TDS Late Payment & Late Deduction Interest: 1% vs 1.5% Explained

TDS defaults come in two distinct flavours with two different interest rates — mixing them up is common, and the difference matters when you're estimating what a delay actually costs.

1% Per Month — Late Deduction

If you were required to deduct TDS on a payment but didn't (or deducted a lower amount than required), interest of 1% per month applies from the date the tax was deductible until the date it's actually deducted. This is the "you should have withheld tax and didn't" penalty.

1.5% Per Month — Late Deposit

If you deducted the correct TDS amount on time but deposited it with the government after the 7th of the following month (30 April for March), interest of 1.5% per month applies from the date of deduction to the date of actual deposit. This higher rate reflects that you already collected the tax — from the deductee's payment — and simply held onto it longer than allowed.

Worked Example

A business deducts ₹50,000 TDS on a professional fee payment made on 5 June, correctly, but deposits it on 20 July instead of by 7 July.

• Deduction happened on time — no 1% interest
• Deposit is late by crossing from June into July's due-date month, and again is late relative to July's own 7th — this typically counts as 2 months for interest purposes (June deduction month + the delay into a second month)
• Interest: 1.5% × 2 months × ₹50,000 = ₹1,500

Small individually, but this compounds across every late deposit through the year, and separately triggers the ₹200/day Section 234E late fee on the quarterly TDS return if the return itself is also delayed.

The Disallowance Risk Most Businesses Underweight

Beyond interest, Section 40(a)(ia) disallows 30% of the underlying expense in the deductor's own income computation if TDS on it isn't deducted and deposited by the relevant deadline — meaning a delayed TDS deposit can increase your own taxable income, not just cost interest. This is often the larger financial hit for businesses with sizeable professional fee, rent, or contractor payments.

Keeping Deduction and Deposit Separate in Your Calendar

Because the two interest rates apply to two different failure points, the practical fix is tracking them as separate checkpoints: deduct correctly at the time of payment (avoiding the 1% rate entirely), then deposit by the 7th (avoiding the 1.5% rate). Most businesses that get the second one wrong aren't getting the deduction wrong — they're simply not treating the 7th as a hard monthly deadline the way they treat the quarterly return date.

If tracking monthly TDS deposits across multiple payment types (salary, rent, professional fees, contractor payments) alongside the quarterly return is becoming error-prone, our TDS return filing service handles both the deposit reminder and the quarterly filing together.