Interest on late payment of tds as per Income Tax Act 2025
Interest on Late Payment of TDS
Under the Income-tax Act, 2025, the interest rules for the late payment or late deduction of Tax Deducted at Source (TDS) are governed by Section 398(3)(a) of Income Tax Act 2025
If a person fails to deduct the tax or fails to pay the tax after deducting it, they are automatically liable to pay simple interest under the following two scenarios:
- Penalty for Late Deduction: If the tax is not deducted on time, simple interest is levied at 1% for every month or part of a month. This interest is calculated from the date on which the tax was supposed to be deductible up to the date it is actually deducted.
- Penalty for Late Payment: If the tax has been properly deducted but is not deposited to the credit of the Central Government on time, simple interest is levied at 1.5% for every month or part of a month. This interest is calculated from the date the tax was actually deducted up to the date it is finally paid.
Example of Interest on late payment of TDS
If TDS of April 2026 of Rs 20000 deducted in June 2026 and Deposited on 8th Aug 2026, Calulate Interest.
To calculate the interest for your scenario, we must apply the rules under Section 398(3)(a) of the Income-tax Act, 2025, which splits the interest into two separate components: one for late deduction and one for late payment.
Because the Act specifies that interest is calculated for “every month or part of a month,” any fraction of a month counts as a full month.
Here is the step-by-step calculation for a TDS amount of ₹ 20,000:
1. Interest for Late Deduction (Section 398(3)(a)(i))
- Rule: 1% per month (or part of a month) from the date the tax was supposed to be deducted until the date it was actually deducted.
- Period: April 2026 to June 2026. This counts as 3 months (April, May, and June).
- Calculation: ₹ 20,000 × 1% × 3 months
- Interest Amount: ₹ 600
2. Interest for Late Payment (Section 398(3)(a)(ii))
- Rule: 1.5% per month (or part of a month) from the date the tax was actually deducted until the date it is finally paid to the government.
- Period: June 2026 to 8th August 2026. This also counts as 3 months (June, July, and August).
- Calculation: ₹ 20,000 × 1.5% × 3 months
- Interest Amount: ₹ 900
Total Interest Payable You will need to pay the sum of both penalties before furnishing your TDS statement.
- Total Interest = ₹ 600 (Late Deduction) + ₹ 900 (Late Payment) = ₹ 1,500
(Note: This calculation assumes the standard interpretation of “part of a month” where the calendar months of April and June are both triggered. You will need to deposit this total interest of ₹ 1,500 along with your principal TDS amount of ₹ 20,000).
How to pay interest on late payment of tds online
Step-by-Step Payment Process
- Access the Portal: Visit the e-Filing portal and select e-Pay Tax from the “Quick Links” section on the home page.
- Verify Identity: Enter your 10-digit alpha-numeric TAN (Tax Deduction Account Number) and a mobile number for OTP verification.
- Select Payment Type:
- Click New Payment and choose the Pay TDS tile.
- Select Income Tax act 1961 or income tax Act 2025.
- Select the relevant Assessment Year (AY)./ Tax year after 1st april 2026.
- Enter Head Details:
- Major Head: Select (0020) for Company Deductees or (0021) for Non-Company Deductees.
- Minor Head: For self-initiated interest payments, select (200) TDS/TCS Payable by Taxpayer. If you are paying against a formal notice or demand from the Department, select (400) TDS/TCS Regular Assessment.
- Add Interest Amount: In the “Add Tax Breakup Details” screen, enter the specific interest amount in the Interest column.
- Complete Transaction: Choose your preferred payment mode (Net Banking, Debit Card, UPI, or Payment Gateway) and click Pay Now.
- Save Receipt: Download the generated challan counterfoil, which contains the CIN (Challan Identification Number) needed for reporting.
After payment, it is necessary to revise your TDS return to include the new challan details and clear any outstanding demands on the TRACES portal.
Interest on late payment of tds disallowed under which section
interest on late payment of tds disallowed under Section 34 Income Tax Act 2025 General conditions for allowable deductions.
Based on the provided provisions of the Income-tax Act, 2025, the exact phrase “interest on late payment of TDS” is not explicitly named in the disallowance sections. However, looking closely at Section 34 (General conditions for allowable deductions) and Section 35 (Amounts not deductible in certain circumstances), here is how the law applies to disallow this expense:
1. Disallowance under Section 34 (General Conditions) Section 34(1) states that for an expenditure to be allowed as a business deduction, it must be “laid out or expended wholly and exclusively for the purposes of the business or profession”.
