Sleet

Missed TDS on a Vendor Bill? The 30% Expense Disallowance Under Section 35 and How It Comes Back

Vatsal Sutariya
Accounting
6 min read
Quick answer

If TDS on a payment to a resident is not deducted, or not deposited by the return due date, section 35(b) of the Income-tax Act, 2025 disallows 30% of the expense. For interest, royalty, technical fees and similar sums paid to non-residents, the whole expense is disallowed. The amount is allowed in the year you pay the TDS.

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Missing TDS on a vendor bill costs more than interest. If it is not fixed in time, part of the expense itself stops being deductible, which raises your tax for the year. The rule moved from section 40(a)(ia) of the 1961 Act to section 35 of the Income-tax Act, 2025, with the same structure.

Key points covered in this guide: The rule in one table, The deadline that matters: the return due date, How the deduction comes back, Which law applies to which year, Short deduction is a grey area, A worked example

The rule in one table

PaymentTDS not deducted, or not paid by the return due dateSection in the 2025 Act (earlier)
Any sum payable to a resident on which TDS applies (contractors, professionals, rent, commission and so on)30% of the sum disallowed35(b)(i) (40(a)(ia))
Interest, royalty, fees for technical services or other taxable sums payable outside India or to a non-resident100% of the sum disallowed35(b)(ii) (40(a)(i))
Salary payable outside India or to a non-resident100% disallowed35(c) (40(a)(iii))

The disallowance is in addition to interest under section 398 for late deduction (1% a month) and late deposit (1.5% a month).

The deadline that matters: the return due date

The test is not the 7th of the month. Section 35(b) asks whether the tax was deducted during the tax year and paid by the due date of the income-tax return under section 263(1).

  • ✓TDS deducted during the year and deposited late but before the return due date: no disallowance, only interest.
  • ✓TDS deducted in a later year, or paid after the return due date: the disallowance applies for this year.

So a missed deduction found before 31 March can still be fixed in the same tax year with no disallowance. One found after the year ends, for example during the tax audit, is disallowed for this year and allowed in the year the TDS is paid.

How the deduction comes back

The disallowance is a timing difference, not a permanent loss.

  • ✓Resident payments: where TDS is deducted in a later year, or deducted in the year but paid after the return due date, the 30% is allowed in the tax year in which the TDS is paid.
  • ✓Non-resident payments: the full sum is allowed in the year the TDS is paid, on the same logic.
  • ✓Payee has already paid tax on it: if you failed to deduct but are not treated as an assessee in default under section 398(2) because the payee included the income in its return and paid the tax, you are deemed to have deducted and paid TDS on the date the payee filed its return. The disallowance then reverses from that date. Under the old law this needed a chartered accountant's certificate from the payee; check the form now prescribed under the 2026 Rules.

Which law applies to which year

  • ✓FY 2025-26 (assessment year 2026-27): section 40(a)(ia) of the 1961 Act. The test is TDS paid by the return due date for that year. For audit cases, that date was extended to 21 November 2026.
  • ✓Tax year 2026-27 onwards: section 35 of the 2025 Act. For a company or an audited business, the return due date for tax year 2026-27 falls in late 2027.

Where a 2025-26 disallowance is reversed by paying TDS in 2026-27, confirm with your auditor how the allowance is claimed under the new Act's transition provisions.

Short deduction is a grey area

Under the 1961 Act, several High Courts held that 40(a)(ia) applied only where tax was not deducted at all or not paid, not where it was deducted under the wrong section at a lower rate. Commentators have questioned whether that line of cases carries over to section 35, given that all resident TDS now sits in one section with numeric payment codes. Until there is a ruling or a clarification, treat a wrong code (for example, 1026 at 2% instead of 1027 at 10%) as a risk and fix it.

A worked example

A Coimbatore pump maker, a company taxed at an effective 25.168% (22% plus 10% surcharge and 4% cess), credits ₹12,00,000 to a resident transport contractor (a firm) on 15 June 2026. TDS at 2% should have been ₹24,000. None was deducted.

Option 1: found at the year-end close, fixed before 31 March 2027.

  1. The company deducts and deposits ₹24,000 as TDS on 25 March 2027 (it cannot recover it from the contractor, who has been paid).
  2. Interest for late deduction: June 2026 to March 2027 is 10 calendar months. ₹24,000 × 1% × 10 = ₹2,400.
  3. The TDS was deducted within tax year 2026-27 and paid before the return due date, so there is no disallowance.
  4. Cost: ₹24,000 + ₹2,400 = ₹26,400.

Option 2: found in the tax audit, TDS paid on 30 April 2027.

  1. The TDS is deducted in tax year 2027-28, a later year, so the disallowance applies for 2026-27 even though the return is not yet filed: 30% × ₹12,00,000 = ₹3,60,000.
  2. Extra tax for 2026-27: ₹3,60,000 × 25.168% = ₹90,604.80, about ₹90,605.
  3. Interest for late deduction: June 2026 to April 2027 is 11 calendar months. ₹24,000 × 1% × 11 = ₹2,640.
  4. The ₹3,60,000 is allowed in tax year 2027-28, when the TDS is paid, so the tax comes back a year later.

Option 3: not fixed until May 2028.

  1. Disallowance for 2026-27: 30% × ₹12,00,000 = ₹3,60,000.
  2. Extra tax: ₹3,60,000 × 25.168% = ₹90,604.80, about ₹90,605, plus interest for the shortfall in advance tax.
  3. The ₹3,60,000 is allowed in tax year 2028-29, when the TDS is paid, so the tax comes back a year or two later.
  4. Interest on the TDS also grows, and a penalty can be considered for the default.

Only fixing it before 31 March avoids the disallowance. After that, paying the TDS sooner only brings the ₹3,60,000 deduction back sooner and stops the interest growing.

Frequently asked questions

Does the 30% apply to the whole bill or only the TDS amount?

To the whole sum payable on which TDS was deductible. On a ₹12 lakh bill, it is ₹3.6 lakh, not 30% of the ₹24,000 TDS.

What if we deducted TDS but deposited it two months late?

If it was deducted during the year and deposited before the return due date, there is no disallowance. You still owe interest at 1.5% a month or part of a month.

Is the 100% rule only for interest, royalty and technical fees?

No. Section 35(b)(ii) also covers any other sum chargeable to tax that is payable to a non-resident or outside India, if TDS applied to it. The full amount is disallowed until the TDS is paid.

Is the disallowance reported in the tax audit report?

Yes. The tax audit report asks for amounts inadmissible because of TDS defaults, so the auditor will list them.

Sources

This is a summary, not legal advice. Confirm the position for your case with your tax auditor and the Act text on incometaxindia.gov.in.

Vatsal Sutariya

Written by

Founder, Airwix Technologies (Sleet)

Vatsal Sutariya is the founder of Airwix Technologies in Ahmedabad, the company that builds Sleet: SleetHR for HR and payroll, and Sleet Accounting for GST billing and books. He writes about GST, invoicing, business tax and choosing software for Indian businesses, and checks each rule against the official notification before it is published.

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