Key Takeaways
- Section 201(1A) levies mandatory interest on every TDS default. There is no provision for waiver or reduction, regardless of the reason for the delay.
- Two separate rates apply: 1% per month (or part of month) for late deduction, and 1.5% per month (or part of month) for late deposit after deduction.
- Interest is calculated on the TDS amount, not on the gross payment. A single day of delay in any month counts as a full month.
- Interest paid under Section 201(1A) is not deductible as a business expenditure. It is penal in nature and cannot be claimed under Section 37(1).
- Even if the deductee has paid tax directly and filed their return (giving the deductor relief from "assessee in default" status under Section 201(1)), interest under Section 201(1A) is still payable.
Every business that deducts TDS operates under two separate deadlines: one for deducting the tax at the time of payment or credit, and another for depositing the deducted amount to the government. Missing either deadline triggers interest under Section 201(1A) of the Income Tax Act, 1961. The interest is automatic, computed by the CPC when processing TDS returns, and there is no appellate mechanism to get it waived.
This is not a one-time penalty. It accrues for every month the default continues, and a delay of even one day in a new month adds another full month of interest. For businesses making hundreds of TDS-liable payments each quarter, a systemic delay of a few days can compound into a significant liability over a financial year.
The provision applies to every category of TDS deductor: employers deducting salary TDS under Section 192, businesses deducting contractor TDS under Section 194C, companies deducting professional fee TDS under Section 194J, and every other person obligated to withhold tax at source. The interest rates and computation method are uniform across all sections.
This guide explains exactly how Section 201(1A) interest is calculated, walks through three worked examples covering the most common default scenarios, and clarifies how this provision differs from the late filing fee under Section 234E and the penalty under Section 271C.
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What Is Section 201(1A)?
Featured Snippet: Section 201(1A) of the Income Tax Act, 1961 imposes mandatory interest on any person who fails to deduct TDS on time or, having deducted it, fails to deposit it to the government on time. The rate is 1% per month (or part of month) for non-deduction and 1.5% per month (or part of month) for late deposit. Interest is computed on the TDS amount from the date the default began to the date it is rectified. No authority can waive or reduce this interest.
Section 201(1A) works alongside Section 201(1), which declares the deductor an "assessee in default" when TDS is not deducted or deposited. Section 201(1) establishes the default; Section 201(1A) prescribes the financial consequence.
The interest is compensatory in design but penal in effect. It compensates the government for the time value of the TDS amount that should have been in the exchequer. Because it is mandatory and formula-driven, neither the Assessing Officer, the CIT(A), nor the ITAT has any power to reduce it. This makes it fundamentally different from penalties under Sections 271C or 271H, where "reasonable cause" can be argued as a defence.
When Does Section 201(1A) Apply?
Section 201(1A) covers two distinct default scenarios. Both can apply to the same transaction if the deductor first delays deduction and then also delays deposit.
Scenario 1: Late Deduction (TDS Not Deducted on Time)
If a deductor fails to deduct TDS at the time the payment is made or the amount is credited to the payee's account (whichever is earlier), interest at 1% per month accrues from the date TDS was required to be deducted until the date of actual deduction.
Common triggers: the accounts team processes a vendor payment without checking TDS applicability, a deduction is applied at a lower rate due to an expired lower-deduction certificate, or a new type of payment (say, rent above Rs 2,40,000 per year) crosses the threshold mid-year and the accounts team does not notice.
The interest clock starts from the date the deduction should have been made, which is the date of payment to the payee or the date of credit to their account, whichever is earlier.
Scenario 2: Late Deposit (TDS Deducted but Not Deposited on Time)
If TDS has been deducted but the deductor fails to deposit it to the government credit by the prescribed due date, interest at 1.5% per month accrues from the date of deduction until the date of actual deposit.
Common triggers: the challan is prepared but not paid before the 7th of the following month, the bank payment fails and is not retried promptly, or the finance team batches multiple months of TDS into a single late deposit.
Note that the higher rate of 1.5% (compared to 1% for non-deduction) reflects the fact that the deductor has already withheld the payee's money and is holding government funds without depositing them.
