Section 201(1A) Interest on TDS: Complete Guide for Late Payment & Deduction

Section 201(1A) of the Income Tax Act, 1961, is a crucial provision that imposes interest on late payment or late deduction of Tax Deducted at Source (TDS). For a comprehensive understanding of TDS, refer to our Complete TDS India Guide. This section ensures that taxpayers comply with their TDS obligations on time by charging penal interest for any delays. Understanding Section 201(1A) is essential for all deductors—whether employers, businesses, or individuals making specified payments—to avoid unnecessary financial penalties and maintain compliance with tax laws.

The interest under Section 201(1A) is calculated at different rates depending on whether the default relates to late deduction (1% per month) or late payment (1.5% per month) of TDS. This provision works in conjunction with Section 201(1), which treats a person as an "assessee in default" for non-compliance with TDS provisions. In this comprehensive guide, we'll cover the legal framework, interest rates, calculation methods, practical examples, payment procedures, and strategies to avoid TDS interest charges.

What is Section 201(1A) of the Income Tax Act?

Section 201(1A) prescribes the interest liability for failures related to TDS compliance. It applies in two distinct scenarios:

• Late Deduction of TDS: When TDS that should have been deducted on or before a certain date is deducted after that date, interest is charged at 1% per month from the date TDS should have been deducted until the actual deduction date.
• Late Payment of TDS: When TDS has been deducted on time but is not deposited to the government account by the due date, interest is charged at 1.5% per month from the date of deduction until the date of actual payment.

The primary objective of Section 201(1A) is to ensure prompt remittance of tax collected at source to the government treasury. The interest charged is simple interest, calculated on a monthly basis, with any part of a month considered as a full month for calculation purposes.

Key Features of Section 201(1A):

Feature	Details
Applicable To	All persons liable to deduct TDS under various sections of the Income Tax Act
Interest Rate - Late Deduction	1% per month or part of a month
Interest Rate - Late Payment	1.5% per month or part of a month
Interest Type	Simple interest (not compound interest)
Period Calculation	Calendar months; any fraction counted as full month
Principal Amount	Amount of TDS that should have been deducted/paid
Payment Due	Before filing TDS return; paid via Challan 281

Interest Rates Under Section 201(1A)

The interest rate under Section 201(1A) depends on the nature of the TDS default. There are two distinct rates applicable:

1. Interest @ 1% Per Month - For Late Deduction

This rate applies when TDS is not deducted on time or is deducted later than the date on which it should have been deducted. The interest is calculated from:

• Start Date: The date on which TDS was deductible (i.e., payment date or credit date, whichever is earlier)
• End Date: The date on which TDS is actually deducted

2. Interest @ 1.5% Per Month - For Late Payment

This rate applies when TDS is deducted on time but not paid to the government by the due date (7th of the following month). The interest is calculated from:

• Start Date: The date on which TDS was deducted
• End Date: The date on which TDS is actually deposited with the government

How to Calculate Interest Under Section 201(1A)

Interest Calculation Formula:

Interest = (TDS Amount × Interest Rate × Number of Months) ÷ 100

Important Calculation Rules:

• Calendar Month Basis: Interest is calculated on a calendar month basis, not on the number of days.
• Part Month = Full Month: Any fraction of a month is considered as a complete month for interest calculation.
• Simple Interest: Interest is calculated as simple interest, not compound interest.
• Principal Amount: Interest is calculated on the TDS amount, not on the gross payment from which TDS was deducted.
• Rounding: The TDS amount is rounded to the nearest rupee before calculation.

Step-by-Step Calculation Process:

1. Determine TDS Amount: Identify the exact amount of TDS that should have been deducted.
2. Identify Key Dates: Note the date TDS should have been deducted, actual deduction date (if applicable), and actual payment date.
3. Calculate Delay Period: Count the number of calendar months from the applicable start date to end date. Remember, part of a month counts as a full month.
4. Apply Interest Rate: Use 1% for late deduction period and 1.5% for late payment period.
5. Compute Interest: Use the formula above to calculate total interest payable.

Practical Examples of Section 201(1A) Interest Calculation

Example 1: Late Payment of TDS Only

Scenario: ABC Ltd. paid a contractor ₹5,00,000 on 15th April 2025 and correctly deducted TDS of ₹50,000 (10%) on the same date. However, the TDS was deposited with the government on 25th June 2025 instead of by 7th May 2025.

Example 2: Late Deduction and Late Payment Both

Scenario: XYZ Company made a salary payment of ₹3,00,000 to an employee on 30th March 2025. TDS of ₹30,000 should have been deducted on 30th March but was actually deducted on 10th May 2025. The deducted TDS was then deposited on 15th June 2025.

Example 3: Multiple Month Delay

Scenario: A company paid professional fees of ₹2,00,000 on 1st January 2025 and deducted TDS of ₹20,000 on the same date. However, the TDS was deposited only on 20th July 2025.

