Direct Tax Laws and International Taxation · Collection, Recovery and Refund of Tax

Consequences of Default in Deduction and Payment of Tax

Updated 11 October 2026 · Fact-checked

If you fail to deduct, collect or deposit tax, you are deemed an assessee in default under section 398(1). You pay simple interest (1% per month until deduction, 1.5% per month until payment), may face penalty under sections 412, 448, 449, 461 and 465, and the tax stays a charge on your assets. Solve by finding the default type, then the interest, then the penalty.

Understand Consequences of Default in Deduction and Payment

Tax deducted at source is the government's money in your hands. The Act therefore makes the deductor answerable if the tax is not deducted, not paid, or deducted but not deposited.

The main consequence is the status of assessee in default under section 398(1). It applies to any person, including the principal officer of a company, who must deduct or collect tax (or an employer under section 392(2)(a)) and does not deduct or pay, does not collect or pay, or deducts or collects but fails to pay. Section 391(3) adds that where the deductor defaults and the assessee has also not paid the tax directly, the deductor is deemed an assessee in default.

There is a relief in section 398(2). If the payee has filed the return under section 263, included the amount in income, and paid the tax due, and the deductor gives an accountant's certificate in the prescribed form, the deductor is not deemed an assessee in default. Note that this relief covers failure to deduct (and failure to collect for the TCS items in section 394(1), Sl. Nos. 1 to 5 and 9). It does not cover failure to deposit tax already deducted.

Interest is separate from default status. It is simple interest at 1% per month or part of a month from the date tax was deductible to the date it is deducted, and 1.5% per month or part of a month from the date of deduction to the date of actual payment. Interest must be paid before the TDS statement is furnished. Where section 398(2) relief applies, the 1% interest runs only till the payee furnishes the return.

Penalties and fees sit on top. Section 448 allows a penalty equal to the tax not deducted (or not paid in the specified cases), section 449 a penalty equal to the tax not collected, section 412 a penalty for tax in default (capped at the arrears), section 461 a penalty of ₹10,000 to ₹1,00,000 for late or incorrect statements, and section 465(2) ₹500 per day for continuing failures.

Key rules to remember

Interest for late deduction: Tax × 1% × months (or part of a month) from date deductible to date deducted; Simple interest. A part of a month counts as a full month.
Interest for late payment after deduction: Tax × 1.5% × months (or part of a month) from date deducted to date paid; Simple interest. Section 398(3)(a)(ii).
Relief from default status: Payee filed return under section 263 + included the income + paid the tax + accountant's certificate; Section 398(2). All conditions must be met. Interest at 1% then runs till the payee's return date.
Time limit for order: Later of: 6 years from end of the tax year of deductibility, or 2 years from end of the tax year of correction statement; Section 398(5). No order after that.
Penalty for failure to deduct or collect: Penalty = tax not deducted or collected (sections 448 and 449); Imposed by the Assessing Officer. 'May impose', so it is discretionary.
Penalty for tax in default: Total penalty under section 412 ≤ tax in arrears; Not levied without a hearing or if default was for good and sufficient reasons.
Penalty for statement default: ₹10,000 minimum to ₹1,00,000 maximum (section 461); ₹500 per day (section 465(2)(k)), capped at tax deductible or collectible (section 465(3)); Section 461(2): no penalty if tax with fee and interest was paid and statement filed within one month of the due date.

How to solve Consequences of Default in Deduction and Payment questions

Use the same sequence for any question on default in deduction, collection or payment.

1Identify the default: not deducted, deducted but not paid, not collected, or statement late or incorrect.
2Check whether the deductor is deemed an assessee in default under section 398(1), and whether section 398(2) relief applies on the facts given.
3Work out the dates: when tax was deductible, when deducted, when paid, and the payee's return date if relief applies.
4Count months by rounding any part of a month up to a full month. Apply 1% to the first period and 1.5% to the second.
5State the penalty exposure: section 448 or 449 equal to tax, section 412 capped at arrears, and section 461 or 465 for statements.
6Mention safeguards: good and sufficient reasons, hearing, and time limit under section 398(5).
7Conclude with the total payable and a clear statement of what is deemed default versus what is only interest.

Quickest way: Two-period interest line

When to use it: Numerical questions asking interest on late deduction and late payment.

Draw a timeline with three dates: deductible, deducted, paid.
Count months from first to second date, rounding up. Multiply tax × 1% × months.
Count months from second to third date, rounding up. Multiply tax × 1.5% × months.
If tax was never deducted, only the first period is relevant until deduction is made.
Add both and note that interest is paid before filing the statement.

