
<p>You might’ve come across the term&nbsp;deferred tax liability&nbsp;(DTL) in a company’s financial report or while planning your taxes. And if we’re being honest, it sounds more complicated than it actually is. In simple terms, DTL is a future tax you owe but don’t need to pay just yet. It arises because the tax rules and accounting rules don’t always match up. This difference in timing creates a liability that needs to be reported today, even though the actual tax will be paid in the future.&nbsp;</p>



<p>If you run a business, manage your own finances, or work in accounting, understanding how DTL works can help you make better decisions, stay compliant, and avoid costly errors down the line.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_Deferred_Tax_Liability"></span>What Is Deferred Tax Liability? <span class="ez-toc-section-end"></span></h2>



<p>Deferred&nbsp;tax liability&nbsp;is the amount of income tax you’ll owe in the future due to temporary differences between your accounting income and taxable income. These differences usually arise because tax authorities and accounting standards often have different rules for recognizing income and expenses.&nbsp;</p>



<p>For example, depreciation of assets may be calculated differently in accounting books versus tax returns. When this happens, your taxable income may be lower (and your tax outgo smaller) for now, but eventually, the authorities catch up, and you owe the deferred amount later.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Why_DTL_Exists"></span>Why DTL Exists <span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li>You recognize an expense in your financials today but can’t claim it on your tax return until later. </li>
</ul>



<ul class="wp-block-list">
<li>You recognize income for accounting now but are taxed on it later. </li>
</ul>



<p>So, DTL is about postponing your taxes, not evading them, and it must be accurately reflected in your balance sheet.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Why_Does_Deferred_Tax_Liability_Arise"></span>Why Does Deferred Tax Liability Arise? <span class="ez-toc-section-end"></span></h2>



<p>The core reason DTL arises is the difference in timing between the way financial income is reported in accounting books versus how it’s taxed under income tax laws.&nbsp;</p>



<p>Let’s break this down.&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Types&nbsp;of Differences</strong>&nbsp;</td><td><strong>Explanation</strong>&nbsp;</td></tr><tr><td><strong>Timing Difference</strong>&nbsp;</td><td>Income or expense is recorded in one year for books but taxed in another year&nbsp;</td></tr><tr><td><strong>Temporary Difference</strong>&nbsp;</td><td>The mismatch will eventually reverse in future years&nbsp;</td></tr><tr><td><strong>Permanent Difference</strong>&nbsp;</td><td>These don’t result in DTL, as they never reverse (e.g., penalties, donations)&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Key_Causes_of_Deferred_Tax_Liability"></span>Key Causes of Deferred Tax Liability <span class="ez-toc-section-end"></span></h2>



<p>Here&#8217;s a breakdown of the most common scenarios that lead to DTL:&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Cause</strong>&nbsp;</td><td><strong>Explanation</strong>&nbsp;</td></tr><tr><td><strong>Depreciation Differences</strong>&nbsp;</td><td>Companies use straight-line method for books and accelerated method for taxes&nbsp;</td></tr><tr><td><strong>Revenue Recognition Timing</strong>&nbsp;</td><td>Advance received for service is taxable now but recognized later in books&nbsp;</td></tr><tr><td><strong>Provision for Expenses</strong>&nbsp;</td><td>Some provisions (such as gratuity or bad debts) are allowed later for tax purposes&nbsp;</td></tr><tr><td><strong>Inventory Valuation Methods</strong>&nbsp;</td><td>FIFO in books vs. weighted average&nbsp;for tax can create timing mismatches&nbsp;</td></tr><tr><td><strong>Installment Sales</strong>&nbsp;</td><td>Revenue booked in full for accounting but taxed over time&nbsp;</td></tr></tbody></table></figure>



<p>These cause your financial income and taxable income to temporarily differ, creating a tax liability you need to account for now but pay later.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Deferred_Tax_Liability_vs_Deferred_Tax_Asset"></span>Deferred Tax Liability vs Deferred Tax Asset <span class="ez-toc-section-end"></span></h2>