TDS Payment Due Dates for FY 2025-26

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

Category of Payment	Due Date for Deposit	Applicable Sections
Government Deductors	Same day (without production of challan)	All TDS sections
Non-Government Deductors (Regular)	7th of the following month	Section 192, 194A, 194C, 194H, 194I, 194J, etc.
March Month TDS	30th April (not 7th April)	All applicable sections
Rent TDS (Section 194IB)	30th of the month following the month in which deduction is made	Section 194IB

How to Pay Interest Under Section 201(1A)

Payment Method:

Interest under Section 201(1A) must be paid before filing the TDS return. The payment is made using Challan 281 (not Challan 280).

Step-by-Step Payment Process:

1. Calculate Interest: Use the formula discussed above to compute exact interest payable.
2. Visit TIN-NSDL Portal: Go to https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp
3. Select Challan 281: Choose "Challan No. ITNS 281" for payment of TDS/TCS interest and other TDS/TCS dues.
4. Enter Details:
   • TAN (Tax Deduction Account Number)
   • Assessment Year
   • Payment Type: Select "(200) TDS/TCS Payable on Regular Assessment"
   • Minor Head: "(500) Interest"
5. Enter Amount: Input the calculated interest amount.
6. Choose Payment Mode: Net Banking, Debit Card, or NEFT/RTGS.
7. Complete Payment: Follow on-screen instructions to complete the payment.
8. Save Challan: Download and save the challan counterfoil for your records.
9. Quote in TDS Return: Mention the challan details in your TDS return while filing.

Important Points for Payment:

• Interest must be paid before filing the TDS return; otherwise, the return may be considered defective.
• The interest amount is not deductible as a business expense under Section 37(1) of the Income Tax Act.
• Keep all challan records for at least 7 years for future reference and audit purposes.
• Ensure correct TAN and assessment year are entered to avoid payment mismatches.

Relationship Between Section 201(1), 201(1A), 271C, and 234E

Understanding the interconnection between different TDS-related provisions is crucial:

Section	Purpose	Nature
Section 201(1)	Declares a person as "assessee in default" for non-deduction or non-payment of TDS	Legal status determination
Section 201(1A)	Imposes interest on late deduction (1%) or late payment (1.5%) of TDS	Interest liability
Section 271C	Levies penalty ranging from minimum TDS amount to amount equal to TDS for non-compliance	Penalty provision
Section 234E	Charges fee of ₹200 per day for delay in filing TDS return (maximum ₹1,00,000)	Late filing fee

Circumstances When Section 201(1A) Interest is NOT Applicable

There are specific situations where interest under Section 201(1A) may not be charged:

• Valid Lower/NIL Deduction Certificate: If the deductor has obtained a certificate under Section 197 (lower/nil deduction) and deducted TDS as per the certificate, no interest is charged even if actual tax liability is higher.
• TDS Deposited Before Deduction Date: If TDS is deposited with the government before the date it should have been deducted, no interest applies.
• Payee Files Return and Pays Tax: Under certain conditions specified in Section 201(1), if the payee has included the income in their return and paid applicable taxes, the deductor may not be treated as an assessee in default. However, they still need to pay 1% interest from the deductible date until the date the payee files their return.
• No TDS Obligation: If payment falls below the threshold limit for TDS deduction under any section, no TDS obligation arises, and hence no interest.

How to Avoid Interest Under Section 201(1A)

Best Practices for TDS Compliance:

• Maintain TDS Calendar: Keep a monthly calendar of all payments requiring TDS deduction with due dates marked.
• Deduct TDS at Source: Always deduct TDS at the time of payment or credit, whichever is earlier.
• Set Reminders: Configure automatic reminders for 5th of every month to ensure TDS payment by 7th.
• Use Online Banking: Set up online payment through NEFT/RTGS or net banking for quick TDS deposits.
• Verify TAN: Ensure your TAN is active and linked correctly to avoid payment issues.
• Quarterly Reconciliation: Reconcile TDS deducted, paid, and reported in returns every quarter.
• Check Thresholds: Stay updated on TDS threshold limits for different sections to ensure compliance.
• Automate Where Possible: Use accounting software with TDS calculation and payment tracking features.
• File Returns on Time: File TDS returns (Form 24Q for salary, Form 26Q for non-salary) by the due date (31st July, 31st Oct, 31st Jan, 31st May for respective quarters).
• Maintain Documentation: Keep all challans, certificates (Form 16, Form 16A), and returns properly filed for audit purposes.

Impact on Business and Tax Planning

Financial Impact:

Interest under Section 201(1A) can have significant financial implications:

• Non-Deductible Expense: Interest paid under Section 201(1A) is not allowed as a business expense, making it a pure financial loss.
• Accumulating Cost: At 1.5% per month (18% annually), the interest can accumulate quickly for large TDS amounts.
• Cash Flow Impact: Unplanned interest payments can affect business cash flow and working capital.
• Audit Concerns: Regular TDS defaults with interest payments may trigger scrutiny during tax audits.

