Sections 396 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Four short provisions in Chapter XIX tie up the working of tax deducted at source (TDS) and tax collected at source (TCS). Section 396 says which sums count as income received, section 399 lays down how a TDS or TCS statement is processed, section 400 lets the Central Government and the Board relax or clarify the Chapter, and section 401 protects the payee from a second demand. This article follows the text as per the Income-tax Act, 2025 as amended by the Finance Act, 2026. If you file or correct statements yourself, our TDS return filing service covers the practical side.
Tax deducted under Chapter XIX is treated as income received by the assessee (section 396). A TDS or TCS statement is processed by correcting arithmetical errors and incorrect claims apparent from the statement, computing interest and fee, setting off what the deductor has paid, and sending an intimation within one year from the end of the tax year in which the statement is filed (section 399). The Government may relax deduction by notification (section 400), and where tax has been deducted the assessee cannot be asked to pay it again (section 401).
Section 396: tax deducted is income received
Section 396 says that two kinds of sums "shall be deemed as income received" for the purpose of computing the income of an assessee.
| Clause | What is deemed income received |
|---|---|
| (a) | Sums deducted under Chapter XIX |
| (b) | Income-tax paid outside India by way of deduction, for which the assessee is allowed a credit against the tax payable under the Act |
Clause (b) has two carve-outs: it does not cover tax paid under section 392(2)(a) (the salary provision, see our post on TDS on salary under section 392) or tax deducted as per section 393(3) (Table: serial number 5).
The practical point is simple. If a payer deducts tax and pays you the balance, your income for the tax year is the full amount, not only the cash that reached your bank. The deducted sum is "received" by you in the eyes of the Act and is then available as credit in line with the rest of the Chapter.
Example (amounts assumed). Meera Fabrics, a partnership firm, is owed Rs. 50,000 by a buyer. The buyer deducts Rs. 5,000 and pays Rs. 45,000. Under section 396(a) the Rs. 5,000 deducted is deemed income received, so Meera Fabrics counts Rs. 50,000 as its receipt, not Rs. 45,000.
Section 399: how a TDS or TCS statement is processed
Section 399(1) says that all statements of tax deducted at source or tax collected at source, including a correction statement, "shall be processed in the following manner". The steps run in order.
| Clause | Step |
|---|---|
| (a) | The amounts deductible or collectible are computed after two adjustments: (i) any arithmetical error in the statement; (ii) an incorrect claim apparent from any information in the statement |
| (b) | Interest, if any, is computed on the basis of the amounts deductible or collectible as reflected in the statement |
| (c) | The fee, if any, is computed as per section 427(1) and (2) |
| (d) | The amount payable by, or the refund due to, the deductor or collector is determined after adjusting the amounts computed under clauses (b) and (c) against any amount paid under section 397(3) or 398 or 427(1) and (2), and any amount paid otherwise by way of tax, interest or fee |
| (e) | An intimation is prepared or generated and sent to the deductor or collector, stating the amount payable or the refund due under clause (d) |
| (f) | A refund due under clause (d) is granted to the deductor or collector |
The reference to "427(1) and (2)" in clauses (c) and (d) was substituted for "427" by the Finance Act, 2026, with effect from 1 April 2026. Our separate article on the fee under section 427 is here.
The adjustments in clause (a) are limited. The Act speaks of an arithmetical error and of an incorrect claim that is "apparent from any information in the statement". The text does not give the processing authority a power to go beyond the statement at this stage. What counts as an incorrect claim apparent from the statement is not defined in section 399.
The time limit and the scheme
Section 399(2): the intimation "shall be sent within one year from the end of the tax year in which the statement is filed". So a statement filed in a tax year gives a limit that runs from the end of that tax year, not from the date of filing.
Section 399(3): the Board may make a scheme for centralised processing of statements. The scheme itself is not in the text of the Act; the Act only gives the power.
