Interest on Late Payment of TDS in 2026: Interest, Late Fee, Penalties and Disallowance

TDS mistakes rarely stay small. A challan paid a week late, a contractor's bill booked without deduction, a quarterly statement filed after the due date — each sets off a separate charge, and they stack. This guide is for business owners, accountants and individuals who deduct TDS on rent or property and have missed a date. It explains the 1% a month or part of a month and 1.5% a month or part of a month interest rates and how the months are counted, the ₹200 a day late fee, the penalties, the expense disallowance and prosecution, and how each maps from the 1961 Act to the Income-tax Act, 2025 — with worked examples in rupees.

Quick answer

Interest on late payment of TDS is 1.5% a month or part of a month from the date tax was deducted to the date it is paid, and 1% a month or part of a month from the date it should have been deducted to the date it is deducted, under section 398(3) of the Income-tax Act, 2025 (old section 201(1A)). Any part of a month counts as a full month. A late fee of ₹200 a day applies for each day a TDS statement is late, capped at the TDS.

• Penalty for late or wrong statements: ₹10,000 to ₹1,00,000 (s.461) — none if fixed within one month

• Penalty for not deducting: up to the tax itself (s.448)

• 30% of the expense disallowed if TDS on a resident payment isn't paid by the return due date

• Prosecution possible if deducted tax is not paid at all (s.476)

• Interest and fee must be paid before the statement is filed

What happens when TDS goes wrong

The Act treats a deductor who does not deduct, or deducts but does not pay, as an "assessee in default" for that tax under section 398(1). That status is what lets the Department recover the TDS itself from you, charge interest, and start penalty proceedings. It applies equally to a listed company, a sole proprietor paying a contractor and a salaried person who bought a flat.

Five separate consequences can follow, and they are not alternatives. Interest compensates the government for the delay. The late fee is a fixed daily charge for filing the statement late. Penalties are discretionary and levied by an Assessing Officer. The disallowance increases your own taxable profit. And prosecution is reserved for tax that was deducted and kept. Fixing one does not cancel the others: paying the interest does not waive the fee, and filing the statement does not undo a disallowance in a return already filed.

The cost of a TDS default (2026-27)

1% a month or part of a month

Late deduction

s.398(3)(a)(i)

1.5% a month or part of a month

Late deposit

s.398(3)(a)(ii)

₹200 a day

Late statement fee

s.427, capped at the TDS

30%

Expense disallowed

s.35(b), resident payees

Interest for late deduction: 1% a month

Section 398(3)(a)(i) charges simple interest at 1% a month or part of a month on the tax for every month or part of a month from the date on which it was deductible to the date on which it is actually deducted. The "date deductible" is set by the provision for that payment — for most non-salary payments, the date of credit in your books or of payment, whichever is earlier. A provision for expenses booked at the year-end is a credit, so the clock can start on 31 March even if the invoice arrives later.

There is a fallback when the payee has already paid tax on the income. Under section 398(2), you are not an assessee in default for the tax itself if the payee has filed a return, included the payment in it and paid the tax due, and you obtain a certificate from an accountant to that effect in the prescribed form. Interest at 1% a month or part of a month still runs, but only until the date the payee filed the return. The same certificate saves you from the disallowance for the year in which that return was filed.

Interest for late deposit: 1.5% a month

Once tax has been deducted, it belongs to the government. Section 398(3)(a)(ii) charges 1.5% a month or part of a month from the date of deduction — not from the due date — to the date of payment. The due date matters only to decide whether you are late: tax deducted in a month is due by the 7th of the next month (30 April for March deductions by non-government deductors), and tax deducted by individuals through Form 141 is due within 30 days from the end of the month in which tax is deducted. Miss that date by a day and interest is counted all the way back to the deduction.

Section 398(3)(b) requires the interest to be paid before you file the TDS statement for the period. In practice you pay it through the same challan route as TDS, under your TAN (or PAN for Form 141), entering the amount in the interest field, and then tag that challan in the statement. If you leave it out, the statement is processed with a default and an intimation follows.

How the months are counted

The law says "every month or part of a month". TRACES, which processes statements, counts calendar months: the month of deduction, every month in between, and the month of payment each count as one month. Tax deducted on 25 June and paid on 10 August therefore attracts three months — June, July and August — even though the delay after the due date was only a few days. Some tribunals, including the Hyderabad and Ahmedabad benches, have read "month" as a 30-day period, which can give a lower figure; that argument is for an appeal, not for the challan.