<p>Understanding both sides of the deferred tax coin is important.&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Aspect</strong>&nbsp;</td><td><strong>Deferred Tax Liability (DTL)</strong>&nbsp;</td><td><strong>Deferred Tax Asset (DTA)</strong>&nbsp;</td></tr><tr><td><strong>What It Is</strong>&nbsp;</td><td>Future tax you owe due to current accounting choices&nbsp;</td><td>Future tax benefit due to overpaid/prepaid taxes&nbsp;</td></tr><tr><td><strong>Arises When</strong>&nbsp;</td><td>You pay less tax now, more later&nbsp;</td><td>You pay more tax now, less later&nbsp;</td></tr><tr><td><strong>Balance Sheet Category</strong>&nbsp;</td><td>Non-current liability&nbsp;</td><td>Non-current asset&nbsp;</td></tr><tr><td><strong>Example</strong>&nbsp;</td><td>Accelerated tax depreciation&nbsp;</td><td>Business loss carried forward&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Example_of_Deferred_Tax_Liability"></span>Example of Deferred Tax Liability <span class="ez-toc-section-end"></span></h2>



<p>Let’s say your company purchases a machine for ₹10 lakhs.&nbsp;</p>



<ul class="wp-block-list">
<li>In your accounting books, you use straight-line depreciation at 10% → ₹1 lakh/year. </li>
</ul>



<ul class="wp-block-list">
<li>For tax purposes, you use Written Down Value (WDV) at 25% → ₹2.5 lakhs in the first year. </li>
</ul>



<p><strong>This leads to </strong></p>



<ul class="wp-block-list">
<li>Lower taxable income this year </li>
</ul>



<ul class="wp-block-list">
<li>Higher accounting income </li>
</ul>



<ul class="wp-block-list">
<li>A deferred tax liability on the difference </li>
</ul>



<p><strong>Calculation:</strong>&nbsp;</p>



<p>DTL = ₹1.5 lakhs × 25% = ₹37,500&nbsp;</p>



<p>Note: Previous examples often cited a 30% tax rate, but as of 2025, the standard effective corporate tax rate for many Indian companies is 25%. Adjust according to your relevant tax jurisdiction and entity structure.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_is_Deferred_Tax_Liability_Shown_in_Financial_Statements"></span>How is Deferred Tax Liability Shown in Financial Statements? <span class="ez-toc-section-end"></span></h2>



<p>DTL appears under Non-current Liabilities in the balance sheet. It is typically disclosed as a line item named “Deferred Tax Liabilities (Net)”. The word net is used because companies often offset DTL with&nbsp;deferred tax assets&nbsp;if both exist.&nbsp;</p>



<p>As of 2025, accounting standards require DTL to be recorded for all taxable temporary differences, unless an exception applies (e.g., initial recognition of goodwill or certain investments).&nbsp;</p>



<p>Under AS 22, Ind AS 12 (India), or IAS 12 (IFRS), you must:&nbsp;</p>



<ul class="wp-block-list">
<li>Identify and track temporary differences. </li>
</ul>



<ul class="wp-block-list">
<li>Recognize DTL if the difference will result in tax payments in the future. </li>
</ul>



<ul class="wp-block-list">
<li>Make appropriate disclosures in the financial statements. </li>
</ul>



<ul class="wp-block-list">
<li>Not discount DTL or DTA </li>
</ul>



<p>This ensures transparency and helps investors understand future tax outflows.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Does_Deferred_Tax_Liability_Affect_Cash_Flow"></span>Does Deferred Tax Liability Affect Cash Flow? <span class="ez-toc-section-end"></span></h2>



<p>No, DTL doesn’t affect your cash flow directly. It’s a non-cash accounting adjustment. But it’s important because:&nbsp;</p>



