Income-tax law | TDS compliance | Updated 27 October 2026

Section 201 of the Income-tax Act, 1961: Consequences of Failure to Deduct or Pay TDS

Section 201 establishes the consequences when a person required to deduct tax at source (TDS) fails to deduct it, deducts less than required, or fails to deposit tax already deducted. It provides for treatment as an assessee in default, interest, recovery and limited relief when the payee has already discharged the relevant income-tax liability. For transactions governed by the Income-tax Act, 2025, the corresponding provision is Section 398, which also covers tax collected at source (TCS).

Applicability: The Income-tax Act, 2025 applies from 1 April 2026. Earlier-period defaults remain subject to the relevant provisions of the 1961 Act and applicable transition/savings rules. The date of the underlying deduction or collection obligation matters.

What does 'assessee in default' mean?

An assessee in default is a person whom the tax law treats as liable for an unpaid withholding obligation. Under Section 201(1), a deductor, including a company's principal officer where applicable, may be so treated for not deducting or not paying all or part of tax required under the Act. This is separate from any additional interest, penalty, prosecution or expenditure-disallowance consequences, each of which has its own statutory conditions.

Section 201: explanation of the principal provisions

Section 201(1): failure to deduct or pay

If a person required to deduct tax, or an employer responsible for tax under Section 192(1A), fails to deduct or pay the required tax, that person may be treated as an assessee in default. The first proviso offers conditional relief where the payee has included the income in a return and paid the corresponding tax. The further proviso restricts penalty under Section 221 unless the Assessing Officer is satisfied that the failure occurred without good and sufficient reasons.

Section 201(1A): mandatory simple interest

Interest applies independently of the principal recovery consequences. For non-deduction it is ordinarily 1% for each month or part of a month from the date tax was deductible to actual deduction. For tax deducted but not paid, it is 1.5% for each month or part of a month from deduction to actual deposit. The interest must be addressed before furnishing the prescribed TDS statement.

Section 201(2): charge on assets

Where tax has been deducted but not paid, the unpaid tax and relevant interest constitute a charge on the assets of the person or company concerned, as provided by the statute.

Section 201(3) and (4): time limit and related rules

Orders deeming a person an assessee in default are subject to statutory limitation periods and related exclusions or extensions. These have been amended over time; the period applicable to a specific default must be checked against the law for the relevant financial year and any applicable savings provision.

Relief where the payee has already paid tax

For eligible cases of failure to deduct, the deductor may avoid being treated as an assessee in default if the payee (1) filed the applicable income-tax return, (2) included the payment in computing income, and (3) paid the tax due on the income declared. The deductor must obtain and furnish the prescribed accountant's certificate, traditionally Form 26A, in accordance with the rules applicable to the period.

Important: This relief does not automatically waive interest. Where the statutory relief applies, interest for non-deduction generally runs from the date tax was deductible to the date the payee furnished the income-tax return. The relief should not be assumed to cure tax actually deducted and retained by the deductor.

Interest rates and illustrative calculations

Type of default	Rate	Period
Tax not deducted when required	1% per month or part thereof	From deductible date until deduction (or statutory endpoint where payee-paid-tax relief applies)
Tax deducted but deposited late	1.5% per month or part thereof	From deduction date until actual deposit

Example 1: A deductor should have withheld Rs. 10,000 on 15 June but deducts it on 10 August. Counting each month or part-month touched (June, July and August), illustrative interest for non-deduction is Rs. 10,000 × 1% × 3 = Rs. 300.

Example 2: If Rs. 10,000 was deducted on 10 August and deposited on 5 September, illustrative late-deposit interest is Rs. 10,000 × 1.5% × 2 = Rs. 300. Actual liability depends on the relevant dates, amount, governing law and any statutory exceptions.

Limitation periods and legacy defaults

For historical Section 201 matters, do not assume that the older seven-year text in archived copies governs every case. Amendments and transitional provisions can alter the operative limitation. Under Section 398(5) of the Income-tax Act, 2025, the order deadline is the later of (a) six years from the end of the tax year in which tax was deductible or collectible, or (b) two years from the end of the tax year in which a correction statement is delivered under Section 397(3)(f), subject to relevant statutory provisions.

Section 398 of the Income-tax Act, 2025

The new provision is titled Consequences of failure to deduct or pay or, collect or pay. Its key parts are:

Section 398(1): deems a defaulting deductor or collector an assessee in default.
Section 398(2): conditional relief where the payee or specified buyer, licensee or lessee filed a return, included the relevant amount and paid tax, supported by an accountant's certificate.
Section 398(3): interest at 1% or 1.5% per month or part-month, depending on the default; it also specifies the interest period when payee-paid-tax relief applies.
Section 398(4): charge on assets for tax deducted or collected but unpaid, together with interest.
Section 398(5) and (6): limitation rules and applicable exclusions.
Section 398(7): penalty protection subject to the Assessing Officer's satisfaction regarding good and sufficient reasons.

For older defaults, the Income Tax Department's transition guidance confirms that proceedings under the 1961 Act may continue after 1 April 2026 under the savings provisions of Section 536 of the 2025 Act.

Other possible consequences

Depending on the facts, non-compliance may also attract penalty under the relevant law, late-filing fees for TDS statements, prosecution for specified failures to deposit deducted tax, and disallowance of specified business expenditure. Under the 2025 Act, Section 35(b) addresses the 30% disallowance for specified resident payments where applicable TDS requirements are not met by the relevant deadline. These are separate consequences; they are not all automatic in every case.

Practical compliance checklist for deductors

Identify the correct TDS section, rate, threshold and the governing tax year.
Check the payee's PAN, residency, declarations and any valid lower/nil deduction certificate.
Deduct tax at the required time and deposit it within the prescribed deadline.
File the appropriate TDS statement and issue the applicable TDS certificate.
Reconcile challans, statements, Form 26AS/AIS and notices from the tax processing system.
If an error occurs, calculate interest, pay outstanding amounts and file a correction statement where appropriate.
Where eligible, obtain the prescribed accountant's certificate to support payee-paid-tax relief.

Frequently asked questions

Does payment of income tax by the payee remove all liability of the deductor?

No. It may prevent assessee-in-default treatment for an eligible non-deduction case when all conditions and certification requirements are met. Interest may still be payable.

Is the interest 1% or 1.5%?

The 1% rate generally concerns tax not deducted or collected on time; the 1.5% rate generally concerns tax deducted or collected but paid late. Both are calculated for each month or part of a month.

Does Section 398 apply to TCS as well as TDS?

Yes. Unlike the heading of Section 201, Section 398 of the 2025 Act expressly addresses deduction and collection defaults.

Can a Section 201 proceeding begin after 1 April 2026?

Yes, for an earlier-period default where saved proceedings are permitted and the applicable limitation period has not expired.

Official statutory texts and compliance guidance

This article is a general explanation of the law as at 27 October 2026. For a particular default, verify the governing statute, date, applicable rules, notices and judicial decisions before taking action.