I did not deduct TDS on a payment to a resident vendor. How much of my expense do I lose, and can I get it back?
You lose 30% of the sum in the year of the expense — not 100%, and not the tax amount. You get it back in the year the tax is finally deducted and paid, or, if the payee has already paid tax and you furnish the accountant's certificate under the first proviso to section 201(1), the second proviso deems you to have deducted and paid on the date the payee filed his return.
Section 40(a)(ia) disallows "thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B" where the tax has not been deducted, or having been deducted has not been paid on or before the due date under section 139(1). Two limits are built into the words. The first is the 30% cap — the balance 70% stays deductible even in a total-default year. The second is that the sum must be one on which tax is deductible under Chapter XVII-B; if the payment falls outside every TDS section, the clause has nothing to bite on.
Its non-resident twin, section 40(a)(i), is harsher. Interest, royalty, fees for technical services or any other sum chargeable under the Act payable outside India, or in India to a non-resident, is disallowed in full — there is no 30% restriction there.
The first proviso is the ordinary route back. Where the tax is deducted or paid in a later year, thirty per cent of such sum is allowed as a deduction in computing the income of the previous year in which the tax has been paid. So the expense is deferred, not destroyed. The Supreme Court in CIT v. Calcutta Export Company treated the Finance Act 2010 relaxation — permitting deposit of tax deducted during the year up to the return filing date — as curative, to be read liberally and applied retrospectively from the provision's insertion in 2005.
The second proviso is the better route where the vendor is compliant. If you have failed to deduct but are not deemed to be an assessee in default under the first proviso to section 201(1), you "shall be deemed to have deducted and paid the tax on such sum on the date of furnishing of return of income by the payee". Read with the first proviso, that means the 30% comes back in the year the payee filed. The Bombay High Court in PCIT v. Perfect Circle India Pvt. Ltd. treated the second proviso as declaratory and curative with retrospective effect from 1 April 2005, and the Delhi Tribunal in Muradul Haque v. ITO applied the same reasoning to the substitution of 100% by 30%.
On scope, the Supreme Court has closed the two escape routes that used to be argued. Palam Gas Service v. CIT and Shree Choudhary Transport Co. v. ITO both hold that the clause covers amounts already paid during the year and is not confined to amounts outstanding as "payable" at year end; Shree Choudhary Transport also holds that splitting payments to keep each below the section 194C threshold does not work.
The corresponding provision under the Income-tax Act, 2025 keeps the same shape. The department's TDS FAQ for FY 2026-27 states the consequence of failing to deduct or deposit as disallowance of 30% of resident payments and 100% of non-resident payments.
A 30% disallowance on a large vendor spend is usually a bigger number than the TDS itself, which is why assessing officers reach for it during scrutiny even where the section 201 limitation has run. It also compounds: the same default produces a section 201 demand, interest under 201(1A), penalty exposure under 271C and the disallowance, and each is dealt with by a different wing of the department.
I paid advance tax for the year but had not filed my return when the search took place. Can the department still call that income undisclosed?
We sell prepaid SIMs and vouchers to distributors below list price. Is that margin commission under 194H?
I deducted TDS during the year but paid it after 31 March, though before I filed my return — can the expense still be disallowed under section 40(a)(ia)?
We paid stock exchange transaction charges without TDS. Are those fees for technical services under 194J?
I have given the excise authorities a bank guarantee for unpaid bottling fee. Does that count as actual payment under section 43B - and is bottling fee even covered by section 43B?
Must you deduct tax on every payment to a non-resident, just to be safe?
I already paid my sub-contractors during the year and nothing was outstanding at 31 March — can section 40(a)(ia) still disallow the expense for not deducting TDS?
A declaration was required by the due date and you filed it late. Is that fatal?
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