<ul class="wp-block-list">
<li>It signals that you’ll have higher tax outflows in future periods. </li>
</ul>



<ul class="wp-block-list">
<li>It can impact your valuation, especially during mergers or acquisitions. </li>
</ul>



<ul class="wp-block-list">
<li>Lenders and investors may factor it into their decisions. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Deferred_Tax_in_Financial_Planning_and_Compliance"></span>Deferred Tax in Financial Planning and Compliance <span class="ez-toc-section-end"></span></h2>



<p>You need to account for DTL properly to:&nbsp;</p>



<ul class="wp-block-list">
<li>Avoid underestimating your tax burden in future years. </li>
</ul>



<ul class="wp-block-list">
<li>Ensure your financial statements reflect true liability. </li>
</ul>



<ul class="wp-block-list">
<li>Stay compliant with audit and reporting standards. </li>
</ul>



<p>For CFOs and finance teams, mismanagement of deferred taxes can lead to restated financials and compliance headaches.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Common_Mistakes_While_Accounting_for_Deferred_Tax_Liability"></span>Common Mistakes While Accounting for Deferred Tax Liability <span class="ez-toc-section-end"></span></h2>



<p>Here’s a breakdown of frequent errors and how to avoid them.&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Mistake</strong>&nbsp;</td><td><strong>Why It Matters</strong>&nbsp;</td><td><strong>Solution</strong>&nbsp;</td></tr><tr><td>Ignoring timing differences&nbsp;</td><td>Skews profit reporting and tax planning&nbsp;</td><td>Reconcile book income and taxable income regularly&nbsp;</td></tr><tr><td>Confusing DTL with DTA&nbsp;</td><td>Leads to incorrect balance sheet classification&nbsp;</td><td>Train accounting team on correct identification&nbsp;</td></tr><tr><td>Failing to reverse DTL in future years&nbsp;</td><td>Overstates liabilities and reduces net profit&nbsp;</td><td>Review DTL reversals annually&nbsp;</td></tr><tr><td>Not disclosing DTL in notes to accounts&nbsp;</td><td>Violates accounting standards and audit compliance&nbsp;</td><td>Add DTL note as per AS/Ind AS requirements&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Final_Thoughts_Dont_Overlook_Deferred_Tax_Liabilities"></span>Final Thoughts: Don’t Overlook Deferred Tax Liabilities <span class="ez-toc-section-end"></span></h2>



<p>You might not pay this tax today, but it’s real, and it’s coming. If you run a business or handle finances, ignoring DTL can lead to overstated profits, confused stakeholders, and audit red flags. Properly accounting for deferred taxes helps you make informed decisions and maintain financial integrity.&nbsp;</p>



<p>So, whether you&#8217;re budgeting for next year, reviewing your tax provisions, or analyzing a company for investment, keep a close eye on&nbsp;deferred tax liability.&nbsp;It’s the kind of future problem you want to be ready for today.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_for_Deferred_Tax_Liability"></span>FAQs for Deferred Tax Liability<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1753846854265"><strong class="schema-faq-question">What is deferred tax liability in simple terms?</strong> <p class="schema-faq-answer">It’s the tax you’ll have to pay in the future because of differences between how income or expenses are recorded in accounting books and how they’re taxed.</p> </div> <div class="schema-faq-section" id="faq-question-1753846865697"><strong class="schema-faq-question">Is deferred tax liability a bad thing?</strong> <p class="schema-faq-answer">Not necessarily. It simply reflects the timing difference in taxes. However, failing to track or reverse it properly can lead to reporting issues.</p> </div> <div class="schema-faq-section" id="faq-question-1753846875178"><strong class="schema-faq-question">How is deferred tax liability calculated?</strong> <p class="schema-faq-answer">You calculate it by identifying temporary timing differences and applying the tax rate to those differences.</p> </div> <div class="schema-faq-section" id="faq-question-1753846886304"><strong class="schema-faq-question">Can deferred tax liability be reversed?</strong> <p class="schema-faq-answer">Yes, it reverses when the temporary difference that created it is settled in future years.</p> </div> <div class="schema-faq-section" id="faq-question-1753846902161"><strong class="schema-faq-question">Where is deferred tax liability shown in financial statements?</strong> <p class="schema-faq-answer">It appears under &#8220;Non-Current Liabilities&#8221; in the balance sheet and should also be disclosed in the notes to accounts.</p> </div> </div>