Interest Rates at a Glance
| Default Scenario | Interest Rate | Period of Computation |
|---|---|---|
| TDS not deducted on time | 1% per month (or part of month) | From the date TDS was due to be deducted to the date of actual deduction |
| TDS deducted but not deposited on time | 1.5% per month (or part of month) | From the date of actual deduction to the date of actual deposit to government |
Key rule: "Part of a month" is treated as a full month. If TDS was due on 10 May and deducted on 1 June, that is two months of interest (part of May + part of June), not 22 days.
TDS Deposit Due Dates
The interest under Scenario 2 is measured against the deposit due dates prescribed under Rule 30 of the Income Tax Rules, 1962.
| Type of Deductor | Nature of Payment | Due Date for Deposit |
|---|---|---|
| Non-government deductor | All payments (salary, rent, professional fees, etc.) | 7th of the following month |
| Non-government deductor | TDS deducted in March | 30 April of the next financial year |
| Government deductor (via challan) | Salary payments | 7th of the following month |
| Government deductor (via book entry) | Non-salary payments | Same day as the deduction |
If the 7th falls on a Sunday or public holiday, the deposit is due on the next working day. However, interest calculation uses actual calendar dates, not adjusted dates. Depositing on 8 April because 7 April was a holiday does not trigger interest, but depositing on 9 April does.
For TDS deducted in March, the extended deadline of 30 April gives deductors additional time. This is particularly relevant for year-end provisions like salary TDS adjustments, final contractor bills, and annual rent payments where March deductions tend to be larger than usual.
Worked Example 1: Late Deduction Only
Facts: On 15 January 2027, ABC Pvt Ltd pays Rs 5,00,000 to a contractor for services. TDS under Section 194C at 2% should have been deducted on 15 January. The accounts team misses the deduction entirely and corrects the error on 10 March 2027, deducting Rs 10,000 from a subsequent payment.
Computation:
- TDS amount: 2% of Rs 5,00,000 = Rs 10,000
- Default: Non-deduction from 15 January to 10 March
- Period: January (part), February (full), March (part) = 3 months
- Interest: Rs 10,000 x 1% x 3 = Rs 300
The company must deposit Rs 10,000 (TDS) + Rs 300 (interest) and report the late deduction in its Form 26Q return.
Additionally, because TDS was not deducted from the original payment, ABC Pvt Ltd will need to either recover Rs 10,000 from the contractor's next payment or absorb it as a cost. If the company absorbs it, the TDS amount is treated as tax paid on behalf of the contractor and is not deductible as a business expense under Section 40(a)(ia).
Worked Example 2: Late Deposit Only
Facts: XYZ LLP deducts TDS of Rs 50,000 on a professional fee payment on 20 October 2026. The deposit due date is 7 November 2026. The LLP deposits the amount on 15 January 2027.
Computation:
- TDS amount: Rs 50,000
- Deduction date: 20 October 2026
- Due date for deposit: 7 November 2026
- Actual deposit date: 15 January 2027
- Period: October (part, from 20 October), November (full), December (full), January (part, to 15 January) = 4 months
- Interest: Rs 50,000 x 1.5% x 4 = Rs 3,000
Note: The 201(1A) interest for late deposit runs from the date of deduction (20 October), not from the due date for deposit (7 November). This is a frequent source of confusion. Many deductors incorrectly compute interest from 8 November (the day after the due date) and arrive at a lower figure. When the CPC processes the return, it will compute interest from the deduction date and raise a demand for the shortfall.
Worked Example 3: Both Late Deduction and Late Deposit
Facts: PQR Enterprises should have deducted TDS of Rs 20,000 on a rent payment made on 5 August 2026. It failed to deduct at the time of payment. It finally deducted the amount on 12 November 2026 and deposited it on 20 December 2026.