GST Implication on TDS Interest:

Interest paid under Section 201(1A) is not subject to GST as it is a statutory liability under the Income Tax Act and not consideration for any supply of goods or services.

Common Mistakes and How to Avoid Them

Common Mistake	Impact	Solution
Deducting TDS but not depositing on time	1.5% monthly interest	Set auto-reminders; deposit by 5th of every month
Incorrect TDS rate application	Short deduction leading to interest and penalty	Verify rates from CBDT circulars before payment
Using wrong challan (280 instead of 281) for interest payment	Payment not reflecting; continued default	Always use Challan 281 for TDS interest
Not paying interest before TDS return filing	Defective return; processing delays	Calculate and pay interest before return due date
Ignoring March TDS special due date	Unnecessary interest for 23 days	Remember: March TDS due date is 30th April
Not maintaining TDS records	Difficulty in reconciliation; audit issues	Maintain digital and physical records for 7 years

Frequently Asked Questions (FAQs)

Q1. Is interest under Section 201(1A) mandatory?

Answer: Yes, interest under Section 201(1A) is mandatory and automatic for any delay in TDS deduction or payment. It cannot be waived by any authority.

Q2. What is the maximum interest that can be charged under Section 201(1A)?

Answer: There is no maximum limit specified. Interest continues to accrue at the prescribed rate (1% or 1.5% per month) until the TDS is actually deposited with the government.

Q3. Can interest under Section 201(1A) be claimed as a business expense?

Answer: No, interest paid under Section 201(1A) is specifically disallowed as a deduction under Section 37(1) of the Income Tax Act. It is considered a penalty/interest on statutory default, not a business expense.

Q4. If I deposit TDS before the 7th but after the deduction month, will interest apply?

Answer: No, as long as TDS is deposited by the 7th of the month following the month of deduction, no interest under Section 201(1A) is charged. The 7th is the statutory due date.

Q5. What if TDS was deducted but the payee has paid the tax in their return?

Answer: If the payee has included the income in their return and paid the applicable tax, the deductor may not be treated as an assessee in default under Section 201(1). However, they are still liable to pay 1% interest from the date TDS was deductible until the date the payee files their return.

Q6. How do I calculate interest if TDS was deducted in parts over multiple months?

Answer: Interest is calculated separately for each TDS deduction. For each deducted amount, calculate interest from the deduction date to the payment date and sum up all interest amounts.

Q7. Is there any penalty in addition to interest under Section 201(1A)?

Answer: Yes, in addition to interest under Section 201(1A), the Assessing Officer may levy penalty under Section 271C, which can range from the amount of TDS not deducted to an equal amount. However, penalty is discretionary and may be waived if reasonable cause is established.

Q8. Can interest under Section 201(1A) be paid in installments?

Answer: While the Act does not prohibit installment payment, it's advisable to pay the full interest amount before filing your TDS return to avoid complications. The TDS return may be considered defective if interest is not fully paid.

Q9. What happens if I don't pay interest under Section 201(1A)?

Answer: If you don't pay interest before filing your TDS return, the return may be treated as defective. The Assessing Officer may issue a notice under Section 201(1) treating you as an assessee in default and may initiate recovery proceedings for the interest amount.

Q10. How long do I need to keep TDS interest payment records?

Answer: It's advisable to maintain all TDS-related records, including interest payment challans, for at least 7 years from the end of the relevant assessment year, as per general tax record-keeping practices.

Who Should Read This Guide?

• Employers: Deducting TDS on salary payments (Section 192)
• Businesses: Making payments to contractors, professionals, rent, etc. Also see TDS Certificate Guide
• Chartered Accountants: Handling TDS compliance for clients
• Tax Professionals: Advising on TDS matters and interest calculations
• Company Secretaries: Ensuring corporate TDS compliance
• Finance Managers: Managing company TDS obligations
• Individual Deductors: Paying rent, professional fees, or other TDS-applicable payments
• Tax Consultants: Providing guidance on TDS interest and compliance

Important Resources and Links

• TDS Payment Portal: https://onlineservices.tin.egov-nsdl.com/etaxnew/tdsnontds.jsp
• TDS Interest Calculator: Calculate Section 201(1A) Interest
• Income Tax Department: https://www.incometax.gov.in
• TDS Return Filing Portal: https://www.tdscpc.gov.in
• Related Guide: Interest Calculator for 234A, 234B, 234C
• ITR Filing: Step-by-Step E-Filing Guide
• Income Tax Notices: How to Reply to IT Notices
• TDS Returns: Form 27Q for Non-Residents
• TDS Forms Guide: Form 24Q | Form 26Q | Form 27EQ