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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_Is_Deferred_Tax_Liability" >What Is Deferred Tax Liability? </a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-2" href="#Why_DTL_Exists" >Why DTL Exists </a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Why_Does_Deferred_Tax_Liability_Arise" >Why Does Deferred Tax Liability Arise? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Key_Causes_of_Deferred_Tax_Liability" >Key Causes of Deferred Tax Liability </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Deferred_Tax_Liability_vs_Deferred_Tax_Asset" >Deferred Tax Liability vs Deferred Tax Asset </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Example_of_Deferred_Tax_Liability" >Example of Deferred Tax Liability </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#How_is_Deferred_Tax_Liability_Shown_in_Financial_Statements" >How is Deferred Tax Liability Shown in Financial Statements? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#Does_Deferred_Tax_Liability_Affect_Cash_Flow" >Does Deferred Tax Liability Affect Cash Flow? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Deferred_Tax_in_Financial_Planning_and_Compliance" >Deferred Tax in Financial Planning and Compliance </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#Common_Mistakes_While_Accounting_for_Deferred_Tax_Liability" >Common Mistakes While Accounting for Deferred Tax Liability </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-11" href="#Final_Thoughts_Dont_Overlook_Deferred_Tax_Liabilities" >Final Thoughts: Don’t Overlook Deferred Tax Liabilities </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-12" href="#FAQs_for_Deferred_Tax_Liability" >FAQs for Deferred Tax Liability</a></li></ul></nav></div>


What is Deferred Tax Liability? Meaning, Causes, and Examples 


<p>Filing your income tax return might seem like a straightforward process—declare your income, claim deductions, pay tax, and you&#8217;re done. But the Income Tax Department doesn’t just take your word for it. It matches your return with various information sources (like Form 26AS, AIS, bank statements, and more). If discrepancies are found and you haven’t been transparent, you could face penalties under Section 270A of the Income Tax Act.&nbsp;</p>



<p>Introduced as part of the Finance Act, 2016, Section 270A replaced the older Section 271(1)(c) for imposing penalties and made the rules around underreporting and misreporting of income far more specific and structured. So, if you&#8217;re curious about what happens when you unintentionally (or intentionally) report incorrect income, this blog will walk you through everything you need to know.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_Section_270A_of_the_Income_Tax_Act"></span>What Is Section 270A of the Income Tax Act? <span class="ez-toc-section-end"></span></h2>



<p>Section 270A empowers the Assessing Officer (AO) to levy penalties on taxpayers who underreport or misreport their income. It applies whether you&#8217;re an individual, business, or entity, and it’s triggered when the income declared in your return is found to be lower than what it should be or when income is omitted or misrepresented intentionally.&nbsp;</p>



<p>This section applies Assessment Year 2017–18 onwards and brings clarity and classification to the penalty structure, replacing the earlier discretionary provisions.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Qualifies_as_Underreporting_of_Income"></span>What Qualifies as Underreporting of Income? <span class="ez-toc-section-end"></span></h2>



<p>Underreporting doesn’t always mean you intended to cheat the tax department—it could result from mistakes, miscalculations, or wrong interpretations of the law.&nbsp;</p>



