Section 398
Section 398: consequences of failing to deduct/collect or pay over TDS/TCS
Section 398 is the enforcement backbone of the TDS/TCS system - it deems a defaulting deductor or collector to be an "assessee in default", carves out relief where the payee has already paid the tax through their own return, fixes the interest rates payable on delayed deduction/collection and delayed payment, and sets a time limit for passing a default order.
This explanation is AI-assisted and pending review by our CA/CS team. It is general information, not professional advice - always cross-check against the bare law text above or talk to our tax team for guidance specific to your situation.
Deemed assessee in default
If a person - including the principal officer of a company - who is required to deduct or collect any amount under the Act, or an employer under Section 392(2)(a), does not deduct or pay, does not collect or pay, or after deducting/collecting fails to pay the whole or any part of the tax required, that person is deemed to be an assessee in default in respect of that tax, in addition to any other consequences under the Act.
Relief where the payee has already paid the tax
A person who fails to deduct (or, for Section 394(1) Table Sl. Nos. 1 to 5 and 9, fails to collect) tax is not deemed an assessee in default if the payee/buyer/licensee/lessee has: furnished a return of income under Section 263; included the relevant amount in computing income in that return; and paid the tax due on the declared income - and the person furnishes an accountant's certificate to this effect, in the prescribed form.
Interest on default - the rates
Without prejudice to the assessee-in-default consequence, a person who does not deduct/collect tax, or fails to pay it after deducting/collecting, is liable to pay simple interest:
- At 1% for every month or part of a month on the amount of tax, from the date the tax was deductible or collectible to the date it is actually deducted or collected; and
- At 1.5% for every month or part of a month on the amount of tax, from the date the tax was deducted or collected to the date it is actually paid.
When and how the interest is paid
This interest must be paid before furnishing the TDS/TCS statement under Section 397(3)(b).
Where the person is not deemed an assessee in default because of the payee's own compliance (sub-section (2)), the 1% interest under clause (a)(i) runs only up to the date the payee/buyer/licensee/lessee furnishes their return of income.
Where the Assessing Officer passes an order for the default under sub-section (1), interest is paid as per that order.
Charge on assets and time limit for the order
If tax deducted or collected is not paid over, the tax together with the simple interest under sub-section (3)(a) becomes a charge on all the assets of the defaulting person.
An order deeming a person to be an assessee in default for failure to deduct or collect cannot be made after six years from the end of the tax year in which the tax was deductible or collectible, or after two years from the end of the tax year in which the correction statement under Section 397(3)(f) is delivered, whichever is later.
Sections 286(1) and 286(3) apply to this time limit.
Link to penalty
No penalty is levied under Section 412 on the defaulting person unless the Assessing Officer is satisfied that the failure to deduct, collect or pay was without good and sufficient reasons.
Frequently asked questions
What interest rate applies for failing to deduct TDS on time?
1% simple interest for every month or part of a month, from the date the tax was deductible to the date it is actually deducted or collected, under Section 398(3)(a)(i).
What interest rate applies once tax has been deducted but not paid over?
1.5% simple interest for every month or part of a month, from the date of deduction/collection to the date of actual payment, under Section 398(3)(a)(ii).
Can a deductor avoid being treated as an assessee in default?
Yes, under Section 398(2) - if the payee has filed their return under Section 263, included the amount in that return, paid the tax due, and the deductor obtains an accountant's certificate confirming this in the prescribed form.
What is the time limit for passing an order deeming someone an assessee in default?
Six years from the end of the tax year in which the tax was deductible or collectible, or two years from the end of the tax year in which the correction statement is delivered under Section 397(3)(f) - whichever is later.
Related sections
Want this applied to your actual filing, not just explained?
Calculate your TDS/TCS default interest liabilityLast updated 9 September 2026