For delayed payment of TDS or delayed deduction, the deductor needs to pay interest for these delays. The interest is paid in through Challan / Book Entry similar to TDS payments.
While preparing TDS Returns, one needs to ‘allocate’ the interest component from each Challan. Unless this is explicitly not allocated / specified, the Department will not adjust the interest liability. Effectively, the interest liability will remain pending and default notices will be generated even if there is enough unused balance in the Challans.
While preparing TDS Returns, for each Challan, from its total value, there is a provision to allocate in either full or in part from this value towards ‘Interest’ – this is called ‘Interest Allocation’.
Once the TDS Return is successfully filed, the Department will pool all the allocated interest values from the Challans and adjust the interest liability for the deductor.
It is a common complaint ‘I have paid the interest, but still the interest default exists’. Main reason for this is that Interest has not been Allocated while preparing TDS Returns.
I have paid excess Interest on FY 25-26 can it be carried forward and used in next financial year and can it be adjusted against TDS payable amount
We assume you are referring to Interest related to TDS payment delays. Till FY:25-26 (AY:26-27), it did not matter what you placed in the ‘Interest’ column in the TDS Challan – the interest specifically had to be ‘allocated’ in the challan. If you have placed the value in the ‘interest’ column and not ‘allocated’, this may be used next year provided there is unused balance available. However, post allocation of interest, it may not be possible. Please take advise of a tax professional.