<p>Situations that count as underreporting include&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Scenario</strong>&nbsp;</td><td><strong>Example</strong>&nbsp;</td></tr><tr><td>Failure to furnish a return&nbsp;</td><td>You didn’t file ITR but had taxable income&nbsp;</td></tr><tr><td>Income assessed is more than income returned&nbsp;</td><td>You reported ₹10 lakhs, but AO assesses ₹15 lakhs&nbsp;</td></tr><tr><td>Deemed total income increased by reassessment&nbsp;</td><td>Income escapes original assessment&nbsp;</td></tr><tr><td>Return processed under 143(1) but reassessed under 143(3)&nbsp;</td><td>Differences in initial processing and final order&nbsp;</td></tr><tr><td>Underreported income due to incorrect claim of deductions or exemptions&nbsp;</td><td>Declaring ineligible HRA or medical claims&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Qualifies_as_Misreporting_of_Income"></span>What Qualifies as Misreporting of Income? <span class="ez-toc-section-end"></span></h2>



<p>Misreporting goes a step further—it&#8217;s intentional, and the penalties are harsher. Instances of misreporting include:&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Misreporting Action</strong>&nbsp;</td><td><strong>Example</strong>&nbsp;</td></tr><tr><td>Misrepresentation or suppression of facts&nbsp;</td><td>Hiding rental income intentionally&nbsp;</td></tr><tr><td>Non-recording of investments or receipts&nbsp;</td><td>Not showing gains from selling property&nbsp;</td></tr><tr><td>Claiming expenses not substantiated by evidence&nbsp;</td><td>Fake travel or business bills&nbsp;</td></tr><tr><td>Recording false entries in books&nbsp;</td><td>Fictitious donations or salary paid&nbsp;</td></tr><tr><td>Failure to report international transactions&nbsp;</td><td>Not declaring income from a foreign source&nbsp;</td></tr><tr><td>Incorrect classification of income heads&nbsp;</td><td>Showing capital gains as agricultural income&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Penalties_Under_Section_270A_Amount_Implications"></span>Penalties Under Section 270A: Amount &amp; Implications <span class="ez-toc-section-end"></span></h2>



<p>Section 270A lays out different penalty slabs for underreporting and misreporting:&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Nature of Income Discrepancy</strong>&nbsp;</td><td><strong>Penalty Rate</strong>&nbsp;</td></tr><tr><td>Underreporting of income&nbsp;</td><td>50% of the tax payable on the underreported amount&nbsp;</td></tr><tr><td>Misreporting of income&nbsp;</td><td>100% to 200% of the tax payable on the misreported amount&nbsp;</td></tr></tbody></table></figure>



<p>Note: The penalty for misreporting can range from 100% to 200%, depending on the case, reflecting the severity of intentional fraud or concealment.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Exceptions_and_Relief_Under_Section_270A"></span>Exceptions and Relief Under Section 270A <span class="ez-toc-section-end"></span></h2>



<p>You may not be penalized under Section 270A in certain cases.&nbsp;</p>



<ul class="wp-block-list">
<li>If the taxpayer offers a valid explanation and proves no intent to mislead </li>
</ul>



<ul class="wp-block-list">
<li>If underreporting arises due to a bona fide mistake </li>
</ul>



<ul class="wp-block-list">
<li>If income has been properly disclosed but misinterpreted due to complex provisions </li>
</ul>



<ul class="wp-block-list">
<li>If the taxpayer voluntarily revises the return before any notice is served under Section 143(2) or 148 </li>
</ul>



<p>However, the burden of proof lies with you to justify your claim.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_to_Avoid_Penalties_Under_Section_270A"></span>How to Avoid Penalties Under Section 270A <span class="ez-toc-section-end"></span></h2>



