Interest Calculation in TDS-Demystified
This article aims to simplify interest calculation when TDS CPC aims processes TDS returns with interest demands.
There are two sections that are constantly used in TDS interest calculation:
1. Section 201(1A)-Interest on failure to deduct tax and interest on failure to deposit deducted tax amount.
2. Section 220(2)-Interest on failure to pay the amount demanded u/s 156 issued by way of notice of demand.
Further, two more provisions are required to be known for calculation of interest:
1. Rule 119A-Rounding off the default (TDS) amount to the nearest 100- beneficial provision for the assesse.
2. Section 288B-Rounding off the tax payable to multiples of Rs.1 0 (similar to Elementary Maths Rounding).
Rate of Interest
|201 (1 A)(i)-Failure to deduct TDS||1% from the due date of deduction till the date of deduction|
|201 (1 A)(ii)-Failure to deposit TDS||1 .5% from the date of deduction till the date of payment|
|220(2)||1% from the due date of payment of demand (due date for payment of demand shall be 30 days from the date of notice of demand)|
Now, let us look at how the interest has to be calculated:
Calculation of Interest u/s 201 (1 A)
|Due Date for deduction||11/04/2017||04/06/2017||05/07/2017|
|Date of deduction||10/05/2017||04/06/2017||05/07/2017|
|No. of months of delay in deducting TDS||2(Month in which the amount was to be deducted till the month in which amount was deducted-both inclusive)||Nil||Nil|
|Amount to be considered for calculating Interest u/s 201(1A)(i)||21 800(Rounded off to nearest 100)||Nil||Nil|
|Rate of Interest||1%||Nil||Nil|
|Amount of Interest(A)||872||–||–|
|Due Date of Payment of TDS||07/06/2017||07/07/2017||07/08/2017|
|Date of payment of TDS||10/11/2017||10/10/2018||25/12/2018|
|No. of months of delay in payment of TDS||7 Months(From May’ 17 to November ’17-both the months inclusive)||17 Months(From June’ 17 to October’ 18-both the months inclusive)||18 Months (From July’17 to December’ 18- both the months inclusive)|
|Amount on which Interest needs to be calculated||21,800||16,000||37,800|
|Rate of Interest||1.5%||1.5%||1.5%|
|Amount of Interest(B)||2,289||4,080||10,206|
|Total Interest to be paid (C=A+B)||3,161||4,080||10,206|
|Total Interest to be paid (Application of Sec.288B)(D)||3,160||4,080||10,210|
Continuing with the above example, the following situations can arise when the demand notice has been issued and the deductor has only paid the basic TDS amount and has not discharged any interest amount, while correcting the original TDS return.
|Date of Payment of TDS||10/11/2017||10/10/2018||25/12/2018|
|Amount paid(only basic amount was paid)||21,808||16,085||37,885|
|Date of Issue of Demand u/s 156 after processing of corrected TDS statement||13/11/2017||13/10/2018||31/12/2018|
|Time Limit allowed under the Act for payment of Demand||30 Days||30 Days||30 Days|
|Due date of payment of Demand||12/12/2017||11/11/2018||29/01/2019|
|Amount Demanded (interest amount)||3,160||4,080||10,210|
|Date of payment of Demand||11/11/2019||11/11/2019||11/11/2019|
|Rate of Interest for calculation u/s 220(2)||1%||1%||1%|
|No. of months of delay||24||13||11|
|Amount on which Interest has to be calculated (As per Rule 1 19A)||3,100||4,000||10,200|
|Amount of Interest u/s 220(2)||744||520||1,122|
|Total Interest payable [201(1 A)+220(2)]||3,905(3161+744)||4,600(4080+520)||11,328(1 0206+1122)|
|Total Interest payable after application of Sec.288B||3,910||4,600||11,330|
Word of caution:
Interest u/s 220(2) shall not be applicable in cases where interest u/s 201 (1A) is applied [Sec. 220(2B)]. In other words, Interest u/s 220(2) will not be applicable if the amount demanded is the basic TDS amount for which Interest u/s 201 (1 A) shall be applied. In all other cases, whether interest u/s 201 (1 A) or late fee u/s 234E is demanded, the interest u/s 220(2) shall be applied.
One stands to lose more if there is interest demand rather than TDS Demand and whenever TDS Demands exist it is safer to settle it with interest!.
Further, even though provisions are available for the defaulter to avoid payment of TDS amount by producing evidences that the deductee has paid taxes as per First proviso to Section 201, it does not provide immunity from interest portion on the amount defaulted. In such cases interest shall be calculated from the due date of deduction till the date of furnishing the return of income by the deductee.
It will always be advisable to regularly visit the TDS CPC website and check the default status tab, to avoid unnecessary cost to the organization in regularizing the defaults. Remember the cost of compliance is always cheaper than the cost of non-compliance!!.
Don’t forget to check interest on late payment of TDS.