Tax Deducted at Source (TDS): Common Compliance Failures and Their Tax Consequences

TDS is where most small errors become expensive. A missed deduction, a late deposit or a wrong code rarely feels serious on the day, but interest, fees, disallowances and penalties add up quickly. This year the law has also changed underneath practitioners, so first work out which Act applies.

Which law applies?

TDS on payments from 1 April 2026 falls under the Income-tax Act, 2025: salary under s. 392, other payments under s. 393 and TCS under s. 394. Defaults for earlier periods, such as FY 2025-26, are still assessed under the 1961 Act. Both regimes will therefore be live in notices for years.

Three practical changes:

• Deposits and returns now use numeric payment codes instead of familiar section labels like 194C.
• Quarterly returns use new forms (138 for salary, 140 for non-salary resident payments, 144 for non-resident payments and 143 for TCS), and the salary certificate is Form 130 in place of Form 16.
• The old section labels still appear in conversation, but notices and software use the new numbering.

What a default costs

Interest is compensatory and cannot be waived. Late fees must be paid before the delayed statement is filed.

The failures we see most

1. Wrong section, code or rate. Under the 2025 Act, s. 393 groups payments into tables. A payment mapped to the wrong row leads to a short deduction and a default notice.
2. Stale thresholds. Finance Act 2025 revised several thresholds and rates, including the commission rate and the rent and professional-fee limits. Check the current s. 393 table instead of relying on last year's chart.
3. Partner payments. TDS on salary, remuneration, commission, bonus or interest paid to partners (s. 393(3), formerly 194T) was introduced for payments from 1 April 2025. Many firms still miss it.
4. Late deposits. The usual due date is the 7th of the following month, and 30 April for March deductions. Interest runs from the date of deduction.
5. Late quarterly returns. The due dates are 31 July, 31 October, 31 January and 31 May. The ₹200-a-day fee accrues daily until the statement is filed.
6. PAN errors. A missing or invalid PAN means a higher rate and a credit mismatch for the deductee.
7. Non-resident payments. Missing the s. 393(2) deduction attracts the harsher 100% disallowance, and the Form 15CA/15CB trail is often incomplete.
8. Ignoring the credit side. TDS is due at the earlier of credit or payment. Year-end provisions are a classic trap.
9. Not reconciling. Compare statements with Form 26AS and AIS before filing, because the deductee's credit depends on them.

Prosecution: what changed

The Finance Act, 2026 rationalised the criminal side:

• Rigorous imprisonment is replaced by simple imprisonment, with lower maximum terms.
• Reported thresholds are fine-only where the tax involved is up to ₹10 lakh, up to six months where it is ₹10 to ₹50 lakh, and up to two years above ₹50 lakh.
• Certain TDS offences, such as those involving in-kind transfers, are decriminalised.
• Under s. 476, there is no prosecution if TDS is deposited before the due date for filing the TDS statement. Interest and late fees still apply.

Defences that work

• Form 26A: where the payee has reported the income and paid the tax, a Chartered Accountant's certificate in Form 26A can relieve the deductor of "assessee in default" status. It can also help on the disallowance.
• Reasonable cause: this can defend the penalty under s. 448, but not the interest.
• Complete documentation: keep contracts, invoices, challans and PAN verification for every payee.

Practitioner checklist

1. Tag every vendor to the correct s. 393 row.
2. Re-check thresholds and rates each April.
3. Calendar the 7th-of-month deposits and the quarterly return dates.
4. Reconcile with Form 26AS and AIS before filing.
5. Pay interest and late fees before filing late statements.
6. For FY 2025-26 and earlier notices, reply under the 1961 Act sections.