<p>Here’s how you can stay in the clear.&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Best Practice</strong>&nbsp;</td><td><strong>Why It Helps</strong>&nbsp;</td></tr><tr><td>File returns on time&nbsp;</td><td>Avoid scrutiny and late penalties&nbsp;</td></tr><tr><td>Match AIS and Form 26AS with your return&nbsp;</td><td>Ensures no income is missed&nbsp;</td></tr><tr><td>Avoid making exaggerated claims&nbsp;</td><td>Stick to deductions and exemptions you are eligible for&nbsp;</td></tr><tr><td>Maintain accurate books and records&nbsp;</td><td>Helps during assessments or audits&nbsp;</td></tr><tr><td>Seek professional help when unsure&nbsp;</td><td>Prevents unintentional errors&nbsp;</td></tr><tr><td>Declare all sources of income&nbsp;</td><td>Don’t ignore gifts, savings account interest, or foreign income&nbsp;</td></tr><tr><td>Respond promptly to notices&nbsp;</td><td>Inaction leads to assumptions and penalties&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Differences_Between_Section_270A_and_Section_2711c"></span>Differences Between Section 270A and Section 271(1)(c) <span class="ez-toc-section-end"></span></h2>



<p>Before Section 270A came into effect, penalties were governed by Section 271(1)(c). Here&#8217;s how they differ:&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Aspect</strong>&nbsp;</td><td><strong>Section 270A</strong>&nbsp;</td><td><strong>Section 271(1)(c)</strong>&nbsp;</td></tr><tr><td><strong>Applicable from</strong>&nbsp;</td><td>AY 2017–18 onwards&nbsp;</td><td>Before AY 2017–18&nbsp;</td></tr><tr><td><strong>Nature of fault</strong>&nbsp;</td><td>Focused on underreporting &amp; misreporting&nbsp;</td><td>Focused on concealment of income or furnishing inaccurate details&nbsp;</td></tr><tr><td><strong>Penalty range</strong>&nbsp;</td><td>Fixed at 50% (underreporting) or 200% (misreporting)&nbsp;</td><td>Discretionary, ranging from 100% to 300%&nbsp;</td></tr><tr><td><strong>Subjectivity</strong>&nbsp;</td><td>Reduced subjectivity&nbsp;</td><td>High discretion with the assessing officer&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Appeal_Options_if_Youre_Penalized"></span>Appeal Options if You’re Penalized <span class="ez-toc-section-end"></span></h2>



<p>If you disagree with the penalty,&nbsp;</p>



<ul class="wp-block-list">
<li>You can file an appeal before the Commissioner of Income Tax (Appeals) under Section 246A </li>
</ul>



<ul class="wp-block-list">
<li>Alternatively, you may approach the Income Tax Appellate Tribunal (ITAT) </li>
</ul>



<ul class="wp-block-list">
<li>In special cases, you may consider revision under Section 264 </li>
</ul>



<p>However, appeals must be backed with strong reasoning and documents.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Common_Mistakes_That_Lead_to_Section_270A_Penalties_and_How_to_Avoid_Them"></span>Common Mistakes That Lead to Section 270A Penalties and How to Avoid Them <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Mistake</strong>&nbsp;</td><td><strong>Impact</strong>&nbsp;</td><td><strong>What To Do Instead</strong>&nbsp;</td></tr><tr><td>Not reporting small income (FD interest, crypto gains, etc.)&nbsp;</td><td>May be seen as concealment&nbsp;</td><td>Always match Form 26AS and AIS&nbsp;</td></tr><tr><td>Overclaiming deductions without valid proof&nbsp;</td><td>Treated as misreporting&nbsp;</td><td>Keep documentary evidence ready&nbsp;</td></tr><tr><td>Using outdated tax rates or slabs&nbsp;</td><td>Wrong tax computation&nbsp;</td><td>Stay updated or consult a tax expert&nbsp;</td></tr><tr><td>Submitting returns after receiving notice&nbsp;</td><td>Considered reactive and suspicious&nbsp;</td><td>File on time voluntarily&nbsp;</td></tr><tr><td>Not reconciling bank statements with ITR&nbsp;</td><td>Unexplained credits flagged&nbsp;</td><td>Perform a thorough review before filing&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Final_Thoughts_Stay_Honest_Stay_Compliant"></span>Final Thoughts: Stay Honest, Stay Compliant <span class="ez-toc-section-end"></span></h2>



