Tax Laws and Practice · Direct Tax at a Glance

Direct Payment of Tax and Bar on Direct Demand

Updated 11 October 2026 · Fact-checked

Under section 391 of the Income-tax Act, 2025, you pay tax directly when no deduction at source is provided for the income, or when tax was not deducted as required. Under section 401, you cannot be asked to pay tax yourself to the extent it has already been deducted at source from that income.

Understand Direct Payment of Tax and Bar on Direct Demand

Tax reaches the government in two main ways. One is deduction at source, where the payer cuts tax before paying you. The other is direct payment, where you pay the tax yourself. Section 391 decides when the second route applies.

Under section 391(1), income-tax is payable directly by the assessee in two situations. First, the Chapter has no provision to deduct tax on that income at the time of payment. Second, tax has not been deducted as per the provisions of the Chapter. So a missed deduction does not make the income tax-free. The liability moves back to you.

Section 401 protects you from double collection. Where tax is deductible at source under the Chapter, you cannot be called upon to pay the tax yourself to the extent tax has been deducted from that income. The words "to the extent" matter. If only part was deducted, the balance can still be demanded.

Section 391(3) deals with the payer. If a person who must deduct tax does not deduct it, or deducts and does not pay it, and the assessee has also failed to pay that tax directly, the person is deemed an assessee in default under section 398(1) for that tax. This covers the principal officer of a company and an employer referred to in section 392(2)(a). It applies apart from any other consequences.

Section 391(2) is a special case. It covers income of the nature in section 17(1)(d), where specified security or sweat equity shares are allotted or transferred by the current employer, which is an eligible start-up referred to in section 140. Direct payment of tax in that case is made as per section 289(3).

Key rules to remember

Direct payment rule (section 391(1)): Tax payable directly by assessee if (a) no TDS provision exists for that income, OR (b) tax has not been deducted as required; Either condition is enough. The two conditions are joined by 'or'.
Bar on direct demand (section 401): No direct demand on assessee to the extent tax has been deducted at source from that income; Applies only where tax is deductible at source under the Chapter. Balance not deducted can still be demanded.
Payer in default (section 391(3)): Deductor/employer fails to deduct or pay + assessee has also failed to pay directly → deductor is deemed assessee in default under section 398(1); Both failures must exist: the payer's and the assessee's. This is in addition to other consequences.
Start-up share income (section 391(2)): Section 17(1)(d) income from eligible start-up (section 140) → direct payment per section 289(3); Remember it as a special route. Do not go into details beyond the section references unless asked.

How to solve Direct Payment of Tax and Bar on Direct Demand questions

Use this method for any question on who pays the tax and whether a demand can be raised on the assessee.

1Identify the income and check whether the Chapter provides for deduction of tax at source on it.
2If there is no TDS provision, apply section 391(1)(a): the assessee pays tax directly.
3If a TDS provision exists, check whether tax was actually deducted. If not deducted, apply section 391(1)(b): the assessee pays directly.
4If tax was deducted, apply section 401. The assessee cannot be asked to pay that part again. Compute any shortfall and state that only the balance is payable by him.
5Check the payer. If the deductor did not deduct, or deducted and did not pay, and the assessee also did not pay, apply section 391(3): the deductor is deemed an assessee in default under section 398(1).
6If the income is from sweat equity or specified securities of an eligible start-up, mention section 391(2) and section 289(3).
7Write the conclusion in one line: who pays, how much, and what the consequence is.

Quickest way: Three-question check

When to use it: Use it for short-answer or case-based questions where time is tight.

Is TDS provided for this income? If no, assessee pays directly (391(1)(a)).
Was TDS actually deducted? If no, assessee pays directly (391(1)(b)). If yes, no direct demand to that extent (401).
Did the payer default and did the assessee also not pay? If yes, the payer is deemed an assessee in default (391(3)).

