TDS Deduction & Penalty - Non-Compliance With TDS

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  • 11 Mar 2023

You are liable to deduct tax on payments if they cross the threshold set under Sections 192 to 194 of the Income Tax Act, 1961.

The amount you deduct as TDS has to be deposited with the government.

Let us look at the 5 steps you need to follow to deduct and deposit TDS, and with each step we would also look at the implications of non-compliance.

Step 1:

As a payer, you will have to obtain a TAN Number (Tax Deduction Account Number) as per Section 203A of the Income Tax Act. This section is used for all TDS-related matters such as returns, deposits etc.

Step 2:

Calculate and deduct tax on the payment made/credited to the payee.

Step 3:

Deposit tax with the government as per Rule 30(2) of the Income Tax Rules. The deadlines for this are:

  • From April to February, the tax needs to submitted on or before the 7th day of the next month.

  • In case of March, the tax needs to be submitted on or before April 30.

If you miss either deducting or depositing the TDS amount, the following implications arise:

  1. When you fail to deduct TDS due: You will have to pay a simple interest of 1% as interest on late payment of TDS along with the TDS amount. Remember that you are considered a defaulter and not the person receiving the income.

  2. When you fail to deposit TDS: If you deduct the TDS amount but fail to deposit the same, you will have to pay a simple interest of 1.5% as interest on late payment of TDS under Section 201(1A)(iie) of the Income Tax Act.

  3. Fine charged by joint commissioner: Under Section 271C, the joint commissioner can charge a fine of up to the total amount of TDS that you have missed to either deduct or pay, in addition to the interest mentioned above.

  4. Expenses not considered: Under Section 40a(i), if you miss deducting TDS on a payment made to a non-resident, you will not be allowed to show the payment as an expense for tax purposes. Similarly, if such a miss was made in a payment to a resident, you would only be permitted to show 70 % of the amount as an expense. This would result in a higher tax liability for you.

  5. Repeat Offense: If you are a repeat offender or the quantum of TDS not paid is high, you can be punished with rigorous imprisonment for a maximum term of seven years and with fine under Section 276.

Step 4:

The next step is to file the TDS return with the Income Tax department as per Rule 31A. The deadlines for this are:

  • For the quarter ending 30th June – by 31st July;

  • For the quarter ending 30th September – by 31st October;

  • For the quarter ending 31st December – by 31st January;

  • In case of the quarter ending 31st March – by 31st May.

In this case, there are can be two breaches: either the payer is delaying filing the TDS return or has filled the TDS form incorrectly.

  • Implication of delayed filing: If you miss the deadline for filing the TDS return, you will have to pay a fine of Rs. 200/- per day or the amount of TDS payable for that quarter – whichever is lower.

  • Implication of Incorrect filing: If you file an incorrect return, the assessing officer will notify you. If you fail to rectify the error within the specified time period, a penalty will be charged under Section 271H of the Income Tax Act. This can range from Rs. 10,000 to Rs. 1 lakh.

  • Are there ways to seek relief from paying these penalties? Relief from the penalty Section 271H is available in following situations:

If you have paid TDS and/late fee to the government If the corrected TDS return is filed within one year of the original filing

Step 5:

  • You need to issue TDS certificate to the payee. The timeline for this is as follows:

  • TDS deduction for the period April to June – Certificate to be given by 15th August;

  • TDS deduction for the period July to September – Certificate to be given by 15th November;

  • TDS deduction for the period October to December – Certificate to be given by 15th February;

  • TDS deduction for the period January to March – Certificate to be given by 15th June;

  • For TDS deduction on salaries - Annual certificate (Form 16) to be given by 15th June.

There will be a penalty of Rs 100 per day of delay per certificate or TDS payable for that quarter, whichever is lower. Adhering to timelines of deducting, paying and filing TDS regularly is a good practice and ensures that you aren’t a recipient of notices from the income tax department.

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