<p>Section 270A is not designed to penalize you for every minor slip—but it does aim to keep intentional defaulters in check. Whether you&#8217;re paying taxes as a salaried employee, self-employed professional, freelancer, or small business owner, transparency in your income reporting is key to staying out of trouble, warranted or otherwise.&nbsp;</p>



<p>Filing accurate returns, maintaining documentation, and understanding the tax provisions that apply to you can save you a lot of trouble—not to mention money. Think of it this way: honesty isn’t just the best policy; it’s the smartest tax-saving tool too.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_for_Section_270A_of_the_Income_Tax_Act"></span>FAQs for Section 270A of the Income Tax Act<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1753846143873"><strong class="schema-faq-question">What is Section 270A of the Income Tax Act?</strong> <p class="schema-faq-answer"> It’s a section that allows the Income Tax Department to levy penalties for underreporting or misreporting of income in your tax return. The penalty is 50% for underreporting and 200% for misreporting.</p> </div> <div class="schema-faq-section" id="faq-question-1753846154652"><strong class="schema-faq-question">When is a 50% penalty applicable?</strong> <p class="schema-faq-answer"> A 50% penalty applies when income is underreported due to errors or omissions, but not due to deliberate misreporting.</p> </div> <div class="schema-faq-section" id="faq-question-1753846165572"><strong class="schema-faq-question">What qualifies as misreporting under Section 270A?</strong> <p class="schema-faq-answer"> Examples include hiding income, claiming fake deductions, not recording investments, or showing fictitious entries in books.</p> </div> <div class="schema-faq-section" id="faq-question-1753846176853"><strong class="schema-faq-question">Can I appeal against a penalty under 270A?</strong> <p class="schema-faq-answer"> Yes, you can appeal before the CIT(A), ITAT, or file for revision under Section 264 depending on the case.</p> </div> <div class="schema-faq-section" id="faq-question-1753846188204"><strong class="schema-faq-question">Is voluntary revision of ITR penalized under Section 270A?</strong> <p class="schema-faq-answer"> If you revise your return before getting any notice from the department, you can often avoid penalties—especially if it’s a genuine mistake.</p> </div> </div>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_Is_Section_270A_of_the_Income_Tax_Act" >What Is Section 270A of the Income Tax Act? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#What_Qualifies_as_Underreporting_of_Income" >What Qualifies as Underreporting of Income? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#What_Qualifies_as_Misreporting_of_Income" >What Qualifies as Misreporting of Income? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Penalties_Under_Section_270A_Amount_Implications" >Penalties Under Section 270A: Amount &amp; Implications </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Exceptions_and_Relief_Under_Section_270A" >Exceptions and Relief Under Section 270A </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#How_to_Avoid_Penalties_Under_Section_270A" >How to Avoid Penalties Under Section 270A </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#Differences_Between_Section_270A_and_Section_2711c" >Differences Between Section 270A and Section 271(1)(c) </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#Appeal_Options_if_Youre_Penalized" >Appeal Options if You’re Penalized </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Common_Mistakes_That_Lead_to_Section_270A_Penalties_and_How_to_Avoid_Them" >Common Mistakes That Lead to Section 270A Penalties and How to Avoid Them </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#Final_Thoughts_Stay_Honest_Stay_Compliant" >Final Thoughts: Stay Honest, Stay Compliant </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-11" href="#FAQs_for_Section_270A_of_the_Income_Tax_Act" >FAQs for Section 270A of the Income Tax Act</a></li></ul></nav></div>


Section 270A of the Income Tax Act: Underreporting & Misreporting of Income Explained 


<p>Section 139 of the Income Tax Act, 1961, is your starting point when it comes to filing your Income Tax Return (ITR) in India. Section 139 of the Income Tax Act, 1961, is your starting point. This section lays down the rules for when, why, and how you need to file your return—whether you’re salaried, self-employed, or running a business.&nbsp;</p>



