Section 154 of Income Tax Act
April 25, 2018
SECTION 2(22)(e) – Deemed Dividend – Taxable for Shareholders
April 26, 2018

Section 201 – Interest on Late Payments of TDS

Last Update Date : April 27, 2018

As already known to everyone, the Income Tax department (I-T department) is a government agency in charge of Income tax collection in India. If you are liable to pay tax then you must pay it, there is no escape. Not paying taxes or even delaying it can put you in trouble. In some cases, the tax department puts the onus of deducting and submitting tax of a person / entity on some other person / entity. In such cases, if the person or entity fails to deduct tax or pay deducted tax, the tax department penalises it. Section 201 of the Income Tax, 1961 explains about the interest charged on such person or entity on late payments of TDS. This in-depth guide by H&R Block describes everything about this penalty.

Section 201

What is Section 201 of the Income Tax Act?

Tax deducted at Source or TDS is generally a tax on source of income. It is an indirect method of tax collection with concepts such as ’pay as you earn’ and ‘collect as it is earned.’ TDS is applicable for salaries, interest payment by banks, payment of commission, payment of rent, payments made to consultants, fees to lawyers or freelancers. In case of a salaried individual, the employer deducts TDS based on income tax slab rates. For interest earned on money in bank account, the banks will deduct TDS @10% and if the bank does not have PAN information of the customer then it will deduct TDS @20%.

As TDS is collected at the source of income, therefore tax deduction of an individual is not taken into account. So, the individual can, later on, declare and submit his/her investment proof to file a return and then claim for the TDS refund. In case you fail to file the TDS return or TDS certificate, will end you up in paying late fees or interest or penalty. Section 201 of Income Tax Act, 1961 provides for these consequences of failure to deduct or pay TDS.

No Assessee in Default under Section 201(1)

Section 201 (1) of Income Tax Act expressly states that any person liable to deduct TDS on the income distributed, makes default in the deduction and/or payment of TDS, shall be treated “assessee in default” and penalty u/s 221 of Income Tax Act shall be payable by such assessee. It explains the Interest and late payments fees. Let’s start with Section 201 (1A).

The Section 201(1A) provides the interest rates for the following two situations:

Situation Interest Rates Period of Interest
Delay in deduction of TDS 1% per month or part* thereof From the month in which TDS was deductible to the date of deduction
Delay on payment of TDS 1.5% per month or part* thereof From the month in which TDS was deducted to the date of payment of tax

Note: Any part of month will be converted into full month. Let’s say if it is 5 months and 6 days, so it will be taken as 6 months.

Talking about Section 201 (1), it explains that who is asseesee in default and if he is assessee in default then penalty may be levied on him. Interest u/s 201(1A) is paid whether he is assessee in default or not.

Note: Where an assessee is deemed to be in default, the assessing officer may levy penalty u/s 221 to the extent of tax and interest in arrears.

However, in the case where the assessing officer is satisfied that their exist good and sufficient reason for the assessee to breach the provision of this section, penalty shall not be levied u/s 221.

Any person including the principal officer of the company, who fails to deduct tax in accordance with the provision of the law on the sum paid or credited in favour of a resident shall not be deemed to be an assessee in default in respect of such tax if the following conditions are satisfied:

  • The payee resident has furnished his return of income u/s 139
  • He has taken into account such sum for computing his total income
  • He has paid tax due on the income declared by him in such return of income and
  • The person who failed to deduct tax at source furnish the certificate of the CA that the payee has fulfilled the above said condition the certificate of CA will be in form 26A

In such case if he not assessee in default, interest u/s 201(1A) shall be payable from the date on which such tax was deductible to the date of furnishing of return of income by such resident.

What does Assessee in Default Mean?

Assessee would be deemed to be as an assessee in default in either of the following condition:

  • The person who is responsible to deduct tax in respect of all the payment covered under TDS provision but fails to deduct or after deducting fails to pay the whole or part of the tax as per law.
  • The employer who is responsible to pay tax on non-monetary perquisites provided to the employee but fails to pay whole or any part of the tax on such non-monetary benefit.

Section 201(2)

Where the tax deducted has not been paid, the amount of tax together with interest payable as above shall be a charge upon all the assets of the person or the company who is in default section 201(2).

Section 201(3)

No order shall be made deeming the assessee to be in default who fails to deduct whole or part of the tax after the expiry 7 year from the end of the financial year in which payment is made or credit given.

Penalty for failure to furnish statements etc. under section 271H

The act reads as follows:

  • Without prejudice to the provisions of the Act, a person shall be liable to pay penalty, if, he (a) fails to deliver or cause to be delivered a statement within the time prescribed in sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C; or (b) furnishes incorrect information in the statement which is required to be delivered or caused to be delivered under sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C.
  • The penalty referred to in sub-section (1) shall be a sum which shall not be less than ten thousand rupees but which may extend to one lakh rupees.

Examples of Computation

PQR Ltd. got work done from ABC LTD for Rs 5, 00, 000 in September 2016 and credited in its books for the same. PQR Ltd paid the in December 2016 and deducted TDS @ 10% i.e. Rs 50,000 in December itself. Now, as per section 194J required that, PQR Ltd. had to deduct the TDS on payment and credit basis whichever is earlier. Which means PQR Ltd. had to deduct the TDS in the month of September, 2016 itself and paid the TDS by 7th October 2017 i.e. the due date of TDS.

Since PQR Ltd. has deducted and paid the TDS late, they will have to pay interest under section 201 (1A).

TDS under situation 1: TDS is not deducted on time

The interest will be calculated from the month in which it ought to be deducted (September 2016) to the month in which it is actually deducted.
So total months are four months (September to December).
Interest will be 50,000 X 1% X 4 = Rs 2,000

TDS under situation 2: TDS is not paid on time

The interest will be calculated from the month in which it ought to be deducted (September 2016ssss) to the month in which TDS is actually paid.
So total months are four months (September to December).
Interest will be 50,000 X 1.5% X 4 = Rs 3,000

Frequently Asked Questions

What is the difference between PAN and TAN?

PAN stands for Permanent Account Number and TAN stands for Tax Deduction Account Number. TAN is to be obtained by the person responsible to deduct tax, i.e., the deductor. In all the documents relating to TDS and all the correspondence with the Income-tax Department relating to TDS one has to quote his TAN.  PAN cannot be used for TAN, hence, the deductor has to obtain TAN, even if he holds PAN. However, in case of TDS on purchase of land and building (as per section 194-IA) as discussed in previous FAQ, the deductor is not required to obtain TAN and can use PAN for remitting the TDS.

I have not received TDS certificate. Can I claim TDS in my return?

Yes, the tax credit in your case will be reflected in your Form 26AS and, hence, you can check Form 26AS and claim the credit of the tax accordingly.
However, the claim of TDS to be made in your return of income should be strictly as per the TDS credit being reflected in Form 26AS. If there is any discrepancy in the tax actually deducted and the tax credit being reflected in Form 26AS then you should intimate the same to the deductor and should reconcile the difference. The credit granted by the Income-tax Department will be as per Form 26AS.

How can I check TDS online?

Yes, you can check TDS online .We, H&R Block have a detailed guide on the same.

As it is rightly said wise men learn by other men’s mistakes, fools by their own, It is better to be a wise men or else a small mistake will land you in to paying heavy payments and penalties as discussed under section 201 of Income Tax Act, 1961. Looking forward for better understanding on Income tax, we at H&R Block would love to be at your service.

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