Common mistakes in Direct Payment of Tax and Bar on Direct Demand

Saying income is not taxable because the payer did not deduct tax.
Students link tax liability with deduction at source.
Fix: State that under section 391(1)(b) the tax is payable directly by the assessee when it has not been deducted.
Writing that section 401 bars all demand on the assessee.
The words 'to the extent' are skipped.
Fix: Say the bar applies only to the extent tax has been deducted from that income. Any balance can be demanded.
Treating the deductor as in default whenever tax is not deducted.
Section 391(3) is read half way.
Fix: Add the second condition: the assessee has also failed to pay such tax directly. Then the deductor is deemed an assessee in default.
Quoting section 391 for the bar on direct demand, or section 401 for direct payment.
The two sections are close in theme and numbers are easy to swap.
Fix: Link 391 with Direct payment and 401 with Bar against direct demand. Write the section number with its heading.
Citing sections of the Income-tax Act, 1961 such as section 191 or 205.
Older notes are used for revision.
Fix: For June 2027, cite the Income-tax Act, 2025 sections only: 391 and 401.

Worked examples

Example 1

Rohan, a freelance designer in Pune, receives ₹3,00,000 from a client. The Chapter has no provision to deduct tax on this receipt. Who must pay the tax on this income and under which section?

Show the solution

Provision: section 391(1)(a) says income-tax is payable directly by the assessee if there is no provision under the Chapter to deduct tax at the time of payment.
Facts: no TDS provision applies to this receipt, so the client will not deduct tax.
Analysis: since deduction is not provided, the tax cannot be collected through the payer. The liability stays with Rohan.
Section 401 does not help him, because no tax has been deducted from this income.

Answer: Rohan must pay the tax on this income directly under section 391(1)(a). He cannot rely on section 401 as nothing was deducted.

Example 2

A company was required to deduct tax from a payment to Meera but did not deduct it. Meera has also not paid the tax directly. What is the position of Meera and of the company?

Show the solution

Provision: section 391(1)(b) makes tax payable directly by the assessee where tax has not been deducted as per the Chapter.
Meera's position: she is liable to pay the tax directly. Section 401 gives her no protection, since no tax was deducted.
Provision for the payer: section 391(3) applies where a person required to deduct tax does not deduct it and the assessee has also failed to pay it directly.
Both conditions are met. The company, including its principal officer, is deemed an assessee in default within the meaning of section 398(1) in respect of that tax.
This is apart from any other consequences the company may incur.

Answer: Meera is liable to pay the tax directly under section 391(1)(b). The company is deemed an assessee in default under section 391(3) read with section 398(1).

Exam tips

Write the provision first with its section number, then apply it to the facts, then give a one-line conclusion.
Always test both limbs of section 391(1): no TDS provision, or tax not deducted. Name the one that fits.
When a question mentions part deduction, state that section 401 bars demand only to the extent of tax deducted.
In default questions, show that both the deductor's failure and the assessee's failure exist before applying section 391(3).
Use only Income-tax Act, 2025 section numbers for June 2027.

Practice questions from Direct Tax at a Glance

Direct Payment of Tax and Bar on Direct Demand: frequently asked questions

What does section 391 of the Income-tax Act, 2025 say?

It says income-tax is payable directly by the assessee when the Chapter has no provision to deduct tax on that income, or when tax has not been deducted as required. It also treats a defaulting deductor as an assessee in default in certain cases.

What is the bar against direct demand under section 401?

Where tax is deductible at source, the assessee cannot be called upon to pay the tax himself to the extent tax has been deducted from that income. So the same tax is not collected twice.

Can the assessee be asked to pay if only part of the tax was deducted?

Yes, for the balance. Section 401 protects the assessee only to the extent of tax deducted. The remaining tax can be payable directly under section 391(1)(b).

When is a deductor treated as an assessee in default under section 391(3)?

When the person required to deduct tax does not deduct it, or deducts and fails to pay it, and the assessee has also failed to pay the tax directly. The person is then deemed an assessee in default under section 398(1) for that tax.