Many businesses treat TDS as a back-office formality: deduct, deposit, file the quarterly return and move on. Yet a single missed deduction on professional fees, a contract payment or a year-end provision can reduce the deduction for a legitimate business expense. Section 40(a)(ia) of the Income-tax Act, 1961 is the provision that links TDS compliance directly to the computation of business profits, and it continues in the new law as Section 35(b)(i) of the Income-tax Act, 2025, which applies from 1 April 2026.
This article explains when the 30% disallowance applies, which due date actually matters, how the expense is allowed back in a later year, the relief where the payee has already paid tax, and the common situations that lead to disallowance, for businesses, finance teams and tax auditors.
Key points at a glance
- If tax deductible at source on a sum payable to a resident is not deducted, or is deducted but not paid by the due date for filing the return of income, 30% of that sum is disallowed.
- Under the Income-tax Act, 2025, the provision is Section 35(b)(i); the TDS provisions are in Chapter XIX-B (the non-salary deductions are consolidated in Section 393).
- The disallowed 30% is allowed in the year in which the TDS is actually paid, so the lapse becomes a timing difference with a cash-flow cost.
- No disallowance arises where the payee has included the income in its return and paid the tax, subject to an accountant's certificate.
- For payments to non-residents, the disallowance is of the entire sum (Section 40(a)(i), now Section 35(b)(ii)).
What is Section 40(a)(ia) of the Income Tax Act?
Section 40(a)(ia) says that, while computing income under the head "Profits and gains of business or profession", 30% of any sum payable to a resident on which tax is deductible at source is not allowed as a deduction if:
- the tax has not been deducted at all; or
- the tax has been deducted but not paid to the Government on or before the due date for filing the return of income under Section 139(1).
It applies to every sum on which TDS is required, not only to a fixed list. In practice the most common heads are:
- Professional and technical fees
- Payments to contractors and sub-contractors
- Rent for land, building, plant and machinery
- Commission and brokerage
- Interest (other than interest on securities)
- Salary, and purchase of goods where TDS applies above the threshold
Until Assessment Year 2014-15 the entire expense was disallowed. The Finance (No. 2) Act, 2014 restricted the disallowance to 30% with effect from Assessment Year 2015-16. The Supreme Court in Palam Gas Service v. CIT (2017) held that the word "payable" covers amounts already paid during the year as well as amounts outstanding at year-end, so the disallowance is not limited to unpaid balances.
Section 40(a)(ia) under the Income-tax Act, 2025: Section 35(b)(i)
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 (Tax Year 2026-27 onwards). The disallowance is carried forward in substance in Section 35(b)(i), which disallows 30% of any sum payable to a resident on which tax is deductible under Chapter XIX-B but has not been deducted, or after deduction has not been paid up to the due date specified in Section 263(1) (the return filing due date).
| Subject | Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|---|
| 30% disallowance, payments to residents | Section 40(a)(ia) | Section 35(b)(i) |
| Full disallowance, payments to non-residents | Section 40(a)(i) | Section 35(b)(ii) |
| Due date that matters for payment of TDS | Section 139(1) (return due date) | Section 263(1) (return due date) |
| Non-salary TDS provisions | Sections 194A to 194T and others | Section 393 (consolidated table of payment codes) |
| Payee has paid tax: not an assessee in default | First proviso to Section 201(1) | Section 398(2) |
| Period covered | Up to FY 2025-26 (AY 2026-27) and earlier years | Tax Year 2026-27 onwards |
Practical point: Tax audits and assessments for FY 2025-26 and earlier years will continue to refer to Section 40(a)(ia). For expenses of Tax Year 2026-27 onwards, the reference is Section 35(b)(i). Since TDS provisions have been renumbered into Section 393, the payment code applied must be checked carefully; a wrong classification can lead to short deduction.
Which due date matters: monthly deposit or return filing?
A frequent misunderstanding is that any delay in depositing TDS beyond the monthly due date triggers the disallowance. It does not. The test in Section 40(a)(ia) (and Section 35(b)(i)) is whether the tax deducted was paid on or before the due date for filing the return of income.
- TDS deducted but deposited after the monthly due date, yet before the return due date: no disallowance, but interest for late payment and possible late fee for the TDS statement apply.
- TDS deducted and deposited after the return due date: 30% disallowance in that year, allowed in the year of payment.
- TDS not deducted at all: 30% disallowance until the tax is deducted and paid, or the payee relief below applies.
How is the disallowed amount allowed in a later year?
The disallowance is not permanent. Where tax is deducted in a subsequent year, or deducted during the year but paid after the return due date, the 30% disallowed earlier is allowed as a deduction in the year in which the tax is actually paid. Section 35(b)(i) of the 2025 Act contains the same rule.
Worked example
Consider a company (taxed under Section 115BAA, effective rate 25.168%) that booked professional fees of ₹10,00,000 in FY 2025-26 without deducting TDS. The omission is noticed during the tax audit in September 2026. Since the tax was not deducted during FY 2025-26, any deduction now falls in a subsequent year.
