Every consequence of a TDS default under the Income-tax Act, 2025 — interest for late deduction and late deposit, the daily fee for late statements, disallowance of the expense, assessee-in-default status under section 398, and the point at which a default becomes a prosecution.
A TDS default is rarely a single charge. Miss a deduction and you can face interest, a disallowance of the expense in computing your own income, a penalty equal to the tax, and — where the tax was deducted and kept — prosecution. This guide separates the consequences so you can see which ones apply to your situation.
There is a critical distinction running through all of this. Failing to deduct tax and failing to deposit tax you did deduct are treated very differently. The first is a compliance failure. The second is holding money that belongs to the government, and it is the one that carries criminal consequences.
Interest
| Situation | Rate | Runs from | Runs to |
|---|---|---|---|
| Tax was deductible but not deducted | 1% per month or part of a month | The date the tax was deductible | The date it is actually deducted |
| Tax was deducted but not deposited | 1.5% per month or part of a month | The date of deduction | The date of payment |
"Part of a month" is not pro-rated. One day into a new month counts as a full month. Tax deducted on 28 July and paid on 2 August has crossed two month-boundaries and attracts two months of interest, not five days' worth.
Fee for a Late Statement
A quarterly statement filed after its due date attracts a fee of ₹200 for every day of delay. The fee is capped at the amount of tax deductible in that statement, so it cannot exceed the tax itself — but on a large statement the cap is high enough not to help.
Worked example. A statement for the September 2026 quarter, due 31 October 2026, is filed on 20 December 2026. That is 50 days late, so the fee is 50 × ₹200 = ₹10,000. If the tax deductible in that statement were only ₹7,000, the fee would be capped at ₹7,000. The fee is payable before the statement can be filed, so it cannot be argued about afterwards.
Disallowance of the Expense
The consequence that costs the most is often not the interest but the disallowance. Where tax was deductible on a payment and was not deducted, or was deducted and not paid within the time allowed, a portion of that expenditure is disallowed in computing your own business income. The expense comes back into your taxable profit.
- For most payments to a resident, 30% of the expenditure is disallowed.
- For payments to a non-resident on which tax was deductible, the disallowance is of the whole expenditure.
- The disallowance is reversed in the year the tax is eventually deducted and paid, so it is a timing cost rather than a permanent one — but it can be a very large timing cost in a single year.
Worked example. You pay ₹40,00,000 in contractor charges and deduct no tax. The tax that should have been deducted might be ₹40,000. The interest on it might be a few thousand rupees. But 30% of ₹40,00,000 — ₹12,00,000 — is added back to your profit, and at 30% that is ₹3,60,000 of additional tax in the year. The disallowance is roughly ninety times the tax you failed to deduct.
Assessee in Default — Section 398
Section 398(1) provides that a person required to deduct or collect tax who does not deduct or pay, or does not collect or pay, or having deducted or collected fails to pay, is deemed to be an assessee in default in respect of that tax. That status is in addition to any other consequence, and it allows the whole recovery machinery of the Act to be turned on the deductor for tax that was never their own liability.
There is relief where the recipient has already accounted for the income. Where the payee has furnished a return, included the sum in it, and paid the tax due, the deductor is generally not treated as an assessee in default for the tax itself — though interest still runs for the period of the delay, and a certificate from an accountant is normally required to establish the position.
Penalty
- Failure to deduct or to pay: a penalty equal to the amount of tax not deducted or not paid.
- Failure to apply for or quote the deduction account number: a fixed penalty.
- Failure to furnish a statement, or furnishing an incorrect one: a penalty in addition to the daily fee.
- Penalties are generally not imposed where the person proves there was reasonable cause for the failure.
When It Becomes a Prosecution
Where tax has been deducted and not paid to the government, the matter can move from penalty to prosecution, with rigorous imprisonment and a fine. This applies to money withheld from someone else and retained. It does not generally apply to a simple failure to deduct.
Never treat deducted tax as working capital. Deducting tax and using the cash to bridge a shortfall is the one TDS default with a custodial consequence. If cash is tight, the safer failure is not to deduct at all — that costs interest and a disallowance. Deducting and not depositing is in a different category entirely.
Fixing a Default
- Work out whether the failure is one of deduction or of deposit, because the interest rate and the exposure differ.
- Deduct or deposit the tax immediately, with interest computed to the date of payment. Interest stops the day the money reaches the government.
- File or correct the quarterly statement. Pay the daily fee, which must be paid before filing.
- If the payee has already offered the income and paid tax on it, obtain the accountant's certificate and rely on the relief from assessee-in-default status.
- Claim the disallowed expenditure in the year the tax is deducted and paid.
- Fix the process, not just the instance. Almost every TDS default is a calendar failure rather than a legal one.
Related Guides
- TDS Compliance Calendar 2026–27
- TDS Compliance Checklist 2026–27
- Section 393 — the unified TDS table
- Income Tax Compliance Calendar 2026–27
Key Facts About TDS Penalty and Interest
- Applies in: All states across India, under the relevant central law.
- Mode: Mostly online via the official government portal.
- Typical timeline: Ranges from a few days to a few weeks depending on the case.
- Non-compliance: May attract penalties, interest or late fees.
- Expert help: TaxClue completes the entire process end to end for you.
What is the interest rate for late TDS payment?
1.5% per month or part of a month where tax was deducted but not deposited, running from the date of deduction to the date of payment. Where tax was never deducted, the rate is 1% per month from the date it was deductible until it is deducted.
What happens if I never deducted TDS on a payment?
Three things. Interest at 1% per month until you deduct it, a penalty that can equal the tax not deducted, and — usually the largest cost — disallowance of 30% of the expenditure in computing your own business income, or of the whole expenditure where the payee is a non-resident.
Over 90% of compliance penalties in India arise from missed due dates — timely handling can save businesses thousands of rupees each year.
TDS Penalty and Interest: a key compliance topic in Indian tax and corporate law that businesses and individuals must understand to remain compliant.