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.