ITR Filling 2024: What you need to do when your employer does not deposit TDS with I-T Dept

Tax Deducted at Source (TDS) is a crucial component of our tax system. As per rules, entities or individuals making certain payments are mandated to deduct TDS before making the payment.

For instance, employers who pay salaries or banks that credit savings or fixed deposit interest to your account need to deduct TDS. In the case of salaried individuals, employers are responsible for calculating the TDS based on the applicable income tax slab. However, for income other than salary, TDS is typically applied at a fixed rate under the Income Tax Act, 1961.

Your employer typically calculates your TDS and starts to deduct the amount from your first paycheck (in the accounting year) itself. The TDS deducted is based on the investment (tax-deduction eligible investments) and expenses’ (home loan interest) declarations that employees provide. “Based on this information, the employer needs to calculate the annual tax liability of each employee and deduct the TDS at the time of payment of salary on a monthly basis (if applicable). The employer is bound to deposit the TDS with the Central Government by the 7th of the next month (for March, by 30th April) and file quarterly TDS returns,” said Yogesh Kale, Executive Director, Nangia Andersen LLP.

Moreover, “towards the end of the year, the employer must collect the proof of actual investments made by the employees and adjust the final tax liability of the employees. That’s when the balanced TDS gets calculated and then deducted. Once the TDS return for the last quarter is filed, the employer would issue Form 16 to the employees which includes all details of the respective employees’ income and taxes deducted,” added Kale.

What if the government doesn’t get TDS?

There are multiple consequences for employers who fail to deposit TDS on time.

“The employer is liable to pay interest on the delayed TDS amount under section 201 for the period of delay. The Income-tax Officer has the power to impose a penalty on the employer under Section 271C of the Act as for failure to deduct or deposit TDS. Whereas, in cases of wilful failure to deposit TDS, another section 276B also provides for prosecution, which may result in imprisonment and a fine,” said Yeeshu Sehgal, Head of Tax Markets, AKM Global, a tax and consulting firm.

Further, employers may not be able to claim a significant part of the employee’s salary as expenses. “30 percent disallowance of salary expenses for resident employees; 100 percent disallowance of salary expenses for non-resident employees in case the TDS is not deposited upto filing of the employer’s tax return, interest at 1.5 percent for every month and part of month from date of TDS deduction to date on which such tax is actually paid; penalty equivalent to TDS amount which the employer has not deposited,” said Kale.

How can an employee verify if their TDS has been deposited by their employer?

Employees can verify TDS deposits through their Form 26AS, accessible via the Income Tax Department's e-filing portal.

Form 26AS provides a consolidated record of TDS deposited on behalf of the employee. Regular checks can ensure the TDS deducted is accurately reflected. Ideally, an employee should check Form 26AS on a quarterly basis to ensure that the employer has deposited the TDS with the Income Tax Department and that it is correctly reflected in Form 26AS.

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TDS not deposited? What can you do?

If an employee finds that their TDS has not been deposited, the first and foremost step is to notify the employer and request immediate rectification. The employee should also send a formal complaint to the employer, detailing the discrepancy.

If the employer does not act, within a reasonable time, “the employee can raise a grievance on the TDS Reconciliation, Analysis and Correction Enabling System (TRACES - https://contents.tdscpc.gov.in/) portal under the tab ‘Request for resolution’ for mismatch of TDS / missing TDS details. This will trigger a query to the employer from the Income-tax Department which would direct the employer to resolve the issue,” said Kale.

Further, “the employee can also file a written application to the employer’s TDS Assessing Officer and Commissioner of Income-tax intimating the tax authorities regarding the defaults of the employer in deposit of TDS,” added Kale.

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Can an employee be held liable for the unpaid TDS amount?

No; employees cannot be held liable for undeposited TDS.

The responsibility of deducting and depositing TDS lies with the employer. Suresh Surana, a practicing chartered accountant, cites court judgements delivered in past cases that have exonerated employees. In one of those cases, the accused was Kingfisher Airlines that had gone bankrupt and had failed to deposit TDS on behalf of the employee.

Also, the Central Board of Direct Taxes does not allow the tax department to directly demand TDS from employees. CBDT Instructions dated Jun 1, 2015 say that since the Act places a bar on a direct demand against the employee, the same cannot be enforced coercively, added Sehgal.

Also read | Byju’s TDS default: Employee not handing over taxes to government, Budget announces measures

Does non deduction of TDS affect income tax return filing?

Non-deposit of TDS by the employer can complicate an employee's income tax return filing.

The main issues include actual TDS deducted and mismatch in amount mentioned in Form 26AS. “In case the TDS is not deposited by the employer / is not reflecting correctly in Form 26AS of the employee, he / she would not get credit of such TDS amount while filing his / her individual tax return,” said Kale.

In such a situation, in order to file the return, the taxpayer will have to pay the tax equivalent to TDS not deposited, that too along with interest for delay. Moreover, “even if this issue is subsequently resolved, the employee would need to file a revised return to claim refund of excess taxes paid which involves administrative hassles and impacts the cashflow of the employee,” added Kale.

On the other hand, “If the TDS claimed by the employee exceeds the TDS reflected in Form 26AS (due to non-deposit by the employer), the tax return may be processed showing such amount of TDS as outstanding or the tax return could even be flagged for scrutiny,” said Surana.

In conclusion, “non-deposit of TDS by the employer complicates the income tax filing process for employees. It may lead to verification issues, potential tax credit issues, unwarranted interest charges and penalties,” added Surana.

Also read | ITR filing 2023-24: Find out if you still owe taxes even after TDS has been paid

Can an employee claim a refund or compensation for any penalties or interest incurred due to non-deposit of TDS by the employer?

Employees cannot directly claim compensation for penalties or interest due to non-deposit of TDS by the employer. However, “the employee may seek legal recourse to explore options for recovering losses due to the employer's negligence. This could involve filing a civil suit against the employer. The employee could also try to negotiate with the employer for compensation for any financial losses incurred due to the non-deposit of TDS,” said Sehgal.