Consequences of Non deduction, late deduction and Late deposit of Tax deducted at sources (TDS)

Non deduction, late deduction and Late deposit of Tax deducted at sources (TDS) may lead you to face following consequences.

  • A: Interest on late deduction /deposit of Tax at source.
  • B : Dis-allowance of Exp , on which tax has not been deducted /deposited u/s 40(a)(ia)
  • C: Penalty and prosecution.(271C and 276B)

Interest on late deduction and delayed deposit of TDS

As per income-tax , interest is payable under the following two circumstances

  1. Tax is not deducted , when it was deductible
  2. Tax once deducted, is not paid on or before due date

To understand the above concept ,we must have to read

  1. When Tax is to be deducted?
  2. When tax deducted at source (TDS) is to be deposited (TDS due date of deposit)?

When tax is to be deducted

  • At the time of credit or payment, whichever is earlier
    • 193- Interest on securities
    • 194A- Interest Other than “Interest on securities”
    • 194C- Payment to contractors / sub-contractors
    • 194D – Insurance commission
    • 194H – Commission or Brokerage
    • 194G- Commission on sale of lottery tickets
    • 194I- Rent
    • 194J- Professional or technical fees
  • Before making payment or distribution
    • 194- Dividend
  • At the time of payment
    • 192- Salaries
    • 194B- Winning from lotteries / crossword puzzles
    • 194BB Winnings from horse races
    • 194EE – Payment from National Saving Scheme
    • 194F Payment for repurchase of units by UTI / mutual funds
    • 194LA: Payment of compensation on acquisition of certain immovable property

What is the Due date of deposit of TDS?

All the TDS deductions made during a month are to be paid on or before 7th of the next month.

Example: All deductions made during April, 2013, must be paid on or before May 7th, 2013.In case 7th of the month happens to be a Sunday or a bank holiday, then the payment can be made on the next business day.

However for deductions made during the month of March, payment must be made on or before 30th April.

What is the rate of interest?

W.e.f 01-07-2010

  • From the date when TDS was deductible till date of actual deduction, rate of interest is 1% p.m.
  • For delayed deposit, from date of deduction till actual date of payment, rate of interest is 1.5% p.m

Prior to 01-07-2010

From FY 2006-07 onwards for delayed deposit, from date of deduction till actual date of payment, rate of interest is 1.0% p.m

What is the due date of payment of interest?

Interest must be calculated and paid before filing of eTDS statement of the quarter.

Quarter 1 Jul-15

Quarter 2 Oct-15

Quarter 3 Jan-15

Quarter 4 May-15

How is interest to be calculated?

  1. Interest is to be calculated for every month or part of a month comprised in a period,
  2. Any fraction of a month shall be deemed to be a full month
  3. The amount of tax, penalty or other sum in respect of which such interest is to be calculated shall be rounded off to the nearest multiple of one hundred rupees and
  4. For this purpose any fraction of one hundred rupees shall be ignored and the amount so rounded off shall be deemed to be the amount in respect of which the interest is to be calculated.

Example of Interest Calculation

Date Of Payment

Date of Deduction

Due Date

Date of Deposit

Delayed Deposit Delayed Deduction
Months Rate Months Rate

05/04/2012

05/04/2012

07/05/2012

09/05/2012

2

1%

-

-

10/04/2012

10/04/2012

07/05/2012

09/05/2012

1

1%

-

-

02/07/2012

04/08/2012

07/09/2012

07/09/2012

-

-

2

1%

02/07/2012

04/08/2012

07/09/2012

15/09/2012

2

1.50%

2

1%

One Day delay may charge you Interest @ 3 %: Suppose tax is deducted on 05.04.2012 and due date is 07.05.2012 however deposited after delay of one day on 08.05.2012.

Delay period in above case is : From 05.04.2012 to 08.05.2012 is one month and 3 days .As per above provisions part of the month is to be taken as full month .so delay of 2 month means 1.5 % per month fo 2 month =3 % interest . So delay of only one day of tds may cause you interest loss of three percent.
Rectifying Interest Default

  • You may download default/Justification report notices after logging into your TAN account at tdscpc.gov.in
  • Default Notice is a plain excel sheet without any password protection
  • If there is any default on account of non-payment or short payment of interest, you need to pay up the same
  • After paying, you have to file correction statement by including the interest payment challan.

Dis allowance of Expenses due to non payment of Tax deducted at source or non-deduction of Tax

Section 40(ia):  Following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,

  1. any interest, or
  2. commission or
  3. brokerage or
  4. rent or royalty or
  5. fees for professional services or
  6. fees for technical services payable to a resident, or
  7. amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work),

on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid.

Expense allowed if tax deposit before the due date of deposit Income Tax return :if Tds is not deposited with due date but deposited on or before the due date specified in sub-section (1) of section 139 then expenses will not be disallowed.

Expenses will be allowed in actual year of tds deposit: Where in respect of any such sum, tax has been deducted in any subsequent year, or has been deducted during the previous year but paid after the due date specified in sub-section (1) of section 139, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

Rationalization of the provision relating to dis allowance of expenditure under Section 40(a)(ia)

The amendment for Rationalization of the provision relating to dis allowance of expenditure under Section

40(a)(ia) is in consequence of the amendment in Section 201. As per the amendment if the payer fails to deduct the whole or any part of the tax as per the provision of Chapter XVII-B on the amount paid

to any resident payee, the payer shall not be deemed to an assessee in default in respect of such tax, if the

following conditions are satisfied:

  • (a) The payee has furnished his return of income under Section 139;
  • (b) He has included such income in the return of  income;
  • (c) He has paid the tax due on the income declared in such return of income
  • (d) The payer furnishes a certificate of chartered accountant in form 26A(download link given below)

The date of payment of taxes by such payee shall be deemed to be the date of filing of his return of income.

Accordingly, as per the  amendment in Section 40(a)(ia) where an assessee fails to deduct whole or part of tax at source on any sum but is not deemed to be an assessee in default under Section 201(1), then for the purpose of Section 40(a)(ia) the assessee shall be deemed to have deducted and paid the tax on such sum on the date of filing of the return of income by the resident payee and therefore, no dis allowance under Section 40(a)(ia) shall be made.

Interest in above case:

If assessee avail the benefit of change in section 40(a)(ia) then interest @1 % shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such payee.

Example: Suppose a Ram paid Rs 10,00,000 as professional fees on 01.05.2012 to Sham but not deducted tax u/s 194J @ 10 %  .Sham furnished his return on 30.08.2013. So to claim benefit of amendment in above section Ram has to

  1. A certificate from CA on form 26A
  2. Deposit interest from 01.05.2012 to 30.08.2013 @ 1 % for 16 months.

Penalty on Non deduction of TDS

Penalty for failure to deduct tax at source.

Section 271C. If any person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B then, such person shall be liable to pay, by way of penalty, a sum equal to the amount of tax which such person failed to deduct or pay as aforesaid. This penalty is imposable by Joint Commissioner.

Prosecution for failure to deduct /deposit tax at source

Section 276B. If any person fails to deduct the whole or any part of the tax as required by or under the provisions of Chapter XVII-B then, such person 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. This penalty is imposable by Joint Commissioner.

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