Example (amounts assumed). Kiran Logistics files a TDS statement. Processing computes interest of Rs. 3,000 under clause (b) and fee of Rs. 2,000 under clause (c), a total of Rs. 5,000. The deductor has already paid Rs. 6,500 by way of interest and fee. Under clause (d) the amount computed (Rs. 5,000) is adjusted against what was paid (Rs. 6,500), leaving Rs. 1,500 as refund due. Clause (e) requires an intimation stating this, and clause (f) requires the refund to be granted.
Section 400: relaxation powers
Section 400 has four sub-sections. Section 400 was amended by section 89 of the Finance Act, 2026.
| Sub-section | Who | What the text allows |
|---|---|---|
| (1) | Central Government, by notification | To provide that deduction or collection of tax shall not be made, or is to be made at a lower rate, from such payment or receipt and for such person or class of persons |
| (2) | Board, with the previous approval of the Central Government | To issue guidelines to remove any difficulty in giving effect to the Chapter. The guidelines bind the income-tax authorities and the person liable to deduct or collect, and are laid before each House of Parliament |
| (3) | Board, by notifying a class of person or cases | A person paying to a non-resident (not being a company) or to a foreign company any sum, whether or not chargeable under the Act, applies to the Assessing Officer to determine the appropriate proportion of the sum that is chargeable. Tax is then deducted under section 393(2) (Table: serial number 17) on that proportion |
| (4) | Board, by notification, by rules | To specify the cases and circumstances in which an application may be made for a certificate under section 395(1) and (3), the conditions for grant, and connected matters |
What has actually been notified under these powers is not in the text consulted. Check the Central Government's and the Board's notifications before relying on any relaxation. For the certificate mechanism itself see our post on lower or nil TDS certificates under section 395. The manner of application under sub-section (3) is "as may be prescribed"; the detail is left to the Income-tax Rules, 2026, and our rule-wise guides cover it.
Section 401: bar against direct demand on the assessee
Section 401 is one sentence. Where tax is deductible at the source under Chapter XIX, the assessee "shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income".
Two points follow from the words. First, the protection is to the extent of the tax deducted: if the deductor deducted only part, the balance is still the assessee's concern. Second, the section speaks of tax deducted, not tax merely deductible. Where the deductor failed to deduct, the consequences fall on the deductor under section 398; see our post on an assessee in default for TDS under section 398, and section 398(2) for the case in which the deductor is not treated as in default.
Example (amounts assumed). A tax authority finds that a customer deducted Rs. 8,000 from a payment to Rahul Enterprises, but the customer never deposited it. Section 401 means the Rs. 8,000 is not demanded again from Rahul Enterprises to the extent it was deducted. How the unpaid sum is recovered from the customer is a matter of section 398 and the recovery provisions, not of section 401.
How the four sections work together
- The payer deducts or collects, and the amount is treated as income received by the payee (section 396).
- The payer pays the sum and delivers statements (section 397, covered in our article on compliance and reporting).
- The statement is processed and an intimation issued (section 399).
- The payee, having suffered deduction, is not asked to pay that tax again (section 401).
- Where a relaxation applies, section 400 supplies the basis.
For the wider Chapter, see our guide to Chapter XIX on collection and recovery of tax.
Need help with TDS statements and intimations?
If an intimation shows a payable amount or a refund you did not expect, a statement review often finds the cause. Our team works through TDS return filing and correction statements so that deducted tax, interest and fee reconcile before the one-year intimation period closes.
Key takeaways
- Sums deducted under Chapter XIX are deemed income received by the assessee (section 396(a)).
- Foreign tax deducted at source counts as income received where credit is allowed, subject to two exceptions in section 396(b).
- Processing under section 399 corrects only arithmetical errors and incorrect claims apparent from the statement.
- The intimation must be sent within one year from the end of the tax year in which the statement is filed.
- The Government and the Board hold relaxation and guideline powers under section 400; what has been notified is outside the text consulted.
- Section 401 stops a direct demand on the assessee to the extent tax has been deducted.
Read next
- Section 397: compliance and reporting for TDS and TCS
- Section 402: definitions for TDS and TCS, administrator to overseas tour programme package
- Section 398: assessee in default and interest
- Section 395: lower and nil TDS certificates
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.