The late fee: ₹200 a day

Section 427 (old section 234E) charges a fee of ₹200 a day for every day during which a statement remains unfiled after its due date. The fee cannot exceed the tax deductible for that statement, and it must be paid before the statement is delivered — the utility and the portal will not accept a late statement without it. Quarterly statements — Form 138 for salary, Form 140 for other payments to residents and Form 144 for non-residents — are due on 31 July, 31 October, 31 January and 31 May; Form 141 is due within 30 days from the end of the month in which tax is deducted.

The fee is automatic. There is no "reasonable cause" defence and no officer's discretion, which is why it is often the largest charge for small deductors who filed late but paid on time. A statement with nil TDS for the quarter attracts no fee, because the cap is zero, but you still need to file it if you are required to. Our TDS return filing guide covers the statements and how to avoid rejections.

Penalties

Late or incorrect statements — section 461. The Assessing Officer may impose a penalty of ₹10,000 to ₹1,00,000 if you do not file a statement on time or file it with incorrect information, such as wrong PANs, wrong challan details or understated tax. For delay, section 461(2) gives a safe harbour: no penalty if you prove the tax, fee and interest were paid and the statement was filed within one month of the due date. Under the old section 271H the window was one year; the Finance (No. 2) Act 2024 cut it to one month from 1 April 2025, and the new Act kept the shorter period.

Failure to deduct or pay — section 448. If you fail to deduct the whole or part of the tax, the officer may impose a penalty equal to the tax not deducted. Section 398(7) adds that no penalty is levied unless the officer is satisfied that you failed without good and sufficient reason, so genuine classification disputes — whether a payment was commission or a discount, for instance — are often argued successfully.

Default in payment — section 412. Once tax is demanded from you as an assessee in default and remains unpaid, a further penalty of up to the amount in arrears can be levied, again subject to a hearing and reasonable cause.

Certificates — section 465. Failing to issue a TDS certificate on time carries ₹500 a day for each day of default, capped at the tax deductible. See our Form 16A and Form 131 guide for the due dates.

Prosecution — section 476. Not paying tax you have deducted is a criminal offence punishable with rigorous imprisonment of three months to seven years, with fine. Section 476(2) protects deductors who pay the tax by the due date of the statement for that period. Prosecution needs sanction and is used against serious, deliberate defaults, but it is a reason never to treat deducted TDS as working capital.

Disallowance of the expense

The cost that hurts most businesses is in their own income tax return. Section 35(b)(i) disallows 30% of any sum payable to a resident — rent, contract charges, professional fees, commission, interest — if TDS was required but was not deducted, or was deducted but not paid by the due date for filing the return. The Department's transition FAQs confirm that this corresponds to the old section 40(a)(ia).

The disallowance is a timing difference, not a permanent loss. Section 35(b)(i)(A) allows the 30% back as a deduction in the year in which the tax is finally paid. For payments to non-residents the rule is harsher: section 35(b)(ii) disallows the whole of the interest, royalty, technical fee or other sum until the tax is paid. Salary paid to a non-resident without TDS is disallowed entirely under section 35(c).

Whether the interest itself is deductible is unsettled. The Madras High Court held in Chennai Properties & Investments (1999) that interest for late TDS is not business expenditure, and several tribunals follow it; the Karnataka High Court in Oriental Insurance treated the interest as compensatory, which is the basis for the contrary view. Most businesses add it back in the computation to avoid a dispute.

Old Act vs Income-tax Act, 2025

Consequence	1961 Act	2025 Act	Amount
Interest — late deduction	s.201(1A)(i)	s.398(3)(a)(i)	1% a month or part of a month
Interest — late deposit	s.201(1A)(ii)	s.398(3)(a)(ii)	1.5% a month or part of a month
Late filing fee	s.234E	s.427	₹200 a day, capped at TDS
Penalty — statements	s.271H	s.461	₹10,000 to ₹1,00,000
Penalty — failure to deduct	s.271C	s.448	Equal to the tax
Disallowance — residents	s.40(a)(ia)	s.35(b)(i)	30% of the expense
Certificate default	s.272A(2)(g)	s.465	₹500 a day
Prosecution	s.276B	s.476	3 months to 7 years

Interest — late deduction

1961 Act

s.201(1A)(i)

2025 Act

s.398(3)(a)(i)

Amount

1% a month or part of a month

Interest — late deposit

1961 Act

s.201(1A)(ii)

2025 Act

s.398(3)(a)(ii)

Amount

1.5% a month or part of a month

Late filing fee

1961 Act

s.234E

2025 Act

s.427

Amount

₹200 a day, capped at TDS

Penalty — statements

1961 Act

s.271H

2025 Act

s.461

Amount

₹10,000 to ₹1,00,000

Penalty — failure to deduct

1961 Act

s.271C

2025 Act

s.448

Amount

Equal to the tax

Disallowance — residents

1961 Act

s.40(a)(ia)

