025	No
July, 2025	07/08/2025	02/08/2025	Yes
August, 2025	07/09/2025	04/09/2025	Yes
September, 2025	07/10/2025	09/10/2025	No
October, 2025	07/11/2025	06/11/2025	Yes
November, 2025	07/12/2025	11/12/2025	No
December, 2025	07/01/2026	02/01/2026	Yes
January, 2026	07/02/2026	05/02/2026	Yes
February, 2026	07/03/2026	05/03/2026	Yes
March, 2026	30/04/2026	25/04/2026	Yes

Interest for failure to deduct tax at source/delay in payment of TDS

As per section 201, if any person who is liable to deduct tax at source does not deduct it or after so deducting fails to pay, the whole or any part of the tax to the credit of the Government, then, such person, shall be liable to pay simple interest as given below:

♦ Interest shall be levied at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax was deducted.

♦ Interest shall be levied at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax was actually remitted to the credit of the Government.

In other words, interest will be levied at 1% for every month or part of a month for delay in deduction and at 1.5% for every month or part of a month for delay in remittance after deduction.

Interest in case deductee pays the tax

As per section 201, a payer who fails to deduct whole or any part of the tax at source is treated as an assessee-in-default. However, the payer who fails to deduct the whole or any part of the tax on the payment made to a payee (whether resident or non-resident) shall not be deemed to be an assessee-in-default in respect of tax not deducted by him, if the following conditions are satisfied:

♦ The recipient has furnished his return of income under section 139.

♦ The recipient has taken into account the above income in its return of income.

♦ The recipient has paid the taxes due on the income declared in such return of income.

♦ The recipient furnishes a certificate to this effect from an accountant in Form No. 26A.

In other words, in case of non-deduction of tax at source or short deduction of tax, in case of a payee, if all the discussed conditions are satisfied, then the payer will not be treated as an assessee-in-default. However, in such a case, even if the payer is not treated as an assessee-in-default, he will be liable to pay interest under section 201(1A). In this case, interest shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such payee. Interest in such a case will be levied at 1% for every month or part of the month.

Note: The order deeming a person to be an assessee in default shall be passed within 7 years (within 6 years from 01-04-2025) from the end of the financial year in which payment is made or credit is given or 2 years from the end of the financial year in which the correction statement is delivered, whichever is later.

Interest shall be paid as per order of the Assessing Officer

If the Assessing Officer has passed an order treating assessee in-default, then the interest shall be paid by the assessee in accordance with the said order.

Filing of TDS statement with payment of interest

Every deductor has to furnish quarterly statement in respect of tax deducted by him i.e., TDS return. As per section 201(1A), interest for delay in payment of TDS should be paid before filing the TDS return.

Basic provisions relating to due date of payment of TCS to the credit of Government

Section 206C gives various items on which tax is to be collected at source. The tax so collected is to be paid to the credit of the Government within a period of 7 days from the last day of the month in which the tax is collected at source. Where it is collected by an office of the Government then it shall be paid to the credit of the Central Government on the same day. If such payment is made without Income-tax challan.

Interest for failure to collect tax at source/delay in payment of TCS

As per section 206C(7), if the person responsible for collecting tax does not collect the tax or after collecting the tax fails to pay it to the credit of Government within the due date prescribed in this regard, then he shall be liable to pay simple interest at the rate of 1% per month or part thereof on the amount of such tax. Interest shall be levied for a period from the date on which such tax was collectible to the date on which the tax was actually paid.

However, with effect from 01-04-2025, the interest rate shall be at the rate of:

a) 1% for every month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which such tax is collected; and

b) 1.5% for every month or part thereof on the amount of such tax from the date on which such tax was collected to the date on which such tax is actually paid.

Interest in case if the buyer or licensee or lessee has paid the tax

As per section 206C(6A), a payer who fails to collect whole or any part of the tax at source is treated as an assessee-in-default. However a collector who fails to collect the whole or any part of the tax at source (other than TCS referred under sub-section 1F, 1G and 1H) shall not be deemed to be an assessee-in-default in respect of tax not collected by him, if the buyer or licensee or lessee from whom tax is to be collected satisfies the following conditions:

♦ Has furnished his return of income under section 139.

♦ Has taken into account such amount for computing income in such return of income.

♦ Has paid the tax due on the income declared by him in such return of income.

♦ Has furnished a certificate to this effect from an accountant in such Form No.27BA.

In other words, in case of non collection of tax at source or short collection of tax, if above conditions are satisfied, than the person responsible to collect tax at source will not be treated as an assessee-in-default in respect of tax not collected or short collected by him.

However, in such a case, even if the person responsible to collect tax at source is not treated as an assessee-in-default, he will be liable to pay interest under section 206C(7). Interest shall be payable from the date on which such tax was collectible to the date of furnishing of return of income by such buyer or licensee or lessee. Interest in such a case, will be levied at 1% or 1.5%, as the case may be, for every month or part of a month.