However, Section 34 places strict negative conditions on what qualifies as a business expense. Interest on late payment of TDS is disallowed under the umbrella of these conditions because it is a statutory penalty/consequence for violating the law:
- Offences and Prohibited Acts: Under Section 34(2)(a), any expenditure incurred “for any purpose which is an offence or is prohibited by law” is strictly disallowed.
- Contravention of Law: Furthermore, Section 34(3) reinforces this by disallowing expenditures related to compounding an offence under any law, or settling proceedings initiated in relation to a contravention of any law.
Since delaying the deposit of TDS is a default of statutory provisions (making the deductor an “assessee in default” under Section 398), the interest paid for this default is treated as a consequence of contravening the law, and thus fails the test of being a legitimate, allowable business expense under Section 34.
2. Disallowance under Section 35 (Specific Tax Disallowances) While Section 34 deals with general business expenses and illegalities, Section 35 specifically deals with tax-related payments.
- Under Section 35(a)(i), any amount paid on account of “tax paid on income” (which includes any surcharge or cess on such tax) is explicitly disallowed as a business deduction. Statutory interest on TDS is generally interpreted as taking the colour of the income tax itself.
Summary of the Rule: If you delay the deposit of TDS, you are liable to pay simple interest at 1.5% per month under Section 398(3)(a)(ii). When you pay this interest, you cannot claim it as a business expense because Section 34 prohibits deductions for expenses arising from contraventions of the law or offences, and Section 35 broadly disallows the payment of income tax from being treated as a deductible expense.
Key Legal Provisions
- Section 37(1): This is the residuary section for business expenses. Tax authorities and several courts disallow TDS interest here because it is not considered an expenditure incurred “wholly and exclusively” for the purpose of business.
- Direct Tax Character: Courts (such as the Madras and Calcutta High Courts) have ruled that TDS interest takes its “colour” from the principal tax. Since income tax itself is not a deductible business expense, interest on it is also disallowed.
- Non-Compensatory Nature: While some argue this interest is “compensatory” and should be allowed, many recent ITAT rulings (like those from Delhi and Kolkata Benches) have held it is a penal charge for non-compliance with statutory laws, which is expressly disallowed under the proviso to Section 37(1).
- Section 40(a)(ii): This section specifically prohibits the deduction of “any sum paid on account of any rate or tax levied on the profits or gains of any business”. Authorities often link the disallowance to this section by treating the interest as part of the tax liability itself.
Summary of Disallowance Reasons
- Not a business expense: Late payment of a statutory liability is not considered a part of regular business operations.
- Inextricably linked to Income Tax: Interest on a direct tax is viewed as having the same non-deductible status as the tax itself.
- Violation of Law: Proviso to Section 37(1) disallows any expenditure incurred for a purpose that is an infringement of law.
Interest on late payment of tds on sale of property
Under the Income-tax Act, 2025, the requirement to deduct TDS on the purchase of immovable property (other than agricultural land) is governed by Section 393(1) [Table: Sl. No. 3(i)], which mandates a 1% deduction if the consideration or stamp duty value is ₹50 Lakhs or more.
If a buyer fails to deduct or is late in depositing this TDS, they are deemed an “assessee in default” under Section 398(1). The interest levied on the late payment of this TDS is strictly governed by Section 398(3)(a), which imposes simple interest in two specific ways:
- Delay in Deduction (1% per month): If the buyer was late in deducting the tax from the seller’s payment, simple interest is charged at 1% for every month (or part of a month) calculated from the date the tax was supposed to be deducted until the date it was actually deducted.
- Delay in Deposit/Payment (1.5% per month): If the buyer deducted the tax but was late in depositing it to the Central Government, simple interest is charged at 1.5% for every month (or part of a month) calculated from the date the tax was deducted until the date it is actually paid to the government.
Important Condition: The law explicitly mandates that any such accumulated interest for late deduction or late payment must be paid before furnishing the TDS statement to the Income Tax Department.
Key Compliance Rules regarding this Interest on late payment of TDS:
- Prerequisite for Return Filing: The accumulated interest must be paid before you are allowed to furnish the quarterly TDS statement (under Section 397(3)(b)).
- Charge on Assets: If the deducted tax remains unpaid, the outstanding tax amount, along with the accumulated simple interest, becomes a formal charge upon all the assets of the defaulting person.
- Departmental Orders: If the Assessing Officer issues a specific order regarding the default, the interest must be paid by the person as directed in that order.
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