Non compliance with TDS provisions can result in

1. Disallowance Under section 40(a)(ia) of the Act 

In case of payments made to resident, the deductor is allowed to claim deduction for payments as expenditure in the previous year of payment, if tax is deducted during the previous year and the same is paid on or before the due date specified for filing of return of income under section 139(1) of the Act.

In case of non-deduction or non-payment of tax deducted at source (TDS) from certain payments made to residents, than 30% of the amount of expenditure on which tax was deductible is disallowed under section 40(a)(ia) for the purposes of computing income under the head “Profits and gains of business or profession”. However the amount disallowed will be allowed as deduction in the subsequent previous year in which TDS is paid to the credit of central government.

TDS Non-Compliance

2. Raising of demand u/s. 201(1) of the Act

Any person whose is liable to deduct TDS has failed to deduct whole or part of TDS or after deduction fails to deposit whole or part of the TDS to the credit of central government. He shall be treated as assessee in default in rest of such tax not deducted or deposited.This applies to employer refer in section 192(1A).

Provided that any person who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid/credited to a resident shall not be deemed to be an assessee in default in respect of such tax if such resident-

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and

(iii) has paid the tax due on the income declared by him in such return of income,

and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed

3. Charging of Interest u/s. 201(1A) of the Act

Any person whose is liable to deduct TDS does not deduct the whole or any part of the tax or after deducting fails to pay the whole or part of tax as required by or under this Act, he liable to pay simple interest,

 (i) at one per cent 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 is deducted; and

 (ii) at one and one-half per cent 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 is actually paid,

and such interest shall be paid before furnishing the TDS statement .

Provided that in case any person whose is liable to deduct TDS ,fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum credited to the account of a resident but is not deemed to be an assessee in default under the first proviso of section 201(1) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident

4. Levying penalty u/s. 271C of the Act

upto the amount of tax in default  for Failure to deduct tax at source, wholly or partly, under sections 192 to 196D (Chapter XVII-B) or failure to pay wholly or partly tax u/s 115-O(2) or second proviso to section 194B.

5. Levying of penalty u/s. 221 of the Act for non payment of demand raised

When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable be liable, by way of penalty, to pay such amount as the Assessing Officer may direct, and in the case of a continuing default, such further amount or amounts as the Assessing Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears . However before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard :

6. Prosecution under Section 276B 

If a person fails to pay to the credit of the Central Government,—

(a) the tax deducted at source by him as required by or under the provisions of Chapter XVII-B; or

 (b) the tax payable by him, as required by or under—

  (i) sub-section (2) of section 115-O; or

  (ii) the second proviso to section 194B,

he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.

7. Penalty u/s. 271BB(1A) for failure to apply for TAN or non-quoting thereof

If a person who is required to quote his “tax deduction account number” in the challans or certificates or statements or other documents , quotes a number which is false, and which he either knows or believes to be false or does not believe to be true, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of ten thousand rupees.

8. Penalty u/s. 272A (2)(k) of the Act: for non filing of TDS returns

The deductor  shall pay, by way of penalty, a sum of one hundred rupees for every day during which the failure continues

9. Fee U/s 234E for late filing of TDS Statement

Fine of Rs. 200/- every day during which the failure continues will be levied on deductor as long as the default continues, subject to a maximum of TDS amount.

10.Penalty u/s. 271H  for late filing or non- filing TDS statement 

Penalty of sum which shall not be less than ten thousand rupees but which may extend to one lakh rupees.

No penalty shall be levied for the failure to file TDS/TCS return on time,if the person proves that after paying tax deducted or collected along with the fee and interest, if any, to the credit of the Central Government, he has filed the return before the expiry of a period of one year from the time prescribed for delivering or causing to be delivered such statement.

Also Read:

(Republished With Amendments)

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  1. Goldy Chhabra says:

    The observations are very relevant and true. The defaulting deductors go scott free and the deductee is made to pay interest and fine u/s 234 for not paying advance tax on time, whereas it is the deductor , especially in salaried people and pensioners, who should be held liable for not deducting TDS before payment of emoluments.
    It is high time that the onus is shifted from deductee/ resident to deductor for mismatches in 26AS, form 16 and 16A.
    Some deductors simply refuse to issue form 16 , and 16A , saying that due drawn statements are sufficient. ( “Aapne to salary ka amount aur tds hi dekhna hai”!!!!)

    There is a need for a platform / portal where a deductee can post a complaint against the deductor for such issues and lapses , where ultimately the deductee is made out the defaulter ,and made to pay the interests and fines under various sections , as he is helpless at the hands of income tax laws and he fears further penalties.

  2. dattatreyahg says:

    good. some stringent measures to deal with defaulting deductors. but something more needs to be done to protect deductees interests. Tax authorities should automatically demand corrective actions from deductors in all cases where form26as shows tds amounts credited,but are indicated as U (ie Unmatched) till they are shown as F (fully matched). Deductees should not be harassed by asking them to take this up with/persuade deductors ,as deductors dont care for such pleadings from deductees as deuctee does not have the legal power that the tax authorities have. And, with an U status,deductee is not allowed to claim that tds amont in his IT return. One more thing.Deductees,normally, pay off full amount of tax without bothering about tds amount deducted,if they dont receive tds certifictes in time(even though it amounts to paying 10% extra), just to avoid stringent consequences of not filing IT returns by due date.(One such consequce is losing the benefit of booking certain losses that can be carried forward.Anoher cosequence is being made ineligible for filing revied IT return. There may be many more that I have not come across yet). These are all CATCH22 situations which cannot be handled by deductee. Only Tax authorities can and should offer solutions for such problems of deductees in the true spirit of CITIZENS CHARTER,which has been hailled as a great REFORM in tax administration by no less a person than Finance Minister. Some of these problems were not there prior to introduction of FORM26as. These problems therefore appear to have arisen because of lack of application of proper thinking at the time of introduction of FORM26as ,PARTICULALY FROM THE POINT OF VIEW OF THE DEDUCTEE.Everything seems to have been seen only from the viewpoint of TAX COLLECTION. These observations are made based on problems I have actually faced. If there is anything wrong in them, I am open to correction. I only hope the Tax authorities do offer solutions in double quick time and tax professionals also help in this regard.

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June 2021