- Disallowance for FY 2025-26: 30% of ₹10,00,000 = ₹3,00,000.
- Additional tax for that year: ₹3,00,000 × 25.168% = ₹75,504.
- The company deducts and pays the TDS of ₹1,00,000 in Tax Year 2026-27 along with interest for the delay.
- The ₹3,00,000 is claimed as a deduction in Tax Year 2026-27, the year in which the TDS is paid.
The total deduction is eventually the same, but the business pays tax earlier, pays interest on the TDS, and must track the reversal correctly. Where the disallowance arose under the 1961 Act and the payment is made after 1 April 2026, the repeal and savings provisions of the 2025 Act should be kept in view while claiming the deduction.
Relief where the payee has paid tax on the income
If the payer failed to deduct tax but the resident payee has included the amount in its return of income, paid tax on it and furnished the return, the payer is not treated as an assessee in default, on furnishing a certificate from an accountant in the prescribed form. In that case the payer is deemed to have deducted and paid the tax on the date the payee filed its return, and the 30% is allowed from that year.
This relief was introduced by the Finance Act, 2012 through the second proviso to Section 40(a)(ia). The Delhi High Court in CIT v. Ansal Landmark Township (P.) Ltd. (2015) held that the proviso is declaratory and curative and therefore applies retrospectively from 1 April 2005. Under the 2025 Act, the relief sits in Section 35(b)(i) read with Section 398(2).
Common situations leading to disallowance in tax audits
Year-end provisions without TDS
TDS applies on credit or payment, whichever is earlier. Year-end provisions for audit fees, legal fees, commission or contract work, where the payee is identifiable, attract TDS. Provisions reversed or booked without deduction are a routine source of disallowance.
Wrong section or wrong payment code
Treating professional services as a contract payment, or technical services as professional fees, results in deduction at a lower rate. The Calcutta High Court in CIT v. S.K. Tekriwal held that Section 40(a)(ia) does not apply to short deduction arising from a bona fide difference of opinion on the applicable section; the consequence is under Section 201. Tribunals have not been uniform on this, so the rate should be checked at the time of booking.
Expenses booked without checking thresholds
Payments to the same party that individually fall below the threshold but cross the annual aggregate limit are often missed, particularly for contractors and rent.
Practical point: The tax audit report requires disclosure of amounts inadmissible for TDS default. Reconciling the expense ledgers with TDS returns and Form 26AS/AIS data of payees before finalising accounts avoids surprises at the audit stage.
Practical checklist for TDS controls
- Map every expense ledger to the applicable TDS section or Section 393 payment code.
- Track cumulative payments per party against annual thresholds.
- Deduct TDS on year-end provisions where the payee is identifiable.
- Deposit all TDS before the return due date, even if the monthly due date has been missed.
- Where TDS was missed, obtain payee confirmation and the accountant's certificate if the payee has paid tax.
- Maintain a register of disallowed amounts to claim them in the year of payment.
Frequently Asked Questions on Section 40(a)(ia)
What is the new section for Section 40(a)(ia) under the Income-tax Act, 2025?
Section 40(a)(ia) corresponds to Section 35(b)(i) of the Income-tax Act, 2025, which applies from Tax Year 2026-27. The 30% disallowance and the relief for later payment are retained.
How much is disallowed under Section 40(a)(ia)?
30% of the sum payable to a resident on which TDS was not deducted, or was deducted but not paid by the return due date. Before Assessment Year 2015-16 the entire amount was disallowed.
Does late deposit of TDS always lead to disallowance?
No. If the TDS is deposited after the monthly due date but on or before the due date for filing the return of income, there is no disallowance, though interest for late payment applies.
Can the disallowed expense be claimed later?
Yes. The 30% disallowed is allowed as a deduction in the year in which the TDS is deducted and paid.
Is there relief if the payee has already paid tax on the income?
Yes. If the payee has included the income in its return and paid tax, and an accountant's certificate is furnished, the payer is deemed to have deducted and paid the tax on the date of the payee's return, and no disallowance applies from that date.
Does Section 40(a)(ia) apply to short deduction of TDS?
The Calcutta High Court in S.K. Tekriwal held that it does not apply to short deduction due to a bona fide choice of section, but views differ and the position depends on facts.
Does the 30% rule apply to payments to non-residents?
No. For non-residents, Section 40(a)(i), now Section 35(b)(ii), disallows the entire sum where TDS is not deducted or paid.
Conclusion
Section 40(a)(ia), now Section 35(b)(i) of the Income-tax Act, 2025, makes TDS compliance part of profit computation. A missed deduction does not make an expense bogus, but it can defer 30% of it to a later year, with tax, interest and reconciliation costs in between. With the renumbering of TDS provisions under Section 393, the transition year is a good time to review ledger mapping, thresholds and year-end processes.
This article is intended for general information and knowledge sharing only and does not constitute professional advice or solicitation of any kind. Provisions are summarised as of September 2026. Readers should refer to the relevant provisions, regulations and judicial pronouncements for their specific facts.