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Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are essential components of India’s tax system to ensure better tax compliance and reduce the burden of lump-sum payments for taxpayers. However, non-compliance with TDS / TCS provisions can lead to penalties and interest charges. In this article, we will explore the various cost and other implication of non-compliance and how you can avoid them.
| Sl. No. | Implication | Remedy |
| 1. | Late Deposit of TDS / TCS
Failure to deposit TDS or TCS to the government within the prescribed time leads to interest liabilities under the Income Tax Act. Interest TDS: 1.5% per month or part thereof from the date of deduction to the date of payment. TCS: 1% per month or part thereof from the date of collection to the date of payment. From 1st April ’25, this would be increased to 1.5%. |
To avoid interest charges, ensure timely payment of the TDS / TCS to the government.
One needs to set up a system for triggers reminders that would be ensure payments before due dates. |
| 2. | Late Deduction or Collection of TDS / TCS
One needs to deduct or collect taxes on time. Delay in doing so results in penalty in form of interest. penalties. Interest TDS: 1% per month or part thereof from the date the tax was deductible to the date it was actually deducted. TCS: 1% per month or part thereof from the date the tax was collectible to the date it was collected. |
Deduct or collect taxes as per the rules specified in the Income Tax Act. Typically, for TDS it is based on providing credit or making payment whichever is earlier. For TCS it is typically when payment is received.
Have a robust system to ensure the rules are followed. |
| 3. | Late Filing of TDS / TCS Returns
There are well defined timelines for filing TDS / TCS Return Statements for each quarter. Delay in filing can lead to penalties and fees. Penalty for delayed filing under Section 234E ₹200 per day of delay, subject to a maximum of the TDS / TCS amount. |
File TDS / TCS returns on or before the due dates should a practice without compromise.
You can prevent delays by setting up reminders that would ensure timely compliance. |
| 4. | Short Deduction / Collection of TDS / TCS
Short deduction or collection can lead to interest penalties and additional compliance issues. The interest is similar to ‘Delayed Deduction or Collection’ Interest: TDS: 1.5% per month from the date the tax was deductible to the actual payment of short-deducted amount. TCS: 1% per month for short collection from the due date to the date of actual collection. From 1st April ’25, this would be increased to 1.5%. |
Ensure the correct rate of TDS / TCS is applied to avoid short deductions or collections. Use of an updated TDS software and proper training to training to the accounting team can minimize such errors. |
| 5. | Penalty for Non-Deduction or Non-Collection (Section 271C)
If one fails to deduct or collect tax at source may attract penalty under Section 271C. Penalty Equal to the amount of TDS / TCS that was not deducted or collected. Note The provision for interest for delayed deduction / collection may also apply in such cases. |
To avoid this, maintain a robust system that ensures TDS / TCS is deducted/collected on time for all eligible transactions. Periodic audits are recommended.
If an error is detected, take corrective action by paying the interest for the delay. |
| 6. | Penalty for Non-Filing of TDS/TCS Returns or reporting incorrect information (Section 271H)
This section applies to: – Failure to file TDS / TCS Returns within the prescribed time – Filed Returns have incorrect details such as PAN, amount, etc. Upto 31st March ’25, the prescribed time-frame is one year from the last date of filing the return. However, from 1st April ’25, this would be reduced to one month only. Penalty |
Always file TDS/TCS returns on time, and ensure that errors in the returns are minimized by conducting thorough reviews before submission. Correct errors promptly to avoid penalties. |
| 7. | Disallowance of Expenses for Non-Deduction of TDS (Section 40(a)(ia))
If TDS is not deducted, or if it is deducted but not deposited, the corresponding expenses can be disallowed for tax purposes under Section 40(a)(ia). Disallowance – Payments to residents: 30% of the expense is disallowed – Payments to non-residents: 100% of the expense is disallowed |
Deduct and deposit TDS on time. If you miss the due date but deduct and deposit the TDS before the end of the financial year, the expense may still be allowed. Be proactive in tracking and reviewing TDS liabilities to ensure full compliance. |
Non-compliance in TDS / TCS leads to financial penalties, interest and unnecessary stress that diverts crucial business time. Proactively manage deadlines, ensure accurate tax calculations and file returns on time to avoid costly errors. Good software and regular audits ensure smooth operations.
Hope this article is helpful. It is authored by the team at PDS Infotech Pvt Ltd, one of the pioneers and has been serving the TDS eco-system for 19+ years with its software TDSMAN. You may
download the trial copy and experience the simplicity and convenience. Visit www.tdsman.com.
One may also evaluate Enterprise TDS and CA-TDSMAN – both of these are cloud-based solution for TDS / TCS compliance.
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