Section 201(1A) Income Tax Act: Interest on Late TDS Payment - Calculation & Rules (FY 2026-27)

Section 201(1A) of the Income Tax Act imposes interest charges on late payment or non-deduction of Tax Deducted at Source (TDS). When a deductor fails to deduct TDS on time or deducts but doesn't deposit it by the due date, interest liability arises at the rate of 1% or 1.5% per month depending on the nature of default. This provision ensures timely compliance with TDS obligations and acts as a deterrent against delays. Understanding Section 201(1A) is crucial for businesses, employers, and all persons responsible for TDS compliance in FY 2026-27 to avoid unnecessary interest burden and penalties.

What is Section 201(1A)?

Section 201(1A) is a consequential provision that works in conjunction with Section 201(1), which declares a person as an "assessee-in-default" for failure to deduct or pay TDS. While Section 201(1) deals with the liability and consequences of being in default, Section 201(1A) specifically quantifies the interest penalty for such default.

Key Features of Section 201(1A)

• Automatic Interest Levy: Interest is automatically charged without any order from the Assessing Officer
• Two-Tier Rate Structure: Different rates for non-deduction (1%) and late payment (1.5%)
• Computed Monthly: Interest calculated on a monthly basis, with part month treated as full month
• Simple Interest: Not compounded - calculated only on principal TDS amount
• Non-Deductible Expense: Interest paid under 201(1A) cannot be claimed as business expense

Who is Liable Under Section 201(1A)?

The following persons/entities are liable to pay interest under Section 201(1A) in FY 2026-27:

• Employers: For delay in TDS on salary (Section 192)
• Businesses: For late payment of TDS on contractor payments, professional fees, rent, etc.
• Banks & Financial Institutions: For delay in TDS on interest payments
• Companies: For late TDS on dividends, payments to directors, etc.
• Individuals/HUF: When liable to deduct TDS (e.g., on rent exceeding ₹50,000 per month)
• Government Entities: For any TDS obligations under various sections

Interest Rates Under Section 201(1A) for FY 2026-27

Section 201(1A) prescribes two different interest rates depending on the nature of default. These rates remain unchanged for FY 2026-27:

How to Calculate Interest Under Section 201(1A)

Interest calculation under Section 201(1A) follows specific rules and principles. Understanding the calculation methodology is essential for accurate compliance.

Calculation Formula

Key Calculation Principles

1. Principal Amount:
   • Interest is calculated on the TDS amount (not on the gross payment)
   • Example: If payment is ₹10,00,000 and TDS is ₹1,00,000, interest is calculated on ₹1,00,000
2. Time Period:
   • Counted in calendar months, not days
   • Any part of a month is treated as a full month
   • Example: Delay of 15 days = 1 month, Delay of 35 days = 2 months
3. Starting Date:
   • For late deduction: Date when TDS should have been deducted
   • For late payment: Date when TDS was actually deducted
4. Ending Date:
   • For late deduction: Date when TDS was actually deducted
   • For late payment: Date when TDS was deposited with the Government

Understanding Calendar Month Calculation

The concept of "calendar month" is crucial for Section 201(1A) interest calculation:

Practical Examples for FY 2026-27

Example 1: Late Payment of TDS (Deducted on Time)

Example 2: Late Deduction + Late Payment (Double Whammy)

Example 3: Salary TDS - Late Payment (FY 2026-27)

Example 4: Rent TDS - Significant Delay (FY 2026-27)

Consequences of Default Beyond Interest

Section 201(1A) interest is just one aspect of non-compliance. Several other serious consequences can follow:

Section 201(1) - Assessee in Default

The deductor is deemed an "assessee-in-default" and can face:

• Recovery proceedings for TDS amount plus interest
• Penalty proceedings under Section 221 for non-payment
• Possible prosecution under Section 276B (rigorous imprisonment up to 7 years)

Section 271C - Penalty for Non-Deduction/Payment

Section 40(a)(ia) - Disallowance of Expense

If TDS is not deducted or paid by the due date of filing income tax return:

• 30% of the payment on which TDS was not deducted/paid is disallowed
• This disallowance increases taxable income and overall tax liability
• Can be claimed in subsequent year if TDS is paid before filing that year's return

Section 234E - Late Filing Fee for TDS Return

• ₹200 per day for delay in filing quarterly TDS return
• Minimum: ₹10,000
• Maximum: Amount of TDS for that quarter

TDS Due Dates for FY 2026-27

To avoid interest under Section 201(1A) in FY 2026-27, TDS must be deposited by the following due dates:

How to Pay Interest Under Section 201(1A)

If you have delayed TDS payment and interest is applicable, follow these steps:

Step-by-Step Process

1. Calculate Interest:
   • Use the formula: TDS Amount × Rate × Months
   • You can use online TDS interest calculators for accuracy
2. Generate Challan:
   • Visit NSDL TIN website or Income Tax e-payment portal
   • Select Challan ITNS 281 for TDS/TCS payment
3. Enter Payment Details:
   • Select appropriate Assessment Year (AY 2027-28 for FY 2026-27)
   • Choose the correct TDS section (192, 194C, 194J, etc.)
   • Enter TDS principal amount
   • Separately enter Interest amount in "Interest" field
4. Make Payment:
   • Pay via net banking, debit card, or UPI
   • Save the challan counterfoil/receipt
5. Mention in TDS Return:
   • While filing quarterly TDS return, mention the interest paid
   • Enter challan details correctly in the return

