TDS Penalties and Prosecution in India: What You Need to Know in 2026

If you deduct TDS but miss a deposit deadline or skip filing your return on time – the Income Tax Department has clear penalties waiting for you. This article covers every major TDS penalty under the Income Tax Act, from interest on late deposits to the risk of rigorous imprisonment under Section 276B. You will also find the latest updates effective from April 2026, so you can stay compliant and avoid costly mistakes.

TDS Penalty Quick Reference Table

Here is a summary of key TDS default penalties at a glance:

Interest on Late or Non-Deduction: Section 201

Section 201 of the Income Tax Act treats a deductor as an ‘assessee in default’ when TDS obligations are not met. Two separate interest rates apply depending on the nature of the default:

• 1% per month (or part of a month) – if TDS was not deducted at all, calculated from the date on which TDS was deductible to the date of actual deduction.
• 5% per month (or part of a month) – if TDS was deducted but not deposited to the government, calculated from the date of deduction to the actual date of deposit.

Even a single day’s delay counts as a full month for interest calculation. For example, if you deduct TDS on 31 March but deposit it on 2 April, you pay interest for two months at 1.5%.

Late Filing Fee: Section 234E

Section 234E imposes a mandatory late fee of Rs. 200 per day for every day a TDS return is filed after the due date. This fee continues to accumulate until the return is filed, but it cannot exceed the total amount of TDS for that quarter.

This is not a penalty – it is a mandatory fee that applies automatically. It must be paid before you can file the TDS return. For businesses with small quarterly TDS amounts, this cap provides some protection, but for larger deductors the daily clock makes timely filing essential.

Penalty for Incorrect TDS Return: Section 271H

Filing an incorrect or incomplete TDS return can attract a penalty ranging from Rs. 10,000 to Rs. 1,00,000 under Section 271H. The Assessing Officer has discretion within this range based on the severity of the inaccuracy.

This section also applies when a return is not filed at all within one year of the due date. Errors such as wrong PAN details, incorrect challan amounts, or mismatched deductee information can all trigger this provision. Correcting errors promptly reduces the risk of a higher penalty.

Default in Issuing TDS Certificate: Section 272A(2)(g)

Every deductor is required to issue Form 16 (for salary) or Form 16A (for non-salary payments) to the deductee within the prescribed time. Failure to do so attracts a penalty of Rs. 500 per day under Section 272A(2)(g).

This penalty runs for each day of non-compliance. Unlike Section 234E, there is no cap tied to the TDS amount here, making sustained non-compliance particularly expensive.

Prosecution for Non-Deposit: Section 276B

Section 276B is the most serious provision in the TDS penalty framework. If a deductor collects TDS from payments but wilfully fails to deposit it with the government, prosecution proceedings can be initiated.

The punishment upon conviction is rigorous imprisonment ranging from 3 months to 7 years, along with a fine. Courts have consistently treated this as a serious economic offence, particularly when the deductor diverts TDS funds for other purposes.

The key word here is ‘wilful’ failure. If a deductor can demonstrate reasonable cause – such as genuine financial distress, administrative error, or reliance on incorrect professional advice – it may be a valid defence in prosecution proceedings.

Expense Disallowance Under Section 40(a)(ia)

Section 40(a)(ia) creates a direct tax cost even before any penalty is assessed. If TDS is not deducted on a payment that requires it, 30% of that expenditure is disallowed while computing business income.

This disallowance can be reversed in a later year when TDS is actually deducted and deposited. However, the timing mismatch increases the current year’s tax liability and may trigger interest under Section 234B or 234C as well.

Key Updates Effective April 2026

The government has introduced two significant changes to the TDS compliance framework from April 2026 onwards:

1. Restricted correction window: The time limit for making corrections to filed TDS statements has been reduced to 2 years from the end of the relevant financial year. Deductors who discover errors beyond this window will not be able to file corrections, making accuracy at the time of original filing more important than before.
2. Decriminalisation of minor defaults: Small or technical TDS defaults will no longer attract prosecution under Section 276B in certain defined cases. This aligns with the government’s broader push to reduce criminalization of procedural tax errors and ease the compliance burden on small businesses and individuals.

Practical Tips to Avoid TDS Penalties

1. Set calendar reminders for TDS deposit due dates – typically the 7th of the following month (30 April for March month).
2. Reconcile TDS challans with TRACES before filing quarterly returns to catch mismatches early.
3. Validate PAN details of deductees at the time of payment to avoid incorrect return filings.
4. Issue Form 16 and Form 16A within 15 days of the due date of filing the TDS return.
5. If you miss a deposit deadline, deposit with applicable interest immediately – do not wait for a notice.
6. Use the TRACES portal to download and verify Form 26AS for reconciliation.

Conclusion

TDS compliance is not optional – and the penalties for getting it wrong range from interest charges to criminal prosecution. Whether it is the 1% monthly interest for non-deduction under Section 201, the Rs. 200 daily fee under Section 234E, or the risk of imprisonment under Section 276B, the consequences are real and escalating. The April 2026 updates bring welcome relief for minor defaults, but tighten the correction window significantly. The safest approach is accurate deduction, timely deposit, and punctual return filing – every quarter, without exception.

You can call or whatsapp at +91 9769647582 for any TDS filing query or service.

Frequently Asked Questions

What is the interest rate for TDS deducted but not deposited?

If TDS has been deducted from a payment but not deposited to the government, interest is charged at 1.5% per month or part of a month under Section 201 of the Income Tax Act.

Is Section 234E a penalty or a fee?

Section 234E is a mandatory late filing fee, not a discretionary penalty. It applies automatically at Rs. 200 per day and must be paid before the belated TDS return can be filed.

Can a deductor face jail for TDS defaults?

Yes. Section 276B allows prosecution for wilful non-deposit of TDS, with imprisonment ranging from 3 months to 7 years. Minor defaults have been decriminalised from April 2026, but significant defaults remain subject to prosecution.

What happens if I deduct TDS but claim the expense without depositing?

Under Section 40(a)(ia), 30% of the related expense will be disallowed in computing taxable income. Additionally, interest under Section 201 and potential prosecution under Section 276B may also apply.

How long do I have to correct a TDS return after April 2026?

From April 2026, the correction window for TDS statements has been restricted to 2 years from the end of the relevant financial year. Errors identified after this period cannot be corrected through the TRACES portal.