Step 1: Interest for late deduction (1% per month)
- Period: 5 August to 12 November = August (part), September, October, November (part) = 4 months
- Interest: Rs 20,000 x 1% x 4 = Rs 800
Step 2: Interest for late deposit (1.5% per month)
- Period: 12 November (date of deduction) to 20 December = November (part), December (part) = 2 months
- Interest: Rs 20,000 x 1.5% x 2 = Rs 600
Total Section 201(1A) interest: Rs 800 + Rs 600 = Rs 1,400
In addition to the Rs 1,400 interest, PQR Enterprises will face a 30% disallowance of the rent expense under Section 40(a)(ia) if the TDS was not deposited by the due date for filing the income tax return. On a rent payment of Rs 2,00,000 (assuming 10% TDS = Rs 20,000), the 30% disallowance equals Rs 60,000 added back to taxable income. At a 25% corporate tax rate, that translates to an additional Rs 15,000 in tax, far exceeding the Rs 1,400 interest itself.
When both defaults occur on the same transaction, the two interest components are calculated separately and added together. The deductor pays interest at 1% for the non-deduction period AND 1.5% for the late deposit period. There is no overlap or netting.
Interest Computation Formula
The formula for Section 201(1A) interest can be expressed as:
For late deduction: Interest = TDS amount x 1% x Number of months (including part months)
For late deposit: Interest = TDS amount x 1.5% x Number of months (including part months)
Month counting rules:
- The month in which the default starts counts as month 1 (even if only 1 day falls in that month)
- The month in which the default ends also counts as a full month
- All months in between count at their full value
- There is no pro-rata calculation within a month
This means the worst-case scenario for interest is a default that starts on the last day of one month and ends on the first day of another month. A delay from 31 January to 1 February is 2 months of interest for what is effectively a 1-day default. Conversely, a delay from 1 January to 31 January is only 1 month.
If you have already missed a deposit deadline, depositing before the end of the current month limits the interest to the minimum number of months. Waiting even one day into the next month adds another full month of interest. Timing matters.
Section 201(1): Assessee in Default and the Relief Provision
Section 201(1) declares a deductor an "assessee in default" if TDS is not deducted or, having been deducted, is not deposited. Being an assessee in default means the deductor is liable to pay the TDS amount, interest under Section 201(1A), and can face penalty proceedings under Section 271C.
However, a proviso to Section 201(1) offers partial relief. If the deductee (the person from whose payment TDS should have been deducted):
- Has included the income in their return of income,
- Has paid tax on that income, and
- Furnishes a certificate from a Chartered Accountant confirming both,
then the deductor is not treated as an assessee in default in respect of the TDS amount. The deductor is not required to pay the TDS that was not deducted.
Critical limitation: This relief applies only to the Section 201(1) liability (the TDS amount itself). Interest under Section 201(1A) remains payable even when this proviso applies. The statute is explicit on this point. The deductor still owes interest for the period of delay, regardless of whether the deductee paid tax directly.
Practical implication: Suppose a company fails to deduct TDS of Rs 2,00,000 on a professional fee. The professional includes the full fee in their ITR and pays tax at 30%. The company obtains a CA certificate and is relieved from paying the Rs 2,00,000 TDS. However, if the non-deduction period was 5 months, the company still owes Rs 2,00,000 x 1% x 5 = Rs 10,000 as Section 201(1A) interest. This interest cannot be recovered from the deductee and must be borne by the company from post-tax profits.
Time limit for Section 201(1) proceedings: The Assessing Officer can pass an order under Section 201(1) and 201(1A) within 7 years from the end of the financial year in which the payment was made or credit was given. For TDS deductible by government deductors, there is no time limit. This means past defaults can surface years later during TDS verification or scrutiny proceedings.
Section 201(1A) vs Section 234E vs Section 271C
These three provisions deal with different TDS defaults. They are not alternatives; all three can apply simultaneously to the same deductor for the same quarter.