2025 Act

s.35(b)(i)

Amount

30% of the expense

Certificate default

1961 Act

s.272A(2)(g)

2025 Act

s.465

Amount

₹500 a day

Prosecution

1961 Act

s.276B

2025 Act

s.476

Amount

3 months to 7 years

Worked examples in ₹

1. Deposit a few days late. A trading company deducts ₹50,000 from a contractor's bill on 25 June 2026 and pays it on 10 August 2026. The due date was 7 July. Interest at 1.5% a month or part of a month runs from 25 June: June, July and August are three months, so 4.5% × ₹50,000 = ₹2,250. Had it paid on 10 July, two months would have cost ₹1,500.

2. Deducted late. A firm credits a ₹10,00,000 contract bill on 10 May 2026 but deducts the 2% TDS of ₹20,000 only on 15 July, and pays it on 7 August. Interest for late deduction at 1% a month or part of a month covers May, June and July — 3% × ₹20,000 = ₹600. The deposit was within the due date for July deductions, so no further interest applies.

3. Late statement. The Form 140 for July–September 2026, due 31 October, is filed on 14 December — 44 days late. The fee is 44 × ₹200 a day = ₹8,800. If total TDS for the quarter was only ₹6,000, the fee is capped at ₹6,000. Because the filing was more than one month late, the section 461 safe harbour is lost and a penalty of ₹10,000 to ₹1,00,000 can be considered.

4. Never deducted. A proprietor under audit pays ₹8,00,000 of professional fees in 2026-27 without deducting TDS and discovers it in the tax audit. 30% of the fees — ₹2,40,000 — is added to that year's profit. If the TDS of ₹80,000 is paid in 2027-28, the ₹2,40,000 is allowed in 2027-28. Interest at 1% a month or part of a month from each payment date to the date of deduction is still payable, and penalty under section 448 is possible.

5. Home buyer files Form 141 late. Neha deducts ₹72,000 from a flat payment on 12 November 2026; Form 141 is due on 30 December. She pays and files on 15 January 2027. Interest is 4.5% × ₹72,000 = ₹3,240 for November, December and January, and the fee is 16 days × ₹200 a day = ₹3,200. Both are paid with the form. Our guide to TDS on purchase of property explains the form.

Work out the TDS firstGet the TDS amount right before you calculate the interest — free, no login.

TDS deadlines that start the interest clock (2026-27)

7th of each month

Deposit TDS deducted in the previous month (business deductors)

30 days after month-end

Form 141 payment and filing for property, rent and other individual deductors

30 April

Deposit TDS deducted in March

31 July, 31 October, 31 January, 31 May

Quarterly statements (Forms 138, 140, 144) — late fee starts the next day

One month after each due date

Last day to avoid the section 461 penalty for a late statement

Notices, demands and how to clear them

Statements are processed by the TDS Centralised Processing Cell under section 399, and any interest, fee or short deduction it finds is sent as an intimation within one year from the end of the financial year in which the statement was filed. On TRACES the default summary and the justification report show each item — late payment interest, late deduction interest, short payment, short deduction and late filing fee — challan by challan.

To clear a demand, pay the amount through a challan under your TAN and file a correction statement that tags the challan to the defaults, or, if the demand is wrong, correct the statement — a challan entered against the wrong quarter or a PAN typed incorrectly is a common cause. Corrections can be filed within two years from the end of the tax year in which the statement was due. An order treating you as an assessee in default for failure to deduct must normally be passed within six years from the end of the tax year in which the tax was deductible.

Clearing a TDS default

1. 1

   Download the justification report

   Log in to TRACES with your TAN, request the justification report for the statement, and see which challans or deductees caused each default.

   TRACES
2. 2

   Check before you pay

   Look for mismatched challans, wrong PANs or wrong section codes — fixing the statement may remove the default without any payment.

3. 3

   Pay the balance

   Pay the interest, fee or short deduction through e-Pay Tax under your TAN, entering each amount in the right field.

4. 4

   File a correction statement

   Tag the new challan to the statement and correct any deductee rows, then check that the default disappears after processing.

Common mistakes and how to fix them

Counting interest from the due date. Interest for late deposit runs from the date of deduction. Calculate from that date, not from the 7th.

Filing the statement before paying interest. Section 398(3)(b) requires the interest to be paid first. A statement filed without it is processed with a default.

Assuming the fee is a penalty you can contest. The ₹200 a day fee is mandatory. Penalty under section 461 is discretionary and avoidable by filing within one month.

Waiting for the notice. Every month adds 1.5% a month or part of a month of the tax. Pay as soon as you find a default.