Common mistakes in Consequences of Default in Deduction and Payment

Using 1.5% for the whole period.
Students remember only the higher rate.
Fix: 1% covers deductible-to-deducted. 1.5% covers deducted-to-paid.
Counting exact days or ignoring part of a month.
Interest is treated like ordinary daily interest.
Fix: Count every month or part of a month as a full month.
Applying section 398(2) relief to tax deducted but not deposited.
The relief looks general.
Fix: Relief covers failure to deduct (or collect in listed cases) when the payee has paid the tax and the accountant's certificate is given.
Saying penalty under section 448 is automatic.
Students overlook the word 'may'.
Fix: The Assessing Officer may impose it. Section 412(3) and 398(7) protect cases with good and sufficient reasons.
Treating section 412 penalty as unlimited.
Confusing it with continuing default amounts.
Fix: Total penalty under section 412 cannot exceed the tax in arrears.
Missing the one-month condition for statement penalty relief.
Only the penalty amount is memorised.
Fix: Under section 461(2) no penalty if tax, fee and interest were paid and statement delivered within one month of the due time.

Worked examples

Example 1

Sundaram Traders Pvt. Ltd. had to deduct tax of ₹80,000 on a payment on 10 May. It deducted the tax on 5 August and deposited it on 20 October of the same year. Compute interest under section 398(3).

Show the solution

Period 1: 10 May to 5 August. 10 May to 10 July is 2 months, 10 July to 5 August is part of a month, so 3 months.
Interest 1 = ₹80,000 × 1% × 3 = ₹2,400.
Period 2: 5 August to 20 October. 5 August to 5 October is 2 months, plus part of a month, so 3 months.
Interest 2 = ₹80,000 × 1.5% × 3 = ₹3,600.
Total interest = ₹2,400 + ₹3,600 = ₹6,000.

Answer: Total interest is ₹6,000 (₹2,400 + ₹3,600). It must be paid before furnishing the statement.

Example 2

Mehta Industries Ltd. failed to deduct tax of ₹50,000 on a payment to a contractor. The contractor filed his return, included the receipt, and paid the tax due. Mehta Industries has an accountant's certificate. Is it an assessee in default, and what is the interest position?

Show the solution

The failure is non-deduction, and section 398(2) applies to failure to deduct.
The payee has filed the return under section 263, taken the amount into income, and paid the tax due.
The deductor has furnished the accountant's certificate, so all conditions are met.
Therefore Mehta Industries is not deemed an assessee in default for this tax.
Under section 398(3)(c), interest at 1% per month or part of a month runs from the date tax was deductible to the date the contractor furnished his return.
Section 412(3)(b) and 398(7) also protect against penalty where there are good and sufficient reasons; section 448 penalty would in any case be discretionary.

Answer: Mehta Industries is not deemed an assessee in default. It still owes 1% simple interest per month or part of a month from the date of deductibility to the date of the contractor's return.

Exam tips

Write the section numbers (398, 412, 448, 449, 461, 465) next to each consequence. It shows structure.
In numerical questions, show a timeline and the month count before multiplying.
In case scenarios, check each condition of section 398(2) one by one and conclude clearly.
For MCQs, watch for 1% versus 1.5%, and for 'may extend' versus 'shall be' in penalty wording.
Always add the limit: penalty under section 412 is capped at arrears, and the order has a time limit under section 398(5).

Practice questions from Collection, Recovery and Refund of Tax

Consequences of Default in Deduction and Payment: frequently asked questions

When is a person an assessee in default for TDS?

When a person who must deduct or collect tax does not deduct or pay it, or deducts it and fails to pay it, section 398(1) deems him an assessee in default. Section 391(3) also applies where the payee has not paid the tax directly.

What is the interest rate for late deduction and late payment of TDS?

It is simple interest at 1% per month or part of a month from the date tax was deductible to the date of deduction. After deduction, it is 1.5% per month or part of a month until the tax is actually paid.

Can the deductor avoid being an assessee in default?

Yes, for failure to deduct, if the payee has filed his return, included the income and paid the tax, and the deductor gives an accountant's certificate. Under section 398(2) this does not cover tax deducted but not deposited.

What is the penalty for late TDS statements?

Section 461 allows a penalty of at least ₹10,000 and up to ₹1,00,000. Section 465(2) also provides ₹500 per day for continuing failure, capped at the tax deductible or collectible. Section 461(2) gives relief if tax, fee and interest are paid and the statement is filed within one month of the due time.