By S&S Co. Advocates & Solicitors · Published 18 September 2026 · Informational content, not legal advice: see our disclaimer
The Range of TDS/TCS Defaults
A deductor or collector can face several distinct categories of default: failure to deduct or collect tax at all, deduction or collection at a lower rate than applicable (often arising from a genuine classification dispute over which section governs a payment), deduction but delayed deposit with the government, and failure to file, or delay in filing, the periodic TDS/TCS returns. Each category attracts a different consequence under the Act, and it is worth identifying precisely which default is alleged before responding.
Interest Under Sections 201(1A) and 206C(7)
Where tax is deducted but deposited late, interest is charged at a specified rate per month or part of a month from the date it was deductible to the date it is actually deposited; where tax is not deducted at all, a higher rate applies from the date it was deductible to the date it should have been deducted, and the lower rate applies thereafter to actual deposit. This interest is compensatory and is levied in addition to any default itself, quite apart from separate penalty exposure.
Expense Disallowance Under Section 40(a)(ia)
For a payer who fails to deduct tax, or deducts but fails to deposit it by the due date for filing the return of income, Section 40(a)(ia) disallows a portion of the corresponding expenditure while computing business income: a consequence distinct from, and in addition to, the deductor's own default liability. The disallowance is generally reversed in the year the tax is eventually deducted and deposited, but it can materially affect the year in which it first arises.
Penalty and the Reasonable Cause Defence
Penalty under Section 271C (for failure to deduct) is equal to the amount not deducted, but Section 273B saves the deductor from penalty where reasonable cause for the failure is shown. A disclosed, consistently applied, and not implausible view on which TDS provision governs a category of payment, even if ultimately held incorrect, has been accepted by tribunals as reasonable cause, so a genuine classification dispute is worth distinguishing from an outright, undisclosed failure to deduct.
Being Treated as 'Assessee in Default'
Where a deductor fails to deduct, or deducts but fails to deposit, tax, Section 201(1) allows the department to treat the deductor as an 'assessee in default' and recover the shortfall directly from them. However, the first proviso to Section 201(1) relieves the deductor of this consequence, though not of the applicable interest, where the recipient of the payment has, in fact, included that income in their own return and paid tax on it, subject to a certificate from a chartered accountant to that effect.
Frequently Asked Questions
Can I avoid being treated as an 'assessee in default' if the payee already paid tax on the income?
Yes: under the first proviso to Section 201(1), a deductor can be relieved of assessee-in-default status (though interest still applies) if the payee has included the income in their return and paid the tax due, supported by the prescribed chartered accountant's certificate.
Does a genuine dispute over which TDS section applies protect me from penalty?
It can: tribunals have accepted a disclosed, consistently applied, non-frivolous view on the applicable TDS provision as reasonable cause under Section 273B, which can save the deductor from Section 271C penalty even where the classification is ultimately found incorrect.
If I deduct tax late, does the expense disallowance under Section 40(a)(ia) apply permanently?
No: the disallowance is generally reversed and allowed as a deduction in the year in which the tax is actually deducted and deposited, so its effect is one of timing rather than a permanent loss of the deduction, though it can shift the tax impact into a different year.
References & Further Reading
This article references the following statutory provisions. Readers should always verify current rules, fees and timelines against the applicable statute and rules as amended, since these are revised from time to time.
- Income Tax Act, 1961: Sections 201, 40(a)(ia), 271C and 273B.