Who is Liable If TDS Is Deducted But Not Paid by Employer?
Table of Contents
Can Employees Be Made Liable If TDS Is Deducted But Not Paid by the Employer?
Background & Legal Framework
Section 199 of the Income Tax Act: TDS deducted by the employer and paid to the government is treated as tax paid on behalf of the employee. The CBDT is authorized to issue rules regarding TDS credit to taxpayers. However, if the employer deducts TDS but fails to deposit it, does the liability shift to the employee?
If an employer deducts TDS but does not deposit it, the amount will not appear in Form 26AS under the employee’s PAN.
Consequences for the employee: Then the employee cannot claim TDS credit while filing their Income Tax Return (ITR). also mismatch notice from the Income Tax Department for TDS claimed but not reflected in Form 26AS. Moreover, employees might be caught in a dispute between the employer and tax authorities.
Section 205: Bar on Recovery from Employees
Section 205 of the Income Tax Act explicitly bars the income tax department from recovering unpaid TDS from an employee if it was already deducted by the employer. The employer remains responsible for depositing TDS, and the employee cannot be penalized for non-payment by the employer.
CBDT Instructions Clarifying No Recovery from Employees
The CBDT issued two key instructions (2015 & 2016) confirming that:
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- When TDS has been deducted but not deposited, the income tax department cannot enforce recovery from the employee.
- Demand notices cannot be issued against employees due to tax credit mismatches caused by employer non-compliance.
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To prevent employers from defaulting on TDS deposits, the CBDT has imposed stricter monitoring and penalties, i.e TDS range officers must closely track compliance within their jurisdictions. If there is a TDS mismatch due to the employer’s failure, the taxpayer is no longer held responsible (CBDT Clarification).
Key High Court Rulings Supporting Employees
Satwant Singh Sanghera (Delhi High Court) Ruling: Employees are entitled to TDS credit, even if the employer fails to deposit the deducted tax. The employee’s tax liability cannot be reopened due to employer default.
Malay Kar v. Union of India (Orissa High Court) [2024]:
The employer deducted TDS but did not deposit it with the government. The employee must be given TDS credit, and the tax cannot be recovered from them. The legal obligation to deposit TDS lies with the employer, not the employee.
Employee Protection Against Employer Default
Section 205 of the Income Tax Act, CBDT circulars, and High Court rulings reinforce that: If an employer deducts TDS but fails to deposit it, the employee is not liable for recovery. The income tax department cannot demand payment from the employee for unpaid TDS. The department must take action against the employer for non-payment.
Penalties for Employers Who Fail to Deduct or Deposit TDS
| Default under Section | Nature of Default | Interest Charged | Period of Interest Payment |
|---|---|---|---|
| 201A | Non-deduction of TDS | 1% per month | From due date of deduction to actual deduction |
| 201A | Non-payment of TDS (after deduction) | 1.5% per month | From date of deduction to actual payment |
- Interest must be paid before filing TDS returns.
- The interest on late TDS deposits is not allowed as an expense under income tax laws.
Penalties for Late Filing of TDS Returns
| Section | Penalty | Conditions |
|---|---|---|
| 234E | ₹200 per day | Until TDS return is filed (not exceeding total TDS amount) |
| 271H | ₹10,000 to ₹1,00,000 | If incorrect TDS details are filed or returns are not submitted within the due date |
No penalty under Section 271H if:
The TDS is paid to the government. Late fees & interest are cleared. TDS return is filed within one year of the due date.
If TDS is not reflected
Employees should regularly check Form 26AS to confirm that the deducted TDS is correctly deposited. Taxpayers must keep evidence (salary slips, bank statements, employer communication). Also, they must raise concerns with the employer before taking legal action. morover File a written complaint with the AO if the employer does not rectify the issue. and contact the employer immediately. Request correction if deposited to the wrong PAN. and if unresolved, file a complaint with the tax authorities.
- Employees are protected under Section 205 if TDS is deducted but not deposited.
- The Employers face strict penalties, including interest and fines for non-compliance.
- Regularly checking Form 26AS can prevent future tax complications.
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