If you’re a deductor under the Indian Income Tax Act & you've missed the deadline to deposit TDS (Tax Deducted at Source), you’ve probably come across the dreaded Section 201(1A). This provision holds a person responsible for deducting tax at source (TDS) & penalises them when they default—either by not deducting or by deducting but not depositing the tax on time.
So what does this section say? Let’s break it down in a simple, relatable way.
What is Section 201(1A) of the Income Tax Act?
Section 201(1A) deals with interest on TDS defaults. It interest liability on the person responsible for deducting TDS, but who either:
- fails to deduct it at all, or
- deducts it but does not deposit it within the stipulated time.
The interest for the delay in the payment of TDS should be paid to compensate for the loss to the government exchequer. “
Interest Provisions under Section 201(1A)
Let’s look at the two scenarios separately:
- TDS Not Deducted at All
- Interest @ 1% per month (or part thereof) from the date on which tax was deductible to the date on which it is deducted.
- TDS Deducted but Not Deposited
- Interest @ 1.5% per month (or part thereof) from the date of deduction to the date of actual payment.
This interest will be levied from the Assessee at the rate of 1.5% per month, & it's mandatory—there is no scope for relaxation unless specifically provided by CBDT.
Why Does This Matter?
From a compliance standpoint, this interest can build up quickly & affect cash flows for businesses. Even a delay of one day can trigger the interest clause for a full month, thanks to the “part of the month” rule.
Imagine deducting ₹50,000 as TDS on 1st April & forgetting to deposit it. If you deposit it on 20th May, you’ll owe interest for 2 full months, i.e. ₹1,500 (1.5% * ₹50,000 * 2 months).
What If the Deductee Pays the Tax?
A common myth is: “If the person I deducted TDS from pays their tax on time, I won't be held liable.” That’s partly true.
Under Section 201, if the deductee (i.e., the recipient of income) pays the full tax directly & files the return, you won’t be treated as an ‘assessee in default’. BUT—you’ll still have to pay the interest under Section 201(1A) for the delay in deduction or payment. “
When and How to Pay This Interest?
- This interest is not TDS itself. It’s a penalty/charge for late compliance.
- It has to be paid before filing the TDS return, & it is not allowed as a deductible expense under the Income Tax Act.
- You can pay it using Challan No. 281, selecting the relevant section & nature of payment.
Common Mistakes to Avoid
- Incorrect calculation of months: Even a 1-day delay counts as a full month.
- Not paying interest before filing the TDS return: This can lead to rejection of the TDS return.
- Assuming interest can be waived: It’s not waivable unless there’s a CBDT circular or special relief.
Real-Life Example
Let’s say a company deducted ₹1,00,000 as TDS on 15th March but deposited it on 25th May. That's a delay of 2 full months, triggering 1.5% per month = ₹3,000 in interest under Section 201(1A).
Small amount? Maybe. But if the default was for ₹10 lakh? Now we’re talking a ₹30,000 hit—plus the risk of penalties & disallowance.
Final Thoughts
Section 201(1A) of the Income Tax Act serves as a warning sign to deductors—deduct TDS on time, & deposit it without delay. While it doesn’t carry harsh penalties, the interest adds up fast & could complicate your tax filings.
Need help with calculating your TDS interest or filing returns without errors? Our experts at Callmyca.com can assist you in staying fully compliant & penalty-free—because tax troubles aren’t worth the interest 😉
