What is Section 201(1A) / Section 398 TDS interest?
Reviewed by CA Apurav GargLast reviewed
In short
Interest for deducting TDS late or paying it to the government late: section 201(1A) of the Income-tax Act, 1961, and section 398 of the 2025 Act from tax year 2026-27, counted per month or part of a month.
Want help applying this to your own accounts?
We handle bookkeeping, GST and TDS for D2C and marketplace sellers, and can walk you through how this works in your business.
Two kinds of interest
A business that deducts TDS owes interest in two situations, each at its own monthly rate:
- Not deducted, or deducted late. Interest runs from the date the tax should have been deducted until the date it is actually deducted.
- Deducted, but paid to the government late. Interest runs from the date it was deducted until the date it is paid.
The second point is often missed: once the due date for depositing is missed, interest is counted back to the date of deduction, not from the due date.
This was section 201(1A) of the Income-tax Act, 1961. From tax year 2026-27 it is in section 398(3) of the Income-tax Act, 2025. The rates have stayed the same; the GST & TDS Interest and Late Fee Calculator uses the rates in force.
How months are counted
Interest is charged for each month or part of a month. The TDS processing system (TRACES) counts calendar months, so a deduction on 25 June and a payment on 2 July count as two months. Tribunals have sometimes read "month" as a period of 30 days instead; the department's system does not.
Interest is in addition to other consequences
- A late fee for each day the TDS statement is filed late, and a possible penalty for not filing it.
- Disallowance of the expense, in part for payments to residents and in full for payments to non-residents, in the deductor's income-tax return when TDS was not deducted or not paid, until it is.
- The payee's credit does not appear in their Form 168 until the tax is paid and reported.
If the payee has already paid the tax
If the payee has included the income in their own return and paid tax on it, the deductor is not treated as in default for the tax itself, provided it obtains an accountant's certificate in the prescribed form. Interest for not deducting still runs, up to the date the payee filed their return.
What goes wrong
- Paying the tax but not the interest, so TRACES raises a demand after processing the TDS statement.
- Counting days instead of months.
- Deducting on payment instead of on credit. TDS is due on the earlier of the two; booking the bill starts the clock.
Example in rupees
A D2C brand is billed by a logistics contractor on 25 June. TDS was due to be deducted on that date, when the bill was credited to the contractor's account.
| Stage | Dates | Months counted | Interest for |
|---|---|---|---|
| Deducted late | 25 June to 10 August (deducted) | June, July, August = 3 | Late deduction |
| Deducted but deposited late | 10 August to 15 October (deposited, after the due date) | August, September, October = 3 | Late payment |
Each part of a calendar month counts as a full month, so a delay of a few weeks can cost three months' interest. Interest for late payment runs from the date the tax was deducted (10 August), not from the due date for depositing it. The two stages carry different monthly rates, set in the law. The brand pays the interest with the tax before filing its quarterly TDS statement. The dates are illustrative.
Legal reference: Income-tax Act, 2025: section 398(3), from tax year 2026-27; Income-tax Act, 1961: section 201(1A), up to 31 March 2026
Related terms
Work it out for your business
Want help applying this to your own accounts?
We handle bookkeeping, GST and TDS for D2C and marketplace sellers, and can walk you through how this works in your business.
General information only, not professional advice. Rules and rates change — check the official source before you act.