Section 201(1A) Interest on Late TDS Deposit: 1% vs 1.5% Calculation

Section 201(1A) of the Income-tax Act, 1961 charges simple interest at 1% per month for late deduction of TDS and at 1.5% per month for late deposit of TDS, with part of a month counted as a full month and both limbs capable of running together. On top of the interest, a deductor who fails to deduct, or fails to pay after deducting, is treated as an assessee in default under Section 201(1), and 30% of the underlying expense can be disallowed under Section 40(a)(ia).

New w.e.f. 01-04-2026 (Income-tax Act 2025): the TDS interest provisions were renumbered under the new Act, but the Section 201(1A) computation — 1% for late deduction, 1.5% for late deposit, part-month counted as a full month — is carried forward unchanged. the new section reference for FY 2026-27 challans.

What the law actually requires

Section 201(1A) applies to every person responsible for deducting TDS. It is not discretionary and not waivable — the interest computes arithmetically from two dates.

The "part of a month" rule

A month means a calendar month, and any part of a month counts as a full month. A deposit made 15 days late is charged for one month; one made 31 days late is charged for two months. This is where companies underestimate the cost — a 2-day delay in March and a 15-day delay in April are each a full month of interest.

Both limbs can apply to the same TDS

The two limbs are not alternatives. If the company both deducts late and deposits late, it pays 1% for the deduction delay plus 1.5% for the deposit delay. In a March-March scenario where TDS was deductible on 15 March, deducted on 15 April and deposited on 30 April:

Worked example: the ₹1,00,000 TDS that ran late

Aurum Retail Pvt Ltd paid a contractor ₹50,00,000 in March 2026 on which 2% TDS of ₹1,00,000 was deductible on 15 March 2026. Aurum deducted the TDS on 15 April and deposited it on 30 April.

The 1.5% limb runs only from the Rule 30 due date (7th of the following month for non-March deductions; 30 April for March deductions) to the actual deposit date — not from the deduction date. A same-month timely deposit attracts no 1.5% charge.

If Aurum had instead deducted on 30 June (still not depositing by 7 July), limb (i) would run 15 March → 30 June = 3.5 months rounded up to 4 months, giving ₹4,000 in limb (i) alone. Every extra part-month compounds the charge.

The bigger hammer: assessee in default

Under Section 201(1), where a deductor does not deduct, or after deducting fails to pay, the person is deemed to be an assessee in default in respect of the tax. The department can then:

• Recover the tax with interest under Section 201(1A) from the deductor;
• Initiate proceedings that treat the company as defaulting on its own tax dues; and
• Where the payee has already paid tax on the amount and the deductor produces a Form 26A (accountant certificate), the first proviso to s.201(1) removes assessee-in-default status; and the second proviso to s.40(a)(ia) deems the TDS as deducted and paid on the s.139(1) due date, so the 30% expense disallowance is ALSO avoided. Only the s.201(1A) interest survives.

The 30% disallowance under Section 40(a)(ia)

Where TDS was deductible but not deducted, or deducted but not deposited before the Section 139(1) due date, 30% of the expenditure is disallowed in computing business income. On the ₹50,00,000 contractor payment, that is ₹15,00,000 added back to taxable income — roughly ₹3.77 lakh of tax at the 25.168% effective concessional rate, before the 201(1A) interest. The disallowance is restored in the year the tax is eventually paid, so it is a timing hit — but a heavy one that lands in the year of default.

Practical implications

• Fix the deduction date, not just the deposit date. Most companies track the 7th-of-next-month deposit but let the credit happen late in the accounting system. If the expense is credited to the vendor's account on 31 March, TDS is deductible on 31 March — deducting "on payment" in April starts limb (i) from 31 March.
• Interest is not deductible as an expense. Interest under 201(1A) is not allowed as a business deduction. It hits post-tax profit directly.
• Part-month discipline matters. A deposit on the 8th instead of the 7th is one day late — and one full month of 1.5% on the TDS amount. A 9th-of-month habit is materially expensive across a year.
• The tax audit reports all of it. Clause 34 of Form 3CD requires tabulation of short deduction, non-deduction and late deposit. A 201(1A) interest line is visible to the Assessing Officer before any notice is issued.
• Deposit before filing the return. The 40(a)(ia) disallowance is avoided only if the TDS is deposited before the Section 139(1) due date. Depositing in the tax-audit season but after the ITR due date still triggers the disallowance for that year.

FAQ

What is the interest rate for late TDS deposit?
1.5% per month from the date of deduction to the date of deposit. Part of a month counts as a full month.

What is the rate for late deduction of TDS?
1% per month from the date TDS was deductible to the date it was actually deducted. Both this and the 1.5% deposit interest can apply to the same amount.

Does a two-day delay really cost a full month of interest?
Yes. "Month" is measured in part-months, and any part counts as a full month. Two days late and 30 days late both attract one month of interest.

Is 201(1A) interest the same as the 234E late-filing fee?
No. 234E is ₹200 per day for late filing of the TDS return; 201(1A) is percentage interest for late deduction/deposit of the TDS itself. A company can owe both.

Can the 30% disallowance under 40(a)(ia) be avoided?
Yes, by deducting TDS and depositing it before the due date for filing the return under Section 139(1). Depositing after that date — even in the same financial year's audit cycle — leaves the disallowance for that year.

If the vendor already paid tax, can the department still charge us?
Where the payee has discharged the tax and the deductor produces Form 26A, both assessee-in-default status (first proviso to s.201(1)) AND the 30% s.40(a)(ia) disallowance (second proviso to s.40(a)(ia)) fall away. Only the s.201(1A) interest survives against the deductor.

Sources

• Section 201(1) and 201(1A), Income-tax Act 1961
• Section 40(a)(ia) (disallowance of 30%); Section 234E (late return fee); Section 139(1) (return due date)
• Clause 34, Form 3CD (tax audit disclosure of TDS defaults)

Use the compliance calendar to track deduction and deposit dates for every TDS liability. For a TDS compliance audit of your company, visit pvtltd.co.

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