Penalty for Non-Deduction/Short Deduction of Tax at Source in India

Under the Income Tax Act, 1961, Tax Deducted at Source, commonly referred to as TDS, is a concept that aims to tax transactions as and when they occur rather than holding on to collecting tax for the same transaction at a later date.

Rather than taxation, the tax deducted at source should be viewed as a control mechanism that aims to ensure that all transactions are recorded for taxation and subjected to deductions as per the provisions of the Income Tax Act, 1961.

First introduced in 1922, TDS initially only covered four specific sources of income under TDS – salary, interest on securities, interest other than interest on securities, and dividends.

However, in recent years, the scope of TDS has grown exponentially, with almost all transactions falling under the scope of this control mechanism. The Government of India laid down specific tax rates for different types of transactions as per which deductions shall be made on the said transactions.

Time of TDS Deduction & Payment

Deduction

The usual rule is to deduct TDS prior to payment or before the entry for the transaction is made into the book of accounts. However, there are some exceptions where TDS must be deducted only on a payment basis:

• Section 194B: Winnings from lottery or crossword puzzle.
• Section 194BB: Winnings from horse race.
• Section 194DA: Payment in respect of life insurance policy.
• Section 194LA: TDS on Payment of compensation on acquisition of certain immovable property.

Payments

As per the provisions mentioned under Section 200 of the Act, tax deducted by any individual must be sent to the government on a monthly basis. The due date, i.e., the last date to pay TDS to the government is the 7th of every subsequent month.

For example, all tax deductions made in the month of January must be sent to the government by 7th February.

Note: However, there is an exception for the month of March, where the TDS collected in March may be remitted to the government by 30th April.

A detailed monthly breakdown of the due dates for depositing TDS in 2023-24 is mentioned below:

Month	Due Date for Depositing TDS
April-23	07-May-23
May-23	07-Jun-23
June-23	07-Jul-23
July-23	07-Aug-23
August-23	07-Sep-23
September-23	07-Oct-23
October-23	07-Nov-23
November-23	07-Dec-23
December-23	07-Jan-24
January-24	07-Feb-24
February-24	07-Mar-24
March-24	30-Apr-24

Consequences of Late Payment/Late Deduction [Section 201(1A)]

Late Deduction

Individual shall be liable to pay interest @1% per month or part of a month on the amount of such tax, which is calculated from the date on which it was deductible to the date on which it is deducted.

Late Payment

Individual shall be liable to pay interest @1.5% per month or part of a month on the amount of such tax, which is calculated from the date of deduction of the tax to the date of payment.

Consequences of Non-Payment/Non-Deduction: [Section 201(1)]

1.    An individual is deemed as “Assessee in default” under Section 220 and is liable to interest as per provisions of Section 220 @1% per month or part thereof.

2.    An individual is also liable to penalty as per provisions of Section 221, which can be maximum up to the amount of TDS not paid/deducted.

3.    Under Section 276B, 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.

Exception:

Individual who fails to deduct, and not the only who fails to pay, shall be penalized as per point (2) and face imprisonment as per point (3) if they obtain a certificate to this effect from a Chartered Accountant that the deductee (individual whose TDS was to be deducted):

• Has furnished their return of income under Section 139,
• Has taken into account such sum for computing income in such return of income,
• Has paid the tax on the income declared by them in such return of income.

Note: The individual shall still be liable to pay interest as per the above-mentioned Point (1).

Return of TDS

As per the provisions stated under Section 200, the return for tax deducted and paid by any individual must be sent to the government on a quarterly basis. The due date, i.e., the last date of return filing of TDS to the government is 31st of the first month of the subsequent quarter.

For example, for all the TDS paid in the months of July, August and September, return should be filed by 31st October.

Note: However, there is an exception for the March-quarter, where the TDS return shall be filed up to 31st May.

A detailed monthly breakdown of the due dates for filing TDS returns in the financial year 2023-24 is mentioned below:

Quarter Ending	Due Date to file TDS Return
June-23	31-Jul-23
September-23	31-Oct-23
December-23	31-Jan-24
March-24	31-May-24

Consequences of Not Filing Return

• Under Section 234E, late fees of INR 200/per day up to a maximum of the amount of TDS is payable.
• Under Section 271H, a penalty of INR 10,000 (up to INR 1 lakh) can be charged if there is any delay in filing return or submission of any incorrect information. However, if the deductor files the return prior to the expiry of a one-year period from the due date of filing return and has paid late fees and interest (if any), then such penalty shall not be levied.

Conclusion

TDS deductions always aim to ensure that all individuals are subject to the same tax rate, while also making sure that no transaction is left untaxed. Besides, considering such deductions are made automatically at the time of transaction, it is strongly advised to file TDS returns on time to avoid any potential consequences of failing to do so.