TDS/TCS Compliance, Consequences & Processing

Everything a deductor or collector must do — TAN, PAN obligations, deposit timelines, quarterly returns, correction statements — and what happens when they don't: interest, default orders, charges on assets, and penalties.

📘 Sections: 397 (Compliance and reporting) · 398 (Consequences of failure) · 399 (Processing of statements)
🔄 Replaces: Sections 200, 200A, 201, 203A, 204, 206, 206AA, 206AB of the Income Tax Act 1961
📅 Effective: 1st April 2026 (Tax Year 2026-27 onwards)

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Note: These exempted persons use their PAN (not TAN) in payment challans and certificates. They still have all other TDS compliance obligations — only the TAN requirement is waived.

If the deductee fails to furnish PAN, TDS must be deducted at the highest of the following three rates:

Rate Option	Applicable To
Rate specified in the relevant provision of this Act	All cases
Rate or rates in force (slab rates)	All cases
5%	Only for purchase of goods [Sl. 8(ii)] or e-commerce payments [Sl. 8(v)]
20%	All other cases — this is the effective cap in most situations

Exceptions to higher TDS [Section 397(2)(c)]: The 20% rate does NOT apply to non-residents (not company/foreign company) in respect of interest on long-term bonds under Section 393(2) [Sl. 2, 3, 4] and other payments as prescribed.

TCS must be collected at the highest of (subject to maximum of 20%):

• Twice the rate specified in the relevant provision; or
• 5%

Exception [Section 397(2)(d)]: The double-rate rule does NOT apply to a non-resident who does not have a permanent establishment in India.

Special rule for rent [Section 397(2)(e)]: Where higher TDS applies on rent (Section 393(1) Sl. 2(i)) due to absence of PAN, the deduction shall not exceed the rent payable for the last month of the tax year or last month of tenancy — to prevent deducting more than is actually available.

If a person does not furnish a valid PAN in:

• A nil-deduction declaration under Section 393(6) or manufacturing declaration under Section 394(2) → the declaration becomes invalid
• An application for a lower TDS/TCS certificate under Section 395(1) or (3) → no certificate will be granted

Additionally, the deductee/collectee must quote their PAN on all bills, vouchers, and correspondence sent to the deductor/collector [Section 397(2)(h)].

Every person responsible for paying to a non-resident (not company or foreign company) any sum — whether or not chargeable to tax in India — must furnish information relating to that payment in the prescribed form and manner [Section 397(3)(d)]. This is the basis for Form 15CA/15CB (the foreign remittance reporting mechanism).

Where a Government office pays TDS/TCS to the Central Government without a challan (e.g., direct book entries by Pay and Accounts Officers, Treasury Officers, or Cheque Drawing Officers), the responsible official must still file a statement in the prescribed form and manner with the prescribed authority — even though no physical challan was used.

Correction Window — 2 Years

Every deductor/collector may file a correction statement to correct any discrepancy or update information in a previously filed TDS/TCS return — within 2 years from the end of the tax year in which the original statement was required to be filed [Section 397(3)(f)].

This is a significant relief provision — errors in TDS returns (wrong PAN, wrong amount, wrong challan details) can be corrected within this window. Corrections filed within 2 years also reset the time limit for default orders under Section 398(5).

Even where interest paid by a bank/co-op society/public company does not exceed the TDS threshold (so no TDS is deducted), the bank/institution must still file a statement with the income-tax authority containing details of such interest payments [Section 397(3)(g)]. This ensures the tax department has information about all interest income — not just amounts where TDS was deducted.

Critical Rule — No Escape from Deposit Obligation

Any person responsible for collecting TCS who fails to collect the tax is still liable to deposit the tax to the Central Government [Section 397(3)(h)]. Failure to collect does not relieve the collector from the deposit obligation — the collector must pay from their own funds and then pursue recovery from the buyer.

Type of Default	Interest Rate	Period
Failed to deduct / collect	1% per month	From the date tax was deductible/collectible to the date of actual deduction/collection [Section 398(3)(a)(i)]
Deducted/collected but failed to deposit	1.5% per month	From the date of deduction/collection to the date of actual payment to Govt [Section 398(3)(a)(ii)]
Not in default under 398(2) (payee paid own tax)	1% per month	From date tax was deductible to the date the payee files their return of income [Section 398(3)(c)]

Where tax has been deducted/collected but not deposited, the tax amount together with interest becomes a charge upon all assets of the defaulting deductor/collector. This is a serious consequence — it gives the tax department priority over other creditors in respect of those assets.

No order deeming a person as assessee in default can be made after the later of:

• 6 years from the end of the tax year in which TDS/TCS was deductible/collectible; or
• 2 years from the end of the tax year in which a correction statement was filed under Section 397(3)(f)

The 2-year window after a correction statement means that filing a correction can actually extend the period during which a default order can be made — a point deductors should be aware of.

No penalty under Section 412 can be levied on a deductor/collector unless the Assessing Officer is satisfied that the person failed to deduct/collect without good and sufficient reasons. This gives deductors protection from penalty where there was a genuine reasonable cause for the default.

Applicability: This relief is available for failure to deduct TDS [Section 398(2)(a)] and for failure to collect TCS under Section 394(1) [Sl. Nos. 1 to 5 and 9] [Section 398(2)(b)]. Note that even if the deductor escapes the "assessee in default" status, interest under Section 398(3)(c) is still payable from the date the tax was deductible to the date the payee files their return.

Practical Example of Section 398(2):

A company forgets to deduct TDS on ₹5 lakh professional fees paid to a consultant in April 2026. The consultant includes this income in their return filed in July 2026 and pays the full tax. The company obtains a CA certificate confirming this. The company:

• Is NOT deemed an assessee in default — no demand for the TDS amount itself
• But still pays interest @ 1% from April 2026 to July 2026 (date of consultant's return filing) on the TDS amount of ₹50,000
• Interest = 1% × 3 months × ₹50,000 = ₹1,500

Time Limit for Intimation [Section 399(2)]

The intimation under Section 399 must be sent within one year from the end of the tax year in which the statement was filed. After this period, no demand can be raised through the processing route (though default proceedings under Section 398 remain available within their own time limit).

Centralised Processing [Section 399(3)]

The Board may establish a scheme for centralised processing of TDS/TCS statements — similar to the Centralised Processing Centre (CPC) for income tax returns. This enables automated, consistent processing at scale.

📖 TDS & TCS Series — Complete

📌 Source: Income Tax Act 2025, Act No. 30 of 2025 — Section 397 (pages 467–468), Section 398 (page 469), Section 399 (page 470), as published in the Gazette of India Extraordinary dated 21st August 2025. All section references are to the 2025 Act. Use the Section Cross-Reference tool to map 1961 Act sections to 2025 Act equivalents.