19 March 2009
-The Income Tax Department is levying interest u/s 201(1A) for variation in the deduction of the TDS on Salary on month to month basis for the last 3 years(2005-06,2006-07,2007-08). Sometimes the deduction is less than the average but sometimes it higher too. -TDS on Salary deducted and deposited on or before due date, everytime. -The Employer is passing the liability to Employees and recovering the same interest from the concern employees. - My query is 1. Whether the above approach is correct? 2. Is there any time limit for charging the interest u/s 201(1A)? 3. Whether it is the right interpretation of the quoted section.
19 March 2009
No Its not a right approach. Why should employee be suffer without fault. So Employer should bear all liabilities of Int on TDS less paid.
19 March 2009
Failure to deduct tax: Where the employer has failed to deduct tax or when short deduction of tax has been done, following statutory provisions are attracted :-
a) Charging of interest u/s 201(1A): The deductor is treated to'be 'assessee in default' in respect of the short deduction/non deduction of tax. Under Section 20H1A) he is liable to pay simple interest @ 15% per annum on the amount of tax in arrear from the date on which such tax was deductible to the date on which such tax is actually paid, to the credit of Central Govt, Charging of interest u/s 201(1A) is mandatory and there is no provision for its waiver.
Procedure for interest calculation: The calculation of interest is to be done as per Rule 119A and is summarised below :
(i) The period for which such interest is to be calculated is to be rounded off to a whole month or months and any fraction of month is to be ignored.
(ii) The amount of tax in respect of which interest is to be calculated is to be rounded off to nearest multiple of 100 ignoring any fraction of Rs. 100.
b) Penalty u/s 221: The assessee in default is liable to imposition of penalty where the assessing officer is satisfied that the defaulter has failed to deduct tax as required without good and sufficient reason. The quantum of penalty is not to exceed the amount of tax in arrear.
c) Penalty u/s 271C : A penalty equivalent to the amount of tax the deductor has failed to deduct, is leviable u/s 271C. Such penalty is however only leviable by a Joint Commissioner of Income Tax.
19 March 2009
According to Guidence notes to section 192, Excess or deficiency arising out of any previous deduction or failure to deduct tax at source during the financial year can be adjusted against subsequent deductions during such financial year(Sub-section(3)) - My concern is if any employee can change/declare the savings at the different point of time differently...it will effect the TDS amount for that month. -or may may from any other reason the TDs amount for the month may vary but if at the end of the financial year, the TDS is fully deducted and during the year also whatever deducted, deposited on time, whether Section 201(1A). -Section 201(1A) says if company does not deduct wholly or any part of the tax or after deducting fails to pay the tax shall be liable to pay interest. - Does`t it a debatabel issue that average tax per month can vary and interest should not be imposed on that on the basis of variation?
28 July 2025
Here's a detailed explanation addressing your concerns about TDS on salary, interest under Section 201(1A), and the issues related to monthly variation in TDS deduction:
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### 1. **Is employer’s approach of passing interest liability on short TDS deduction to employees correct?**
**No, it is not correct.**
* The **employer is the 'deductor' and hence the 'assessee in default'** under Income Tax law if TDS is not deducted correctly or deposited late. * **Interest under Section 201(1A) is payable by the employer/deductor**, not the employee. * Employees **should not bear the interest liability** because the responsibility to deduct and deposit TDS timely and correctly lies solely with the employer. * The employer can recover TDS amount from employees (where applicable), but **interest and penalty for short deduction/delay are the employer’s liabilities**.
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### 2. **Is interest under Section 201(1A) chargeable when TDS is deducted and deposited on or before due date but month-to-month deduction varies?**
* Interest under **Section 201(1A) applies when there is failure to deduct TDS or short deduction or late payment**. * If the **total TDS for the whole financial year has been deducted correctly and deposited on time**, then **no interest should be charged**, even if monthly deduction varies. * The law allows adjustment of TDS shortfall in one month against excess TDS deducted in another month in the **same financial year** (Refer: Section 192(3) and CBDT Circulars). * Hence, if the **aggregate TDS deducted and deposited by the employer for the entire financial year is correct and on time**, interest should **not be levied** just because monthly TDS amounts fluctuate. * However, if the **short deduction/deposit is not rectified within the same year**, interest will be applicable from the date tax was deductible till payment.
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### 3. **Is there a time limit for charging interest under Section 201(1A)?**
* Interest is charged from the **date on which tax was deductible** to the **date on which tax is actually paid**. * There is **no specific limitation period** like a few years; it continues till the shortfall is rectified. * However, for assessments and penalty proceedings, **normal limitation periods under Income Tax Act apply**, typically 3 or 6 years depending on the case.
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### 4. **Is it debatable that interest should not be imposed on monthly variation in TDS when overall TDS is fully paid?**
* **Yes, this is a valid point.** * As per **CBDT’s guidance and judicial precedents**, the tax authorities should consider the **net effect for the whole financial year**. * Interest should be levied **only for actual default or delay**, not for mere variations in monthly deduction if total deduction is correct. * Unfortunately, **some departments still raise interest notices without considering the aggregate position**, leading to disputes.
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### Summary Table:
| Question | Answer | | --------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | | Can employer pass interest liability to employee? | No, interest liability under Sec 201(1A) lies with employer only. | | Is interest chargeable if TDS is timely but monthly deduction varies? | No, if total TDS for FY is correct and timely, no interest should be charged. | | Time limit for interest under Sec 201(1A) | Interest from due date of TDS deduction to date of actual payment. | | Is interest on monthly variation debatable? | Yes, interest should only be on actual short deduction, not monthly variations if total TDS is correct. |
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### **What can be done?**
* Employer should calculate the **aggregate TDS for the financial year** and verify if total TDS was deposited timely. * If yes, **raise objection/appeal against interest demand for monthly variation** citing Section 192(3) and relevant CBDT circulars. * Employees should **not pay interest** on behalf of employer. * Consult a tax professional or legal advisor if notices are received to defend on this basis.
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If you want, I can help draft a reply or representation against such interest notices. Would you like that?