If you are preparing your Income Tax Return and
realize that you forgot to deduct or deposit Tax Deducted at Source (TDS),
welcome to this page! Today, we will discuss the consequences of TDS defaults
and the available remedies under the Income Tax Act, 2025.
Section 35(b)(i):
Payments Made to a Resident
If any payment is made or credited to a resident, 30%
of such sum shall not be allowed as a deduction in the current tax year if:
• TDS was not deducted during the tax
year.
• TDS was deducted but not paid to
the government up to the due date of return filing.
Example
Scenario:
ABC
Ltd. takes services from MVM & Associates, and the service charge is Rs.
7,00,000. ABC Ltd. makes the payment on July 19, 2026, but fails to deduct the
TDS. In this case, 30% of Rs. 7 Lakhs (i.e., Rs. 2,10,000) will be disallowed
for ABC Ltd. in Tax Year 2026-2027.
Here is a breakdown of how deductions are allowed if
the TDS is deducted but deposited on subsequent dates:
|
Deposited Date
|
Allowed (Tax Year 2026-2027)
|
Allowed (Tax Year 2027-2028)
|
|
07/08/2026
|
Rs.
7,00,000
|
Nil
|
|
15/07/2027
|
Rs.
7,00,000
|
Nil
|
|
31/10/2027
|
Rs.
7,00,000
|
Nil
|
|
15/12/2027
|
Rs.
4,90,000
|
Rs.
2,10,000
|
|
17/04/2028
|
Rs.
4,90,000
|
Rs.
2,10,000
|
Section 35(b)(ii):
Payments Made to a Non-Resident
If any amount is paid or credited to a Non-Resident or
a Foreign Company, 100% of such sum shall not be allowed as a deduction in the
current tax year if:
• TDS was not deducted during the tax
year.
• TDS was deducted but not paid to
the government up to the due date of return filing.
Example
Scenario:
ABC
Ltd. takes services from a Non-Resident person, and the service charge is Rs.
7,00,000. ABC Ltd. makes the payment on July 19, 2026, but fails to deduct the
TDS. In this case, 100% of the amount (i.e., Rs. 7,00,000) is disallowed for
ABC Ltd. in Tax Year 2026-2027.
Here is how deductions apply based on the deposit
date:
|
Deposited Date
|
Allowed (Tax Year 2026-2027)
|
Allowed (Tax Year 2027-2028)
|
|
07/08/2026
|
Rs.
7,00,000
|
Nil
|
|
15/07/2027
|
Rs.
7,00,000
|
Nil
|
|
31/10/2027
|
Rs.
7,00,000
|
Nil
|
|
15/12/2027
|
Nil
|
Rs.
7,00,000
|
|
17/04/2028
|
Nil
|
Rs.
7,00,000
|
Section 35(b)(iii): TDS
Compliance by Employers on Provident Funds (PF)
No deduction is allowed for employer contributions to
a provident fund or other employee funds unless the employer ensures proper TDS
on taxable payments (such as salary) made from such funds.
Section 35(c): TDS on
Salary Payable Outside India or to a Non-Resident
For any salary payable outside India or to a
Non-Resident in India, the sum shall not be allowed as a deduction if:
• TDS was not deducted during the tax
year.
• TDS was deducted but not paid to
the government up to the due date of return filing.
Important
Note: If the TDS on such salary is
deposited late—even by a single day—the salary expense shall not be allowed as
a deduction.
The Main Interesting
Twist: What if the Payee Pays the Tax?
Let's revisit our earlier example: ABC Ltd. pays MVM
& Associates Rs. 7,00,000 on July 19, 2026, without deducting TDS.
What if MVM & Associates pays the full tax on this
service income and files their Income Tax Return on August 19, 2027?
In this scenario, ABC Ltd. can still claim the full
Rs. 7,00,000 as a deduction, provided the following conditions are met:
• MVM & Associates must have
declared the full income and paid the required tax on it.
• They must obtain a certified Form
149 from a Chartered Accountant and upload it to the income tax portal.
The
Catch?
Interest Penalties
ABC
Ltd. is still liable to pay interest on the non-deducted TDS:
• Interest Rate: 1% per month (or part of a month).
• Period: From the date on which the TDS should have been deducted until the
date the payee files their Return of Income (ROI).
Interest
Calculation:
•
Assuming a 10% TDS rate, the required TDS was Rs. 70,000.
• Duration: 14 months (July 19, 2026, to August 19, 2027).
• Formula: Rs. 70,000 * 1% * 14 months = Rs. 9,800.
ABC Ltd. must pay Rs. 9,800 in interest to regularize
this transaction.