TDS Deducted but Not Deposited: Penalty and What to Do

What happens when TDS is deducted but not deposited?

Take a small construction firm that pays a contractor Rs 5 lakh and deducts TDS. The firm does not deposit the deducted amount with the government. When the contractor checks his tax record (Form 26AS or AIS), he finds no credit for that deduction.

He complains to the firm, and he can also approach the department. The department's system, TRACES, shows the default against the deductor. A notice or default intimation to the firm then follows.

The issue rarely stays hidden. The contractor needs the credit to pay his own tax, so the mismatch comes to light sooner or later.

Interest, late fee and penalty: what can it cost?

Several charges can apply together. Each one is separate, so they add up.

Under the Income-tax Act, interest is charged on TDS that was deducted but deposited late. The rate is 1.5% per month or part of a month, counted from the date of deduction to the date of actual deposit. A part month is counted as a full month. If TDS was deducted late, a lower rate of 1% per month applies for that delay.

Check the exact section numbers with your CA, because the new Income-tax Act, 2025 is coming into effect and renumbers provisions.

• Interest for late deposit, at 1.5% per month or part of a month.
• Late fee of Rs 200 per day for every day the quarterly TDS statement is delayed. The fee cannot exceed the TDS amount for that statement.
• Penalty of Rs 10,000 to Rs 1 lakh if the statement is not filed within one year of the due date, or if it carries wrong information.
• Possible prosecution in serious cases, explained below.

Can non-deposit of TDS lead to prosecution?

Yes, the law does provide for it. Failure to pay TDS that was deducted can attract prosecution, with rigorous imprisonment of three months up to seven years and a fine. Courts and the department look at the facts of each case before taking any action.

Recent amendments have given some relief where the delay is cured. Broadly, if the tax is deposited before the time allowed for filing the quarterly TDS statement, prosecution for the delay may not apply. Do not rely on this without checking your dates and facts with a professional.

The safe approach is simple. Deposit the tax on time, and if you have missed a date, deposit with interest as soon as possible.

Other problems: expense disallowance and deductee complaints

There is a hidden cost on the business's own income tax. If TDS is not deducted, or is deducted but not deposited by the allowed date, 30% of the related expense can be disallowed while computing the firm's profit. That raises the firm's own tax bill. The allowed date is generally the due date for filing the firm's income tax return.

There is also a relationship cost. A contractor or vendor who does not get credit for TDS will lose trust, may delay work, or may refuse to deal with you again. For a small business, that damage can be bigger than the interest.

What should you do if you have already missed TDS deposits?

Do not wait for the notice. Acting early usually keeps the cost lower, though the final outcome depends on your facts.

• List every deduction made but not deposited, with the date of deduction, the party's PAN, and the amount.
• Deposit the tax through challan with the interest calculated up to the date of payment.
• File or correct the quarterly TDS statement (Form 24Q, 26Q or 27Q, as applicable) and pay any late fee due.
• Check that the challan details and PANs match in the statement, so the deductee gets credit.
• If a notice or default intimation has already come, read it carefully, note the reply deadline and take professional help before replying.

How to avoid TDS default every month

The best fix is a fixed routine. Treat deducted TDS as government money, not working capital. Open a separate account or ledger head for it if that helps.

Generally, TDS deducted in a month is due for deposit by the 7th of the next month. The exception is tax deducted in March, which has a later date, so confirm it each year. Quarterly statements have their own due dates after each quarter ends.

Also collect the correct PAN from every vendor before you pay. A missing or wrong PAN can lead to a higher TDS rate and mismatches in the statement.

• Deduct at the right rate and on the right payments.
• Deposit by the due date every month.
• File the quarterly TDS statement on time.
• Issue TDS certificates to the deductees on time.
• Reconcile your books with TRACES at least once a quarter.

Need help with a TDS default or notice?

TDS rules look simple, but the interest calculation, correction statements and notice replies can get complicated. CGA - Canjain Global Advisors has CAs and Advocates who handle TDS compliance, corrections and departmental notices for businesses across India. Contact CGA through our website to get your TDS position reviewed before the department writes to you.

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