You deducted TDS. You deposited it. You filed the return. And yet, a tax notice lands in your inbox. This is the most frustrating scenario for any finance team or business owner.
Here is the reality: TDS compliance is not just about deducting tax. It is about getting every detail right: the PAN, the section, the challan, the return, and the timing. A single error in any of these areas can trigger a notice, interest liability, or penalty. The Income Tax Department's systems now cross-verify TDS data with Form 26AS and AIS in real-time. Mismatches are flagged almost instantly.
This guide focuses on the five most common TDS mistakes that trigger notices and how to fix them.
Looking for expert help with TDS mistakes that trigger notices, wrong PAN, wrong section 194C 194J, TDS challan errors, TDS return mismatch? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
The 2026 Transition: Why This Year Is Different
Before we dive into the mistakes, one critical point: From 1 April 2026, the Income Tax Act, 2025 takes over from the 1961 Act. Payments made on or after that date fall under the new Act's TDS framework.
For FY 2025-26 (AY 2026-27), returns filed in July 2026 still use the old section numbers. But from Tax Year 2026-27 onwards, new section numbers apply. This transition creates a new category of errors: using the wrong section number during the cutoff period.
Mistake #1: Wrong PAN (or PAN Not Linked to Aadhaar)
The Problem
Entering the wrong PAN of the deductee is one of the most common TDS errors. Even a single digit mistake means the TDS credit never reflects in the deductee's Form 26AS or AIS.
When the system cannot match the TDS to a valid PAN, the credit is treated as "unverified." Claiming unverified TDS credits in your ITR almost always leads to an intimation under Section 143(1) proposing an adjustment.
The "Inoperative PAN" Trap
Even if the PAN is correct, if it is inoperative (not linked with Aadhaar), the payer is legally forced to apply the 20% TDS rate under Section 206AA. The deductor is penalised for not checking this status on the deduction date.
Consequences
| Issue | Consequence |
|---|---|
| Wrong PAN | Tax credit never reflects in the deductee's Form 26AS, so they cannot claim it; the credit sits against someone else's PAN |
| Inoperative PAN | TDS deducted at 20% instead of the standard rate |
| PAN not provided | Higher TDS rate (20%) applies mandatorily |
How to Fix
- Deductor: Verify the deductee's PAN and Aadhaar-PAN linking status before each payment. For corrections, file a correction statement on TRACES with the correct PAN.
- Deductee: If TDS is missing from Form 26AS, contact the deductor to file a correction.
Mistake #2: Wrong TDS Section
The Problem
Deducting TDS under the wrong section is a frequent error, especially when classifying payments. The most common confusion is between Section 194C (contractor payments) and Section 194J (professional services).
Examples:
- Paying a freelance consultant under 194C (1-2%) instead of 194J (10%)
- Treating manpower supply as 194J when it is contract "work" (Finance Act 2026 made this explicit for Section 393(1), Table Sl. No. 6(i) from 1 April 2026)
- Using 194I for rent but applying the wrong rate (2% for machinery vs 10% for land/building)
Consequences
| Error | Consequence |
|---|---|
| Deducting under a lower rate section | Short deduction notice; interest under Section 201(1A) |
| Deducting under a higher rate section | No default for the deductor, but the deductee's cash is locked until they claim a refund in their ITR |
| Wrong section in the return | Short-deduction defaults at TRACES processing; a correction statement is needed |
The 2026 Transition: New Section Numbers
Under the Income Tax Act 2025:
- Old 194C → New Section 393(1) Table Sl. No. 6(i)
- Old 194J → New Section 393(1) Table Sl. No. 6(iii)
- Old 194H → New Section 393(1) Table Sl. No. 1(ii)
- Old 194Q → New Section 393(1) Table Sl. No. 8(ii)
Challans and quarterly statements for tax year 2026-27 (Forms 138, 140 and 144) must use the new provisions and the payment codes in the current return utility; check the code list in the latest utility rather than reusing FY 2025-26 masters.
How to Fix
- Request the client (deductor) to file a correction statement on TRACES, changing the section.
- If short deduction occurred, pay the shortfall with interest under Section 201(1A) immediately.
- Update your ERP, payroll, and TDS software with new payment codes before filing Q1 FY 2026-27 returns.
Mistake #3: Wrong Challan / Payment Details
The Problem
Challan errors are deceptively simple to make but remarkably hard to fix. Common errors include:
- Selecting the wrong Assessment Year or Tax Year
- Choosing the wrong Major Head (wrong tax type)
- Entering the wrong Minor Head (wrong payment category)
- Incorrect PAN or TAN on the challan
Consequences
| Error | Consequence |
|---|---|
| Wrong Assessment Year | Tax credit does not reflect in the correct year |
| Wrong Major/Minor Head | Payment is misallocated; no credit appears in Form 26AS |
| Wrong TAN | Payment is not linked to your deductor account; defaults triggered |
How to Fix
- For TDS challans (ITNS 281): Log into TRACES → Statement/Payment → Request for OLTAS Challan Correction.