| Parameter | Section 201(1A) | Section 234E | Section 271C |
|---|---|---|---|
| Nature | Interest on late deduction/deposit | Late filing fee for TDS return | Penalty for failure to deduct TDS |
| Trigger | TDS not deducted on time, or deducted but not deposited on time | TDS return (Form 24Q/26Q) filed after the due date | Complete failure to deduct TDS |
| Rate/Amount | 1% or 1.5% per month on TDS amount | Rs 200 per day of delay (capped at TDS amount) | Equal to the amount of TDS not deducted |
| Computation basis | TDS amount due | Days of delay in return filing | TDS amount that should have been deducted |
| Waiver possible? | No | No | Yes, under Section 273B if reasonable cause is shown |
| Tax deductibility | Not deductible (penal) | Not deductible (penal) | Not deductible (penal) |
| Applies to deposit delay? | Yes (1.5% rate) | No (234E is about return filing, not deposit) | No (271C is about failure to deduct, not deposit) |
Example of overlap: A company fails to deduct TDS of Rs 1,00,000 in Q2, deducts and deposits it 3 months late, and files the Q2 return 45 days after the due date. It will owe:
- Section 201(1A) interest on late deduction and late deposit (computed as shown in the examples above)
- Section 234E late filing fee of Rs 200 x 45 = Rs 9,000
- Potential Section 271C penalty of Rs 1,00,000 (if proceedings are initiated by the Assessing Officer)
- 30% expense disallowance under Section 40(a)(ia) if TDS was not deposited before the return filing due date
The cumulative financial impact of these overlapping provisions can be several multiples of the original TDS amount. This is why treating TDS compliance as a monthly discipline (not a quarterly clean-up exercise) is essential for every business.
Common Mistakes
1. Calculating interest on the gross payment instead of TDS amount. Section 201(1A) interest is computed on the TDS amount that should have been deducted or deposited, not on the underlying payment. If the gross payment is Rs 10,00,000 and TDS is Rs 1,00,000, interest applies to Rs 1,00,000.
2. Counting days instead of months. The statute says "every month or part of a month." A delay from 7 November to 8 November is one month, not one day. A delay from 7 November to 8 December is two months (part of November + part of December), not 31 days.
3. Assuming the deductee's direct tax payment eliminates the interest. The Section 201(1) proviso relieves the deductor from paying the TDS amount if the deductee has paid tax directly. But interest under 201(1A) survives. Many deductors assume both liabilities are eliminated, which leads to short payment during assessments.
4. Using the deposit due date as the start date for late-deposit interest. The 1.5% interest runs from the date of actual deduction, not from the due date for deposit. If TDS is deducted on 20 October and deposited on 10 November (3 days late), the interest covers October (part) and November (part) = 2 months, not 3 days.
5. Not paying interest proactively before the CPC demand. The CPC computes 201(1A) interest automatically when processing TDS returns. If the deductor has not already paid the interest with the late deposit, the CPC raises a demand with additional interest for the further delay. Paying interest at the time of deposit closes the liability immediately.
6. Confusing Section 201(1A) with Section 234E. Section 234E is a late filing fee for TDS returns (Rs 200 per day). Section 201(1A) is interest on late deduction or deposit. They apply to different defaults. Filing the return on time does not eliminate 201(1A) interest if the underlying deposit was late, and depositing on time does not eliminate 234E if the return itself was filed late.
7. Forgetting the 30% expense disallowance under Section 40(a)(ia). When TDS is not deducted or not deposited by the due date for filing the return of income, 30% of the expenditure is disallowed in the deductor's income computation. This is a separate consequence from the 201(1A) interest and can significantly increase the deductor's taxable income.
How Tax Garden Helps
Tax Garden's TDS compliance service handles the entire deposit and filing cycle, eliminating the conditions that trigger Section 201(1A) interest. Our approach is preventive: we structure your TDS workflow so that deductions happen at the point of payment and deposits happen within the statutory window, leaving no room for interest to accrue.
What we cover:
- Automated TDS calendars with alerts before every 7th-of-the-month deposit deadline
- Real-time TDS computation at the time of payment booking, so deductions are never missed
- Interest liability calculation for past defaults, with exact month-count and challan preparation
- Corrected return filing for quarters where short deduction or late deposit was reported
- Form 26Q and 24Q filing within the statutory window to prevent overlapping Section 234E fees
- Reconciliation of TRACES demands against your books to verify CPC-computed interest before payment
If you have pending TDS defaults or have received a CPC demand for Section 201(1A) interest, see our pricing plans for flat-fee TDS compliance. We work with businesses across Hyderabad and India, from single-TAN startups to multi-entity groups filing dozens of quarterly returns.