Note: The order deeming a person to be an assessee in default shall be passed within 6 years from the end of the financial year in which payment is made or credit is given or 2 years from the end of the financial year in which the correction statement is delivered, whichever is later. (applicable from 01-04-2025)

Interest shall be paid as per order of the Assessing Officer

If the Assessing Officer has passed an order treating assessee in-default, then the interest shall be paid by the assessee in accordance with the said order.

Filing of TCS statement with payment of interest

Every collector has to furnish quarterly statement in respect of tax collected by him i.e., TCS return. As per section 206C(7), interest for delay in payment of TCS should be paid before filing the TCS return.

Interest for non-payment of tax as per demand notice

Before understanding the provisions for levy of interest in case of non-payment of tax demanded as per demand notice issued under section 156(1), it is important to first understand the provisions of section 220(1) relating to payment of tax as per demand notice.

As per section 220(1), when a demand notice under section 156(1) has been issued to the taxpayer for payment of tax (other than notice for payment of advance tax), then such amount shall be paid within a period of 30 days of the service of the notice at the place and to the person mentioned in the notice. In certain cases, the above period of 30 days can be reduced by the tax authorities with the approval of designated authorities.

Section 220(2) deals with payment of interest in case of failure to pay tax within the time specified in the demand notice. As per section 220(2), if the taxpayer fails to pay the amount specified in any notice of demand issued under section 156(1) (as discussed) within the period as allowed in this regard, then he shall be liable to pay simple interest at 1% for every month or part of a month. Interest shall be levied for the period commencing from the day immediately following the end of the period mentioned in the notice and ending with the day on which the amount is paid.

After processing of TDS/TCS statements an intimation is generated specifying the amount payable or refundable. Such intimation shall be deemed as notice of demand under Section 156. Failure to pay such tax specified in intimation shall attract interest under Section 220(2).

It is provided that where interest is charged under sub-section (1A) of section 201 on the amount of tax specified in the intimation issued under sub-section (1) of section 200A for any period, then, no interest shall be charged under Section 220(2) on the same amount for the same period.

It is also provided that where interest is charged under sub-section (7) of section 206C on the amount of tax specified in the intimation issued under sub-section (1) of section 206CB for any period, then, no interest shall be charged under sub-section (2) on the same amount for the same period

Appeal filed to challenge the demand notice

Where any notice of demand has been served upon an assessee and any appeal or other proceeding, as the case may be, is filed or initiated in respect of the amount specified in the said notice of demand, then, such demand shall be deemed to be valid till the disposal of the appeal by the last appellate authority or disposal of the proceedings, as the case may be, and any such notice of demand shall have the effect as specified in section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 (11 of 1964).]

Variation in amount of interest in certain cases

Where as a result of an order under section 154, or section 155, or section 250, or section 254, or section 260, or section 262, or section 264 or an order of the Settlement Commission under section 245D(4), the amount on which interest was payable under section 220(2) had been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded.

However, if subsequently as a result of an order passed under the said sections or under section 263, the amount on which interest is payable is increased, the assessee shall pay interest from the day immediately following the end of the period mentioned in the first notice of demand and ending with the day on which the amount is paid.

Interest shall not be levied on penalties for under-reporting or misreporting income until the order is passed by the CIT(A) or ITAT

The Finance Act, 2026, effective from 01-03-2026, inserted a new fourth proviso in Section 220(2) which provides the mechanism for computing interest on the penalties imposed under Section 270A (penalty for under-reporting and misreporting of income). It provides as follows:

(a) In cases of regular assessment or reassessment, no interest would be charged on the penalty under Section 270A until the CIT (Appeals) passes an order under Section 250.

(b) Where the assessment or reassessment leading to the penalty was made in accordance with directions issued by the Dispute Resolution Panel (DRP) under Section 144C, the interest shall not be charged until the date of the order passed by the ITAT under Section 254.

Waiver of interest under section 220(2A) by Commissioner

The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may reduce or waive the amount of interest paid or payable by the taxpayer under section 220(2), if he is satisfied that:

♦ Payment of such interest has caused or would cause genuine hardship to the taxpayer.

♦ Default in the payment of the amount on which interest has been paid or was payable, was due to circumstances beyond the control of the taxpayer.

♦ The taxpayer has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him.

Time-limit for passing order under section 220(2A)

The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case may be, shall pass order, either accepting or rejecting assessee’s application to reduce or waive interest, within a period of 12 months from the end of the month in which application is received. However, order shall be passed on or before May 31, 2017 in case of application pending as on June 1, 2016.

Further, no order rejecting the application shall be passed unless the assessee has been given an opportunity of being heard.

MCQ On Interest for Delay in Payment of TDS/TCS And for Non-Payment of Tax Demanded

Q1. Tax deducted during the month of April to February should be paid to the credit of the Government on or before ___________ from the end of the month in which the deduction is made.

(a) 5 days (b) 7 days

(c) 15 days (d) 30 days

Correct answer : (b)

Justification of correct answer :

Tax deducted during the month of April to February should be paid to the credit of the Government on or before 7 days from the end of the month in which the deduction is made.