- For other challans: Use the e-Filing portal's challan correction facility.
- Confirm which portal applies to your specific challan type before correcting.
Mistake #4: TDS Deducted but Not Deposited Correctly
The Problem
This is the most expensive mistake, not because the rate is high, but because the interest clock starts ticking from the date of deduction.
TDS must be deposited within the prescribed timeline:
- For government offices paying without a challan (book entry): On the same day
- For all other deductors: By the 7th of the following month, except tax deducted in March, which is due by 30 April
Consequences
| Default | Interest Rate |
|---|---|
| Delay in deduction | 1% per month from when it should have been deducted |
| Delay in deposit | 1.5% per month from deduction date to actual deposit |
Example: If you deduct Rs 1,00,000 TDS on 1 April but deposit on 1 October (due date was 7 May):
- Interest runs from the date of deduction, and a part of a month counts as a full month: April to October = 7 months
- Interest for late deposit = Rs 1,00,000 × 1.5% × 7 = Rs 10,500
Additional Penalties
If TDS is not deducted, or is deducted but not deposited:
- 30% of the expense paid to a resident is disallowed under Section 40(a)(ia) until the TDS is paid (100% under Section 40(a)(i) for non-resident payments)
- A penalty equal to the TDS not deducted can be levied under Section 271C
- Failure to deposit TDS already deducted can lead to prosecution under Section 276B (Section 476 of the 2025 Act, where Finance Act 2026 reduced the punishment from 1 April 2026)
How to Fix
- Deposit the outstanding TDS immediately with interest under Section 201(1A).
- File the TDS return with updated payment details.
- If the delay is significant, consider applying for compounding under the prescribed procedure.
Mistake #5: TDS Return Mismatch / Correction Issues
The Problem
Even if TDS is correctly deducted and deposited, the TDS return itself can cause mismatches:
- Mismatch between TDS claimed in ITR and TDS in Form 26AS
- Mismatch between income reported and TDS credit claimed
- Incorrect TDS details in the return
Consequences
| Error | Consequence |
|---|---|
| TDS claimed > TDS in Form 26AS | ITR processed with demand notice under Section 143(1) |
| TDS in Form 26AS > TDS claimed | Refund delayed; credit may be lost |
| Mismatch triggers defective return | Notice under Section 139(9); must correct within 15 days |
How to Fix
- Reconcile before filing: Compare TDS claimed in your ITR with Form 26AS and AIS before submission.
- If you receive a notice: Submit rectification request with correct TDS/tax claims.
- If the deductor made the error, contact them to file a correction statement.
- Deadline: To correct your own ITR for AY 2026-27, file a revised return by 31 March 2027 (Finance Act 2026). A fee under Section 234I applies if it is filed after 31 December 2026.
Summary: The 5 TDS Mistakes That Trigger Notices
| Mistake | Error | Consequence | Fix |
|---|---|---|---|
| Wrong PAN | Incorrect/inoperative PAN | Credit never reflects; 20% TDS applied | File correction on TRACES |
| Wrong Section | 194C vs 194J confusion | Short deduction notice; interest liability | Request deductor correction |
| Wrong Challan | Wrong AY/Major Head | Credit not reflected; defaults triggered | Correct on TRACES |
| TDS Not Deposited | Late deposit after 7th | Interest @ 1.5%/month | Deposit with interest immediately |
| Return Mismatch | TDS claimed ≠ Form 26AS | Demand notice under 143(1) | Reconcile before filing |
Key Points to Remember
-
The 2026 transition matters. For payments from 1 April 2026, use new section numbers and payment codes (Sections 392, 393, 394).
-
Verify PAN on the deduction date. An inoperative PAN triggers 20% TDS under Section 206AA automatically.
-
Section classification is critical. Using the wrong section (e.g., 194C for professional fees) triggers a notice.
-
TDS challan corrections (ITNS 281) go through TRACES, not the e-Filing portal.
-
Interest under Section 201(1A) applies automatically. There is no grace period for late deposit.
-
Reconcile before you file. Match your ITR with Form 26AS and AIS before submission. This is your best defence.
Sources: Income Tax Department (incometaxindia.gov.in); CNBC TV18; Financial Express; Outlook Money; TaxBuddy; Economic Times; Business Standard; Mint. Verify current rates, deadlines, and procedures on incometaxindia.gov.in before acting, as rules may be updated periodically. This article is general information on TDS mistakes that trigger notices and not a substitute for professional advice.
Bookmark this page: you will need it when filing TDS returns and responding to notices. Share it with your finance team and deductors.