Related Reading
- TDS Rate Chart for FY 2026-27 covers every applicable TDS section, rate, and threshold in one reference table
- Form 24Q and 26Q Filing Guide explains the quarterly return process that reports your TDS deductions and deposits to the CPC
- Tax Garden Pricing for flat-fee TDS compliance plans that cover deduction, deposit, return filing, and TRACES reconciliation
Frequently Asked Questions
Frequently Asked Questions
Is Section 201(1A) interest applicable if the deductee has already paid tax on the income?
Yes. Section 201(1A) interest is payable regardless of whether the deductee has paid tax directly. The proviso to Section 201(1) may relieve the deductor from paying the TDS amount itself, but the interest obligation under 201(1A) survives independently.
Can Section 201(1A) interest be waived by the Assessing Officer or CIT(A)?
No. Unlike the penalty under Section 271C (which can be waived under Section 273B for reasonable cause), there is no provision in the Income Tax Act to waive or reduce interest under Section 201(1A). It is a statutory charge computed by formula, and no officer has discretion to modify it.
How is 'part of a month' counted under Section 201(1A)?
Any fraction of a month is treated as a full month. If TDS was due on 15 January and deducted on 2 February, the interest covers January (part) and February (part), which equals 2 months, not 18 days.
Does Section 201(1A) apply to government deductors?
Yes. Government deductors are subject to the same interest rates. The only difference is the deposit timeline: government deductors making book-entry payments for non-salary items must deposit on the same day, while salary TDS follows the standard 7th-of-next-month deadline.
Can I claim Section 201(1A) interest as a business expense?
No. Interest under Section 201(1A) is penal in nature and is not deductible under Section 37(1) of the Income Tax Act. It must be paid from post-tax funds.
What happens if I deposit TDS late but do not pay the 201(1A) interest separately?
The CPC will compute the interest automatically when processing your TDS return and raise a demand. The demand will include the original interest plus additional interest for the period between the return processing date and the date of payment. It is better to compute and pay the interest at the time of late deposit.
Are the Section 201(1A) interest rates changing for FY 2026-27?
No. The rates of 1% per month for late deduction and 1.5% per month for late deposit remain unchanged for FY 2026-27. These rates have been in effect since 1 July 2010 (when the late-deposit rate was raised from 1% to 1.5%).
How do I pay Section 201(1A) interest?
Pay the interest using Challan ITNS 281 under the same TAN used for the original TDS deposit. Select the correct assessment year and section code. The interest should ideally be deposited along with the late TDS amount in the same challan. If the TDS has already been deposited and the interest was missed, file a separate challan for the interest component. Report the interest payment in the relevant quarterly TDS return.
Does Section 201(1A) interest apply to short deduction as well?
Yes. If TDS is deducted at a rate lower than the applicable rate (for example, 1% instead of 2% under Section 194C), the shortfall is treated as non-deduction. Interest at 1% per month applies on the differential TDS amount from the date of payment to the date the shortfall is rectified. This commonly occurs when deductors apply incorrect rates or fail to account for the absence of PAN (which requires TDS at 20%).
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Sources
This guide is based on Section 201(1) and Section 201(1A) of the Income Tax Act, 1961, as amended by the Finance Act 2010 (which raised the late-deposit interest rate from 1% to 1.5% effective 1 July 2010). TDS deposit due dates are prescribed under Rule 30 of the Income Tax Rules, 1962. The distinction between Section 201(1A) interest, Section 234E late filing fee, and Section 271C penalty is drawn from the respective statutory provisions. The non-deductibility of Section 201(1A) interest is established under Section 37(1) (only expenditure "not in the nature of penalty or offence" is deductible) and confirmed by multiple ITAT rulings. Relief under the proviso to Section 201(1) is subject to the deductee furnishing a CA certificate in the prescribed form. Rates and thresholds confirmed as unchanged for FY 2026-27. Verify current applicability with your Chartered Accountant before acting on any provision.