The provisions relating to Tax Deducted at Source (TDS) defaults have been restructured under the Income Tax Act, 2025. The earlier Section 201(1) and Section 201(1A) of the Income Tax Act, 1961 are now covered under Section 398, effective from 1st April, 2026.
Section 398 deals with the consequences arising from failure to deduct tax at source, failure to deposit tax deducted at source, and the interest liability associated with such defaults. The provision is intended to ensure proper deduction and timely deposit of tax collected on behalf of the Government.
A person who fails to comply with TDS obligations may be treated as an assessee-in-default and may become liable for recovery proceedings, interest, penalty and other consequences prescribed under the Act.
Quick Reference – Section Mapping & Default Consequences
- New Section (IT Act 2025): Section 398
- Nature of Provision: Consequences of TDS defaults
- Earlier Sections (IT Act 1961): Sections 201(1) and 201(1A)
- Applicable To: Persons responsible for deducting and depositing tax at source
- Primary Consequence: Assessee-in-default status
- Interest Liability: 1% or 1.5% per month or part thereof depending upon the nature of default
Applicability of Section 398 & What Has Changed Under the Income Tax Act, 2025?
Section 398 applies to every person responsible for deducting and depositing tax at source under the provisions of the Income Tax Act, 2025.
The section covers situations where:
- Tax required to be deducted at source is not deducted;
- Tax is short deducted;
- Tax deducted is not deposited to the credit of the Central Government; or
- Tax deducted is deposited after the prescribed due date.
Under the Income Tax Act, 1961, these provisions were contained under Sections 201(1) and 201(1A). Under the Income Tax Act, 2025, these provisions have been consolidated and restructured under Section 398.
TDS Default Mapping & Consequences
| Nature of Default | Old Section (IT Act, 1961) | New Section (IT Act, 2025) | Consequence |
|---|---|---|---|
| Failure to deduct tax at source | Section 201(1) | Section 398 | Assessee-in-default |
| Failure to deposit tax deducted at source | Section 201(1) | Section 398 | Assessee-in-default |
| Interest for failure to deduct tax at source | Section 201(1A) | Section 398(3)(a)(i) | Interest @ 1% per month or part thereof |
| Interest for failure to deposit tax deducted at source | Section 201(1A) | Section 398(3)(a)(ii) | Interest @ 1.5% per month or part thereof |
What is an Assessee-in-Default?
A deductor who fails to deduct or deposit TDS as required may be treated as an assessee-in-default, leading to recovery, interest and penalty consequences.
However, the deductor may avoid this status if the resident payee has:
- Filed the return of income;
- Included the relevant income in total income;
- Paid the tax due; and
- Furnished the prescribed accountant’s certificate (Form No. 149, earlier Form 26A).
Interest liability may still apply even if assessee-in-default relief is available.
Types of TDS Defaults Covered Under Section 398
- Failure to Deduct Tax at Source: Non-deduction or short deduction of TDS may result in assessee-in-default status.
- Failure to Deposit Tax Deducted at Source: Failure to deposit deducted tax within the prescribed time may attract recovery and interest.
- Interest for Failure to Deduct Tax at Source: Interest at 1% per month or part thereof applies until tax is deducted.
- Interest for Failure to Deposit Tax at Source: Interest at 1.5% per month or part thereof applies until payment is made.
Consequences of Non-Compliance
Failure to comply with TDS obligations may result in:
- Recovery of tax not deducted or deposited;
- Interest liability under Section 398;
- Penalty proceedings under Section 448;
- Disallowance and other consequences, wherever applicable under the Act; and
- Additional compliance proceedings by the Income Tax Department.
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