Key takeaways
- As a deductee, the question is whether every rupee customers deducted is reaching your PAN.
- As a deductor, the question is whether short deductions, late filings and missing PANs are building up demands.
- If you answer "don't know" to three or more questions, a structured review will usually pay for itself.
TDS is usually managed as two separate jobs. The receivables team worries about credit customers have deducted. The payables team worries about deducting and depositing correctly from vendors. Nobody looks at both, and money leaks on each side.
From 1 April 2026, TDS runs under the Income-tax Act, 2025: salary TDS under section 392 and most other TDS under section 393, with new form numbers such as Form 140 for the non-salary quarterly return. The questions below apply under both the old and the new law.
Part one: credit you are owed
- Do you reconcile 26AS to your books every quarter?
If it only happens at return time, customers have usually moved on and corrections are hard to get.
- Do you know your total unmatched TDS in rupees?
Not a count of mismatches, a value. Without it, nobody can decide how much effort the gap deserves.
- Is each gap tagged by customer and cause?
Not filed, wrong PAN, wrong year or section, or timing. Each has a different fix.
- Do you chase customers with specific requests?
Quarter, amount, PAN and section. General reminders rarely produce a correction statement.
- Are lower deduction certificates applied correctly?
If you hold a certificate, check that customers actually deducted at the lower rate. Excess deduction is cash tied up until refund.
Part two: defaults you may be carrying
- Are vendor PANs validated before payment?
Where a payee has not furnished a valid PAN, section 397(2) of the 2025 Act (old 206AA) requires deduction at the highest of the specified rate, the rate in force, or 20% in most cases. If you deducted at the normal rate, the shortfall is yours.
- Do you check the TRACES default summary each quarter?
Short deduction, short payment, late payment interest and late filing fees all show up there, and they accumulate quietly.
- Are quarterly returns filed on time?
The late filing fee is ₹200 for each day of delay, capped at the TDS amount, and a penalty of ₹10,000 to ₹1 lakh can apply for failure to file. Interest runs at 1% a month for late deduction and 1.5% a month for late payment after deduction.
- Is the section applied correctly for each payment type?
Contractor, professional, rent and commission payments carry different rates. Mapping errors in the ERP repeat every month.
- Do you issue TDS certificates on time and to the right PAN?
Your vendors' 26AS depends on your filing. Errors on your side become their disputes, and they will come back to you.
Reading your score
| "No" or "don't know" answers | What it usually means | Suggested action |
|---|---|---|
| 0–2 | TDS is under control | Keep a quarterly rhythm |
| 3–5 | Visible gaps on at least one side | Run a focused review of the last completed year |
| 6 or more | Credit lost and defaults likely | Full two-sided review, starting with the largest customers and vendors |
Source: TraCarta view, illustrative scoring.
Two worked examples
Deductee side (illustrative). A manufacturer bills ₹250 crore a year to 300 customers, most of whom deduct 2% on contract work. Books show ₹4.1 crore of TDS; 26AS shows ₹3.7 crore. Of the ₹40 L gap, ₹28 L sits with six customers: two never filed a quarter, three used a wrong PAN, one reported the amount in the next year. Six targeted requests recover most of the ₹40 L. Without the analysis, the company would have written it off or waited for a refund that never came.
Deductor side (illustrative). The same company pays ₹60 crore to 900 vendors. Forty vendors, paid ₹3 crore between them, had no valid PAN on the vendor master, but TDS was deducted at the normal 2%. At the 20% higher rate the correct deduction was ₹60 L, not ₹6 L. The ₹54 L shortfall becomes a demand in the company's own name, with interest at 1% a month from the date the tax was deductible. One quarter of late filing adds ₹200 a day in fees on top.
The deductor-side cost in the example
| Item | Amount |
|---|---|
| Payments to vendors without valid PAN | ₹3.0 cr |
| TDS deducted at 2% | ₹6 L |
| TDS due at 20% higher rate | ₹60 L |
| Shortfall payable by the company | ₹54 L |
| Interest at 1% a month for 12 months | ₹6.5 L |
Source: TraCarta, illustrative example. Rates from section 397(2) of the Income-tax Act, 2025 and Income Tax Department guidance on interest.
Who acts on each answer
- Receivables and the tax team own questions 1 to 5. Credit only reaches your PAN when customers file correctly, so the work is identifying and chasing them.
- Payables and vendor master owners own questions 6 and 9. A PAN check at onboarding costs minutes and prevents demands later.
- The TDS compliance team owns questions 7, 8 and 10: filing on time, clearing TRACES defaults and issuing certificates.
- The CFO owns the rhythm: one quarterly review that looks at both sides together, with the value of each gap in rupees.
Common mistakes
- Clearing TRACES defaults only when a notice arrives, after interest has run for a year.
- Correcting a PAN in the vendor master but not filing a correction statement for past quarters.
- Assuming the ERP picks the right section. Payment codes are set up once and rarely reviewed.
- Counting mismatches instead of valuing them, so small cases get as much attention as large ones.
What to do next
Start with the side that has the most "don't know" answers. For credit, a quarter-by-quarter match of 26AS against books will show where the money is. For defaults, the TRACES default summary is the quickest place to see what the department already thinks you owe.
Our TDS Recovery practice covers both sides and reports results in a signed quarterly TDS statement (see what you receive). To see how we work, read how we work or get in touch.
Sources
- Income Tax Department: Tax Deduction at Source (TDS)
- Income Tax Department: Higher deduction of tax at source (206AA, 206AB)
- India Briefing: Section 393 of the Income-tax Act, 2025
- Saral: Old vs new TDS sections and forms
- Taxguru: Lower and nil withholding under the Income-tax Act, 2025 (section 395)
- Taxguru: TDS and TCS changes from 1 April 2026
- Income Tax Department: FAQs on higher rate of TDS under section 397(2)
- Income Tax Department: Late filing fees and penalty for TDS/TCS statements
- Income Tax Department: Interest for delay in payment of TDS/TCS
Managing Partner of TraCarta. He started the firm in 2018 to recover airline GST credit for corporate clients and leads its three recovery practices.
View profileGeneral information only, not tax advice. Check the current law and your facts before acting.