Challan 281 - Payment Components

Tax Treatment of Interest Paid

For the Deductor (Payer)

Accounting Treatment

• Book Entry: Interest must be debited to Profit & Loss account
• Tax Adjustment: While computing taxable income, this interest must be added back
• Permanent Difference: It's a permanent disallowance, not timing difference
• No Deferred Tax: No deferred tax asset/liability is created on this interest

Example of Tax Treatment

For the Deductee (Receiver)

The deductee is not affected by Section 201(1A) interest, as:

• Interest is paid by the deductor to the Government, not to the deductee
• Deductee receives credit for the TDS deducted (as per Form 26AS)
• No additional tax liability or benefit for the deductee

How to Avoid Interest Under Section 201(1A) in FY 2026-27

Best Practices for Deductors

1. Maintain TDS Calendar:
   • Create a monthly calendar with all TDS due dates for FY 2026-27
   • Set reminders 3-5 days before due dates
   • Mark key dates: 7th of every month, 30th April 2027, 30th May 2027
2. Segregate TDS Funds:
   • Immediately set aside TDS amount in a separate account
   • Don't use TDS funds for business operations
3. Use TDS Software:
   • Implement updated accounting software with TDS calculation and alert features
   • Automate payment reminders
   • Ensure software is updated for FY 2026-27 compliance
4. Designate Responsibility:
   • Assign specific person(s) for TDS compliance
   • Create backup system in case of leave/absence
5. Regular Reconciliation:
   • Match books with TDS challans monthly
   • Verify Form 26AS quarterly
   • Use TRACES portal for online tracking
6. Early Payment:
   • Pay TDS 2-3 days before due date
   • Account for bank processing time and holidays
7. Quarterly Review:
   • Before filing TDS return, verify all payments
   • Check for any missed deductions/payments
8. Stay Updated:
   • Monitor CBDT circulars and notifications for FY 2026-27
   • Check for any changes in due dates or rates

Red Flags to Watch Out For

• Frequent cash flow crunches affecting TDS payment ability
• Using TDS funds for working capital
• No proper documentation of TDS transactions
• Delays in salary processing affecting TDS deposit timelines
• Multiple vendors/contractors without systematic TDS tracking
• Lack of TDS knowledge among accounting staff

Updates and Compliance for FY 2026-27

Key Compliance Points

• Interest Rates: Continue at 1% and 1.5% (no change announced)
• Due Dates: Standard due dates remain same
• Online Payment: Mandatory e-payment for all tax payments
• TDS Return Filing: Online filing mandatory through TRACES portal
• New Portal Features: Enhanced functionality on new Income Tax portal
• Digital Compliance: Increased focus on automation and digital tracking

Important Dates for FY 2026-27

Frequently Asked Questions (FAQs)

Key Takeaways for FY 2026-27

• Section 201(1A) charges interest at 1% or 1.5% per month on late TDS payment or non-deduction
• Interest rates remain unchanged for FY 2026-27
• Interest is calculated on TDS amount, not gross payment
• Period is calculated in calendar months, with part month = full month
• If both deduction and payment are delayed, both interest rates apply
• Interest is automatic and doesn't require any department order
• Interest paid is not deductible as business expense
• Beyond interest, defaulters face penalties u/s 271C, late fees u/s 234E, and expense disallowance u/s 40(a)(ia)
• Best practice: Pay TDS 2-3 days before due date to avoid any complications
• Use TDS calendar, software, and systematic processes for FY 2026-27 compliance
• Voluntary payment of interest is better than waiting for department notices
• Stay updated with CBDT notifications and portal changes throughout FY 2026-27

Conclusion

Section 201(1A) continues to serve as an important compliance mechanism in the TDS framework for FY 2026-27, ensuring that tax deducted at source reaches the Government exchequer in a timely manner. The interest provisions act both as a penalty for delay and compensation for the time value of money lost to the Government. While the interest rates of 1% and 1.5% per month remain unchanged, their impact can be significant when combined with penalties and expense disallowances.

For businesses and individuals responsible for TDS compliance in FY 2026-27, the key is to build robust systems and processes that ensure timely deduction and payment of TDS. With enhanced digital infrastructure and improved online portals, compliance has become easier, but the responsibility remains with the deductor to maintain discipline. A systematic approach to TDS compliance not only saves interest costs but also protects against more severe consequences like penalties, prosecution, and business disruption from recovery proceedings.

Remember: TDS amounts don't belong to you - they are taxes withheld on behalf of the Government and must be remitted promptly. Treating TDS as working capital or delaying payment for cash flow management is a risky and costly strategy that can backfire significantly.

For complex situations, large TDS amounts, or recurring compliance issues in FY 2026-27, consulting a qualified Chartered Accountant or tax professional is highly recommended to ensure full compliance with Section 201(1A) and all related TDS provisions.