11 July 2024
Short deduction of TDS (Tax Deducted at Source) can indeed have consequences as per the provisions under the Income Tax Act, 1961. Here’s a detailed overview of what happens in case of short deduction of TDS:
### Consequences of Short Deduction of TDS:
1. **Interest Liability:** - **Interest u/s 201(1A):** If TDS is deducted at a rate lower than the prescribed rate or not deducted at all, interest is levied under section 201(1A). The interest is calculated from the date on which TDS was deductible to the date on which it is actually deducted. The current rate of interest is 1% per month or part of a month.
2. **Penalty:** - **Penalty u/s 271C:** If TDS is not deducted or deducted but not paid to the government, a penalty equal to the amount of TDS not deducted or paid can be levied under section 271C.
3. **Disallowance of Expenses:** - **Disallowance u/s 40(a)(ia):** If TDS is not deducted or deducted but not paid to the government, the corresponding expenses (on which TDS was required to be deducted) may be disallowed while computing income under the head "Profits and gains of business or profession".
4. **Prosecution:** - In severe cases of intentional non-deduction or non-payment of TDS, prosecution proceedings can be initiated under section 276B of the Income Tax Act.
### How to Rectify Short Deduction of TDS:
1. **Payment of TDS with Interest:** - If TDS has been short deducted, the deductor should pay the balance amount of TDS along with interest under section 201(1A) to the government. This should be done at the earliest to minimize interest liability.
2. **Filing of Correction Statement:** - A correction statement (revised TDS return) should be filed to reflect the correct amount of TDS deducted. This helps in rectifying any errors in the original TDS return.
3. **Communication with Deductee:** - Inform the deductee (the recipient of income on which TDS was required) about the short deduction, subsequent payment of balance TDS, and any interest paid. This ensures transparency and clarity.
### Prevention:
- **Regular Compliance Review:** Conduct periodic reviews of TDS compliance to ensure all deductibles are identified correctly and TDS is deducted and paid on time.
- **Use of TDS Software:** Utilize TDS software to minimize errors in TDS calculation and deduction.
- **Professional Assistance:** Seek advice from tax professionals or consultants to ensure compliance with TDS provisions and avoid potential penalties.
In conclusion, while short deduction of TDS may lead to interest liability and other consequences, timely rectification and compliance can mitigate these risks. It's crucial for deductors to understand their obligations under the Income Tax Act and ensure proper adherence to TDS provisions to avoid penalties and legal repercussions.
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