Thus, option (b) is the correct option.

Q2. Tax deducted during the month of March should be paid to the credit of the Government on or before 30th day of April.

(a) True (b) False

Correct answer : (a)

Justification of correct answer :

Tax deducted during the month of March should be paid to the credit of the Government on or before 30th day of April.

Thus, the statement given in the question is true and hence, option (a) is the correct option.

Q3. Tax deducted under section 194-IA (i.e., on immovable property) in the month of March should be paid to the credit of the Government on or before 30th day of April.

(a) True (b) False

Correct answer : (a)

Justification of correct answer :

Tax deducted under section 194-IA (i.e., on immovable property) should be paid to the credit of the Government on or before 30 days from the end of the month in which the deduction is made. Hence, tax deducted under section 194-IA in the month of March should be paid to the credit of the Government on or before 30th day of April.

Thus, the statement given in the question is true and hence, option (a) is the correct option.

Q4. Interest will be levied ___________ for every month or part of a month for delay in deduction and ___________ for every month or part of a month for delay in remittance after deduction.

(a) @ 1.5%, @ 1% (b) @ 1%, @ 2%

(c) @ 1%, @ 1.5% (d) @ 2%, @ 1%

Correct answer : (c)

Justification of correct answer :

Interest will be levied at 1% for every month or part of a month for delay in deduction of tax and at 1.5% for every month or part of a month for delay in remittance of tax after deduction.

Thus, option (c) is the correct option.

Q5. As per section 201(1A), interest for delay in payment of TDS should be paid before filing the TDS return.

(a) True (b) False

Correct answer : (a)

Justification of correct answer :

As per section 201(1A), interest for delay in payment of TDS should be paid before filing the TDS return.

Thus, the statement given in the question is true and hence, option (a) is the correct option.

Q6. Section ___________ gives various items on which tax is to be collected at source.

(a) 201 (b) 203A

(c) 203AA (d) 206C

Correct answer : (d)

Justification of correct answer :

Section 206C gives various items on which tax is to be collected at source.

Thus, option (d) is the correct option.

Q7. Where the tax is collected by an office of the Government and payment is to be made without Income-tax challan it shall be paid to the credit of the Central Government______.

(a) On or before 7 days of the month following the month in which the tax is collected

(b) On or before 15 days of the month following the month in which the tax is collected

(c) On the same day

(d) On or before 30 days of the month following the month in which the tax is collected

Correct answer : (c)

Justification of correct answer :

Where the tax is collected by an office of the Government and payment is to be made without income-tax challan, it shall be paid to the credit of the Central Government on the same day.

Thus, option (c) is the correct option.

Q8. Under section 206C(7), simple interest will be levied at the rate of 1% per month or part thereof for a period from the date on which such tax was collectible to the date on which the tax was actually paid.

(a) True (b) False

Correct answer : (a)

Justification of correct answer :

As per section 206C(7), if the person responsible for collecting tax does not collect the tax or after collecting the tax fails to pay it to the credit of Government within the due date prescribed in this regard, then he shall be liable to pay simple interest at the rate of 1% per month or part thereof on the amount of such tax. Interest shall be levied for a period from the date on which such tax was collectible to the date on which the tax was actually paid.

However, with effect from 01-04-2025, the interest rate shall be at the rate of:

c) 1% for every month or part thereof on the amount of such tax from the date on which such tax was collectible to the date on which such tax is collected; and

d) 1.5% for every month or part thereof on the amount of such tax from the date on which such tax was collected to the date on which such tax is actually paid.

Thus, the statement given in the question is true and hence, option (a) is the correct option.

Q9. As per section 220(2), if the taxpayer fails to pay the amount specified in any notice of demand issued under section 156 within the period as allowed in this regard, then he shall be liable to pay simple interest ______ for every month or part of a month.

(a) @ 0.5% (b) @ 1%

(c) @ 1.5% (d) @ 2%

Correct answer : (b)

Justification of correct answer :

As per section 220(2), if the taxpayer fails to pay the amount specified in any notice of demand issued under section 156 within the period as allowed in this regard, then he shall be liable to pay simple interest at 1% for every month or part of a month.

Thus, option (b) is the correct option.

Q10. As per section 220(2A), ___________ may reduce or waive the amount of interest paid or payable by the taxpayer under section 220(2).

(a) The Chief Commissioner (b) The Joint Commissioner

(c) The Assistant Commissioner (d) The Deputy Commissioner

Correct answer : (a)

Justification of correct answer :

As per section 220(2A), the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may reduce or waive the amount of interest paid or payable by the taxpayer under section 220(2), if he is satisfied that:

1) Payment of such interest has caused or would cause genuine hardship to the taxpayer.

2) Default in the payment of the amount on which interest has been paid or was payable, was due to circumstances beyond the control of the taxpayer.

3) The taxpayer has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him.

Thus, option (a) is the correct option.

Above document contains the provisions of the Income-tax Act, 1961, as amended by the Finance Act, 2026.

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(Republished with amendments)