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Your TDS statement is filed and the challans are paid, and then reconciliation throws up a mismatch: a contract payment deducted at 1% when section 194C asked for 2%, or a November challan deposited on 15 December against a 7 December due date. The exposure is rarely a single charge. Interest under section 201(1A) and the section 234E fee follow automatically, while the TDS short deduction penalty under sections 271C and 271H depends on how you behave now. Fix the numbers yourself, in the right order, and most of the discretionary exposure goes away.
The Income-tax Act, 1961 treats these as separate defaults, and each carries its own consequence. Accounts teams use the words interchangeably, which is how a correction for one default quietly creates another.
Tax was deducted, but less than the law required. The usual causes are a wrong rate, a wrong section, a payee who never furnished PAN so the higher rate under section 206AA should have applied, or a threshold that was misjudged. Where the shortfall is deducted in a later month, the deduction itself is late, and that is a second default on the same rupees.
The deduction was correct, but the government received less than the statement reports. Typical reasons: a challan short by the interest component, a challan mapped to the wrong quarter, or the same challan claimed twice across two statements.
Tax deducted in November must ordinarily reach the government by 7 December; the March deduction gets until 30 April. Tax under sections 194-IA (property) and 194-IB (rent) is payable within 30 days from the end of the month of deduction. A delay here is a late payment default even where the deduction was perfectly timed.
Section 201(1) treats a deductor who fails to deduct, or fails to pay after deducting, as an assessee in default. Section 201(1A) then fixes simple interest on a monthly basis, and part of a month counts as a full month.
| Default | Provision | Charge | Period |
|---|---|---|---|
| Failure to deduct, or short deduction | Section 201(1A)(i) | 1% simple interest per month or part month | From the date tax was deductible to the date it is deducted |
| Deducted but not paid | Section 201(1A)(ii) | 1.5% simple interest per month or part month | From the date of deduction to the date of payment |
| Late filing of TDS statement | Section 234E | Rs 200 per day, capped at the tax deductible | From the due date of the statement to the date of filing |
| Failure to deduct or pay | Section 271C | Penalty equal to the tax not deducted or paid | Separate order after show cause |
| Late or incorrect statement | Section 271H | Rs 10,000 to Rs 1,00,000 | Separate order after show cause |
An eleven-day delay in December still costs one month at 1.5%. Nothing is prorated for part of a month.
There is an exception worth knowing. A proviso inserted by the Finance Act 2022 gives relief where tax is deducted late but deposited by the 7th of the month following that deduction: the 1.5% charge under section 201(1A)(ii) does not run on that amount. The 1% charge for the period up to the date of deduction remains.
The section 234E fee is levied while the statement is processed under section 200A, at Rs 200 for every day of delay, capped at the tax deductible in the statement. It appears in the intimation whether or not anyone opens your file.
Sahyadri Precision Components Pvt Ltd, a Pune MSME, pays a private limited vendor Rs 40,00,000 on 28 November 2025 for a job-work contract. Section 194C applies at 2%, so Rs 80,000 should have been deducted. The rate master in the accounting software was still set for an individual payee, and Rs 40,000 was deducted.
That Rs 40,000 was deposited on 15 December 2025 against a due date of 7 December 2025. The Q3 statement in Form 26Q, due 31 January 2026, was filed on 20 February 2026. The shortfall is noticed in March. The balance of Rs 40,000 is deducted from the vendor's next running bill on 10 March 2026 and paid the same day.
Total outflow is Rs 46,600, of which Rs 40,000 was always the government's money. What stays open is the penalty exposure under sections 271C and 271H.
Section 271C allows a penalty equal to the tax not deducted or not paid, which on the example above would be another Rs 40,000. Section 271H allows Rs 10,000 to Rs 1,00,000 for a statement that is late or carries incorrect particulars.
Both are penalty proceedings. They need a show-cause notice and an order, and section 273B gives a defence where the deductor proves reasonable cause. A documented software error corrected on your own initiative, before any notice, reads very differently in a penalty file from a default found during a survey.
Section 271H also has a specific escape route. The proviso to sub-section (1) says no penalty is to be levied where the deductor proves that, after paying the tax deducted along with the fee and interest, the statement was delivered within one year of the time prescribed for delivering it. If a filing has already slipped, that window is the one to use.
The consequences run past TDS. Under section 40(a)(ia), 30% of a payment to a resident is disallowed in computing business income where tax was not deducted, or was deducted but not paid by the due date for filing the return under section 139(1). The disallowance reverses in the year of payment, but the book-profit and cash-flow effect is real for a small company.
Correction protects the vendor too. TDS credit reaches the payee's Form 26AS and AIS only when the statement is processed with the right details. A shortfall left alone becomes the vendor's tax problem at year end, and then your relationship problem.
Download the default summary and the justification report for the quarter from TRACES. Match each flagged default against your ledger, the challan (CIN, amount and date) and the entry in the statement. Correction without reconciliation usually repeats the original error in a new form.
Raise a challan for the shortfall and interest and pay it. Then map that challan to the correct quarter and Form in the correction statement. A challan that is paid but not mapped leaves the default exactly where it was.
On the e-filing portal, open the filed statement, choose the correction type, add the challan, and correct the deduction amount, rate, date or PAN. For property transactions, the Form 26QB correction is raised online and, once approved, a revised Form 16B can be downloaded for the buyer and seller.
Where a section 200A intimation has already been issued, correcting the statement may not by itself close the demand shown in it. Respond within the time allowed, and where the intimation is factually wrong, the appeal under section 246A lies before the Commissioner (Appeals).
Download the TRACES default summary and justification report for every open quarter
Match each default to a ledger entry, a challan CIN and the statement line
Compute section 201(1A) interest separately for short deduction and for late deposit
Pay the tax and interest through a fresh challan before filing the correction
Map that challan to the correct quarter and Form in the correction statement
File the correction and download the revised intimation and Form 16 or 16A
Record the whole sequence in a dated note for the assessment file
Penalty and assessment proceedings are decided on paper, and the paper is what you kept. Maintain one folder for each financial year: the original and corrected statements with acknowledgements, challan copies with CIN and the mapping used, your interest working sheet showing the months counted, the TRACES justification report after correction, revised Form 16 or 16A issued to the payee, and a short note explaining what went wrong and when it was found. Statement formats and the rules sit on the Income Tax Department's website if you need the exact form numbers while preparing that note.
Common mistakes cluster here. Paying the challan but forgetting to map it to the quarter is the most frequent. Next is correcting the statement while leaving a section 200A demand open. Some deductors compute interest only for the month of payment and miss the earlier months of the short-deduction period. Others correct their own record but never issue a revised certificate to the vendor, so the credit stays mismatched.
Timing matters more than volume. Interest and the section 234E fee are statutory and will be collected either way. The penalty under sections 271C and 271H is the part that responds to a clean, early, documented correction.
Open TRACES this week, download the default summary for every quarter you have filed, and reconcile it against your challans and ledger before the next statement is due.
This article is for general information only and is not legal advice. Consult a qualified professional for your specific facts.
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