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

Section Interest Rate
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:

SAMPLE SCENARIOS

Calculation of Interest u/s 201 (1 A)

Particulars Scenario-1 Scenario-2 Scenario-3
TDS Amount 21,808 16,085 37,885
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.

Particulars Scenario-1 Scenario-2 Scenario-3
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.

Tags:

Author Bio

Qualification: CA in Practice
Company: N/A
Location: Chennai, Tamil Nadu, IN
Member Since: 19 Feb 2019 | Total Posts: 15
Chartered Accountant with a thirst for knowledge. Trying out my new life of practising my profession! View Full Profile

My Published Posts

More Under Income Tax

2 Comments

  1. mahadevanb1994@gmail.com says:

    Thank you for pointing out the error. The corrected article will be published. The no. of months to be taken will be 7 only which is from the due date of deduction.

  2. Shreya says:

    Hello sir ,
    Can u please clear my one ambiguity ?
    As Sec 201(1A)(ii) says that , If person fails to deposit TDS then he would be liable to pay intrest @ 1.5% from date of deduction till date of payment . so in given above scenario 1 , Date of deduction is 10/5/17 and Date of payment is 10/11/17 so number of months should be 7 (i.e from may to nov )
    Hence i am confused either to take 6 months or 7 months , Please help me in clearing my confusion .

Leave a Comment

Your email address will not be published. Required fields are marked *