Forgetting the March deadline. March deductions are due on 30 April; missing it by a day costs three months of interest — March, April and May.

What changed under the Income-tax Act, 2025

The Income-tax Act, 2025 took effect on 1 April 2026. It moved TDS interest from section 201(1A) to section 398(3), the late fee from section 234E to section 427, the statement penalty from section 271H to section 461, the failure-to-deduct penalty from section 271C to section 448 and the disallowance from section 40(a)(ia) to section 35(b). The rates and amounts did not change, and the Department's transition FAQs confirm that defaults for periods up to 31 March 2026 continue to be handled under the old Act.

Two changes made by the Finance (No. 2) Act 2024 are now part of the new law. The one-year window to avoid the statement penalty was cut to one month from 1 April 2025, and prosecution for not paying deducted tax no longer applies where the tax is paid by the due date of the statement. Both reward deductors who catch and fix a default within weeks rather than months.

Official links

• Income-tax Act, 2025 — Gazette texts.398, 427, 461, 448, 412, 476, 35(b), 465
• TDS compliance helpInterest rates, transition rule, disallowance
• Form 141 FAQsDue dates for individual deductors
• e-Filing portalPay TDS, interest and fee
• TRACESDefaults, justification report, corrections

What to do next

Run through this quarter's challans against deduction dates and check each was paid by the 7th; pay any shortfall with interest before the statement is due, and file within one month of the due date at the latest. Use our free TDS calculator to confirm the deduction itself, and read what TDS is and how it works for the due dates across all payments.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

What is the interest on late payment of TDS?

If you deduct TDS but deposit it late, interest is 1.5% a month or part of a month from the date of deduction to the date of payment, under section 398(3)(a)(ii) of the Income-tax Act, 2025 (old section 201(1A)). If you fail to deduct on time, interest is 1% a month or part of a month from the date tax was deductible to the date you deduct it. Both are simple interest and must be paid before you file the TDS statement.

How is TDS interest calculated for part of a month?

The law charges interest for every month or part of a month, so any part of a month counts as a full month. The TDS processing system counts calendar months: tax deducted on 25 June and paid on 10 August attracts three months — June, July and August — or 4.5% at 1.5% a month or part of a month. A few tribunals have read 'month' as a 30-day period, but expect the portal's calculation.

What is the late fee for filing a TDS return late?

A fee of ₹200 a day applies for every day the quarterly statement is late, under section 427 (old section 234E), capped at the TDS amount for that statement. It must be paid before the statement is accepted. It applies to Forms 138, 140, 144 and 141, and is separate from any penalty.

What is the penalty for not filing a TDS return?

The Assessing Officer can impose a penalty of ₹10,000 to ₹1,00,000 under section 461 (old section 271H) for not filing a statement on time or for filing incorrect details. No penalty applies for delay if the tax, fee and interest are paid and the statement is filed within one month of the due date — a window cut from one year from 1 April 2025.

What is the penalty for not deducting TDS?

Under section 448 (old section 271C), the Assessing Officer can levy a penalty equal to the tax you failed to deduct or pay, unless you show good and sufficient reason. On top, the expense may be disallowed: 30% of a payment to a resident on which TDS was not deducted or paid by the return due date is added back to profit.

Is interest on late payment of TDS a deductible business expense?

Courts are divided. The Madras High Court held in Chennai Properties (1999) that this interest is not business expenditure, and several tribunals follow it; the Karnataka High Court in Oriental Insurance treated it as compensatory rather than penal, which some argue makes it deductible. Most businesses treat it as not deductible to avoid a dispute; discuss your position with your tax adviser.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 12 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1. 1.The Income-tax Act, 2025 (Act No. 30 of 2025), Gazette of India Extraordinary, 21 August 2025 — Ministry of Law and Justice (Legislative Department) · accessed 12 October 2026
2. 2.TDS Compliance — e-Filing help (FAQs on the transition to the Income-tax Act, 2025) — Income Tax Department (e-Filing portal) · accessed 12 October 2026
3. 3.Form 141 — FAQs — Income Tax Department (e-Filing portal) · accessed 12 October 2026
4. 4.Memorandum explaining the provisions in the Finance (No. 2) Bill, 2024 — Ministry of Finance (Union Budget 2024-25) · accessed 12 October 2026
5. 5.TDS late payment interest calculator — Income Tax Act 2025 — TaxHeal · accessed 12 October 2026
6. 6.Section 461: penalty for not filing TDS or TCS returns — TDSMAN · accessed 12 October 2026
7. 7.Interest on late payment of TDS — allowability — TaxGuru · accessed 12 October 2026