What Is TDS Deduction?

A deductor would face the following consequences if he fails to deduct TDS or after deducting the same fails to deposit it to the credit of Central Government’s account:

Disallowance of expenditure: As per Section 40(a)(i) of the Income Tax Act, any sum (other than salary) payable outside India or to a non-resident, which is chargeable to tax in India in the hands of the recipient, shall not be allowed to be deducted if it is paid without deduction of tax at source or if tax is deducted but is not deposited with the Central Government till the due date of filing of return.

However, if tax is deducted or deposited in the subsequent year, as the case may be, the expenditure shall be allowed as deduction in that year.

Similarly, as per Section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance if it is paid without deduction of tax at source or if tax is deducted but is not deposited with the Central Government till the due date of filing of return.

However, where in respect of any such sum, tax is deducted or deposited in subsequent year, as the case may be, the expenditure so disallowed shall be allowed as deduction in that year.

Levy of interest: As per Section 201 of the Income Tax Act, if a deductor fails to deduct tax at source or after the deducting the same fails to deposit it to the account of Central Government then he shall be deemed to be an assessee-in-default and liable to pay simple interest as follows:

(i) at one per cent for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted; and

(ii) at one and one-half per cent for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid.

Levy of Penalty: Penalty of an amount equal to tax not deducted could be imposed under Section 271C. Penalty shall be charged under Section 221, if deductor fails to deduct and pay tax to the credit of Central Governm​ent. The penalty shall be levied to the extent the Assessing Officer directs, however, the total amount of penalty shall not exceed the amount of tax in arrears.

Prosecution: If a person fails to pay to the credit of the Central Government the tax deducted at source by him he shall be punishable with rigorous imprisonment for a term which shall not be less than three months but which may extend to seven years and with fine.