What Happens If You Don't Deposit TDS on Time

You deducted the TDS. You just didn't deposit it yet

You paid a consultant 80,000 last month. You deducted the TDS at 10%, so you transferred 72,000 and held back 8,000 to deposit with the government. Then the 7th came and went. A client escalation, a product launch, a team emergency. The 8,000 is still sitting in your account.

This is not a rare situation. It happens in most growing businesses at some point.

The problem is that the Income Tax Act does not treat this as an oversight. It treats it as holding on to government money. The penalties are structured accordingly.

Here is exactly what you are exposed to and what to do about it.

What the law actually requires

TDS obligations have two distinct steps that many founders conflate into one.

The first step is deduction. You are required to deduct TDS at the time of payment or at the time of credit in your books, whichever happens first. If you raise a payable entry for a vendor before you actually pay them, your TDS obligation has already been triggered.

The second step is deposit. The amount deducted must be deposited with the Income Tax department by the 7th of the month following the month of deduction. The one exception is March: TDS deducted in March must be deposited by April 30th.

Missing either step creates liability. Missing both creates compounding liability.

The penalty structure, laid out clearly

The Income Tax Act has four separate provisions that can apply when TDS goes wrong. They are not alternatives. Multiple provisions can apply to the same default at the same time.

Interest under Section 201(1A)

If you failed to deduct TDS at all, interest runs at 1% per month from the date the TDS was due to be deducted to the date it is actually deducted. If you deducted but failed to deposit, interest runs at 1.5% per month from the date of deduction to the date of deposit. Both are calculated on the TDS amount.

On 8,000 of TDS deposited two months late, the 1.5% monthly interest comes to 240. Small in isolation. At scale, across multiple vendors and quarters, it adds up.

Late filing fee under Section 234E

Every TDS return filed after its due date attracts 200 per day of delay. The fee applies per return, and it is capped at the total TDS amount for that return. So if you owe 8,000 in TDS on a return and you file 60 days late, the 234E fee is 12,000 but is capped at 8,000. The fee cannot exceed the TDS itself, but the fee is mandatory. Courts have confirmed it cannot be waived.

Penalty under Section 271C

The Assessing Officer can levy a penalty equal to the amount of TDS that was not deducted or not deposited. So if the TDS amount was 8,000 and the penalty is invoked, you could owe another 8,000. This is a discretionary penalty, meaning the officer decides whether to apply it, but the trigger is straightforward: TDS was not deducted or not paid on time.

Prosecution under Section 276B

This is the provision that founders don't know exists until they are deep in a default situation. Wilful failure to deposit TDS that has already been deducted can lead to prosecution. The punishment is imprisonment between 3 months and 7 years, along with a fine.

What "wilful" means and where the line sits

The word "wilful" does the heavy lifting in Section 276B. A genuine oversight, a first-time delay with a reasonable explanation, is unlikely to result in prosecution. The department generally reserves prosecution for patterns of behaviour: repeated defaults over multiple quarters, amounts that are significant, and situations where the TDS was deducted from the vendor but never reached the government.

The key distinction the courts draw is this: if the money was taken from the vendor and you had it but chose not to deposit it, that is the scenario where prosecution becomes real. If there was a genuine cash flow crisis and you can demonstrate that, the prosecution risk drops significantly, though interest and penalty still apply.

Do not assume that keeping quiet protects you. The vendor's Form 26AS does not show the TDS credit, and when they file their return, the mismatch creates a trail.

How to fix a TDS default

If you've missed a TDS deposit deadline, the path forward is straightforward.

Calculate the interest first. Work out the TDS amount, the months of delay, and the applicable interest rate (1% for failure to deduct, 1.5% for failure to deposit). The total you need to deposit is TDS plus interest.

Deposit using Challan 281 on the Income Tax portal. Select the correct section code for the type of payment (Section 194J for professional fees, 194C for contractors, and so on). Paying under the wrong section code creates reconciliation problems later.

File or revise the TDS return. The return must reflect the correct deposit details. If the return was already filed and is now being corrected, file a revised return through TRACES. If the return hasn't been filed yet, file it now with the correct challans linked.

Issue Form 16A to the vendor. Once the return is filed and processed, generate Form 16A from TRACES and issue it to the vendor. This is what they need to claim the credit in their own return. Until you do this, the credit does not appear in their Form 26AS.

Why this matters for the vendor too

When TDS is deducted but not deposited, the credit does not appear on the vendor's Form 26AS. They cannot claim what isn't reflected there. Their tax return shows income but no corresponding TDS credit, which means they end up paying tax on income from which tax was already deducted.

Some vendors follow up. Others don't notice until their CA raises it during return filing. Either way, it creates friction in the vendor relationship and may surface the default in a way you didn't anticipate.

Common mistakes founders make

Thinking TDS doesn't apply to small one-off payments. The thresholds matter. For professional fees under Section 194J, TDS applies once aggregate payments to a single vendor cross 30,000 in a financial year. For contractor payments under 194C, it's 30,000 per payment or 1 lakh aggregate per year. Below the threshold, no TDS. At or above it, TDS applies to the total amount, not just the excess.

Not treating the March-April 30 deadline as different from the rest. Every other month has a 7th-of-the-following-month deadline. March is the exception. TDS deducted in March must be deposited by April 30. Founders who run on autopilot miss this every year.

Deducting TDS at the wrong rate. If a vendor has submitted a lower deduction certificate under Section 197, the rate changes. If they haven't, the standard rate applies. Deducting at a lower rate than required triggers the 1% interest on the shortfall, plus potential penalty.

Assuming the accountant is tracking this. Unless you have explicitly confirmed that TDS tracking, deposit, and return filing is in scope for your accountant, it may not be. This is not an assumption. Get it in writing.

Key Takeaways

TDS must be deducted at the time of payment or credit in your books, whichever comes first. Deposit is due by the 7th of the following month, and April 30th for March deductions.
Interest under Section 201(1A) runs at 1% per month for failure to deduct and 1.5% per month for failure to deposit.
Late filing fee under Section 234E is 200 per day per return, capped at the TDS amount. Courts have confirmed it is not waivable.
Section 271C allows a penalty up to the TDS amount. Section 276B allows prosecution for wilful non-deposit, with imprisonment up to 7 years.
To fix a default: deposit TDS plus interest using Challan 281, file or revise the return, and issue Form 16A to the vendor.
Until TDS is deposited and the return is filed, the credit does not show on the vendor's Form 26AS, creating problems for their own tax return.