Disallowance for Non-Deduction of TDS [Section 40(a)(i) and 40(a)(ia)]
## Disallowance for TDS Default — Sec. 40(a)(i) & 40(a)(ia)
To enforce TDS compliance, the Act disallows expenses if TDS is not properly deducted/deposited. The disallowance percentage depends on whether the payee is a resident or non-resident.
### Section 40(a)(i) — Payments to Non-Resident / Foreign Company
Any amount paid/credited to a NR or Foreign Company on which TDS is deductible:
If TDS is not deducted during the P.Y., OR
TDS is deducted but not paid to the Government by the due date of ROI,
→ 100% of such payment is disallowed in the current P.Y.
Subsequent allowance: Allowed in the P.Y. of actual deposit to Government.
### Section 40(a)(ia) — Payments to Resident
Any amount paid/credited to a Resident on which TDS is deductible:
If TDS is not deducted during the P.Y., OR
TDS is deducted but not paid to Government by the due date of ROI,
→ 30% of such payment is disallowed in the current P.Y.
Subsequent allowance: Allowed in the P.Y. of actual deposit (30% disallowed earlier is allowed back).
### Quick Comparison
Payee
Section
Disallowance
Non-Resident / Foreign Co.
40(a)(i)
100%
Resident
40(a)(ia)
30%
### Special Relief — Payee Has Filed Return and Paid Tax
If the payer fails to deduct TDS, but the payee:
1. Has furnished his Return of Income,
2. Has included such amount in his total income, AND
3. Has paid tax due on such amount,
Then the disallowed amount is allowed back in the year the payee files his ROI. (Payee's compliance saves the payer.)
Worked example
### Example 1
Example 1 (Resident): A Ltd. paid ₹10,00,000 as professional fees to a resident consultant in P.Y. 25-26 without deducting TDS u/s 194J.
Example 3 (Payee relief): C Ltd. did not deduct TDS on ₹4,00,000 rent paid to a resident. The landlord filed his ROI, included this rent, and paid tax.
→ Disallowance of 30% × 4,00,000 = ₹1,20,000 is allowed back in the year landlord files his ROI.
⚠️ Common exam mistakes
Applying 100% disallowance to resident payments — for residents it is only 30%.
Believing depositing TDS late (after ROI due date) avoids disallowance — it doesn't; deduction simply shifts to year of deposit.
Forgetting the payee-relief provision: if payee includes income in ROI and pays tax, payer's disallowance can be reversed.
Confusing 'date of credit' with 'date of payment' — TDS liability arises on whichever is earlier.
Bare-Act text Section 40(a)(i) and 40(a)(ia) · Income-tax Act, 1961 · click to expand
Section 40(a)(i): Any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, or in India to a non-resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139... Section 40(a)(ia): Thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139...