<p>But Section 139 isn&#8217;t just one clause. It has several subsections, each tailored for different scenarios like late filing, revised returns, filing for companies, and even filing if your income is below the taxable limit.&nbsp;</p>



<p>So, if you’re wondering what this section is and what it entails, we’ll walk you through everything you need to know—clearly and simply.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Section_139_of_the_Income_Tax_Act"></span>What is Section 139 of the Income Tax Act? <span class="ez-toc-section-end"></span></h2>



<p>Section 139 outlines the legal obligation to file your income tax return. It details the&nbsp;</p>



<ul class="wp-block-list">
<li>Due dates for different categories of taxpayers </li>
</ul>



<ul class="wp-block-list">
<li>Types of returns based on timing and circumstances </li>
</ul>



<ul class="wp-block-list">
<li>Mandatory vs. voluntary returns </li>
</ul>



<ul class="wp-block-list">
<li>Revised, belated, and updated return provisions </li>
</ul>



<p>In essence, it serves as the foundation of income tax compliance in India.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Who_is_Required_to_File_ITR_Under_Section_1391"></span>Who is Required to File ITR Under Section 139(1)? <span class="ez-toc-section-end"></span></h2>



<p>Section 139(1) mandates individuals and entities to file ITR under certain conditions.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Individuals"></span>Individuals <span class="ez-toc-section-end"></span></h3>



<p>You must file your ITR if:&nbsp;</p>



<ul class="wp-block-list">
<li>Your gross total income exceeds the basic exemption limit (₹3 lakh for individuals below 60, ₹5 lakh for 60–80 years, and ₹7.5 lakh for 80+ years). </li>
</ul>



<ul class="wp-block-list">
<li>You have deposited over ₹1 crore in one or more current accounts. </li>
</ul>



<ul class="wp-block-list">
<li>You have spent ₹2 lakh or more on foreign travel. </li>
</ul>



<ul class="wp-block-list">
<li>Your electricity bill exceeds ₹1 lakh in a year. </li>
</ul>



<ul class="wp-block-list">
<li>You hold foreign assets or have signing authority in any foreign account. </li>
</ul>



<ul class="wp-block-list">
<li>You&#8217;re claiming a tax refund. </li>
</ul>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Companies_Firms"></span>Companies &amp; Firms <span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li>Every company (including those with no income or losses) must file returns. </li>
</ul>



<ul class="wp-block-list">
<li>Every firm (including LLPs) is required to file ITR as well, regardless of profit or loss. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Types_of_ITR_Filing_Under_Section_139"></span>Types of ITR Filing Under Section 139 <span class="ez-toc-section-end"></span></h2>



<p>Here’s a breakdown of the key subsections under Section 139 and what they mean.&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Subsection</strong>&nbsp;</td><td><strong>Purpose</strong>&nbsp;</td><td><strong>Who It Applies To</strong>&nbsp;</td></tr><tr><td><strong>139(1)</strong>&nbsp;</td><td>Original/Voluntary Return&nbsp;</td><td>Individuals, firms, companies&nbsp;</td></tr><tr><td><strong>139(3)</strong>&nbsp;</td><td>Return of Loss&nbsp;</td><td>Businesses that want to carry forward losses&nbsp;</td></tr><tr><td><strong>139(4)</strong>&nbsp;</td><td>Belated Return&nbsp;</td><td>If you miss the due date&nbsp;</td></tr><tr><td><strong>139(5)</strong>&nbsp;</td><td>Revised Return&nbsp;</td><td>To correct a previously filed return&nbsp;</td></tr><tr><td><strong>139(8A)</strong>&nbsp;</td><td>Updated Return&nbsp;</td><td>Allows ITR filing up to 2 years later&nbsp;</td></tr><tr><td><strong>139(9)</strong>&nbsp;</td><td>Defective Return&nbsp;</td><td>Issued if your return has errors or is incomplete&nbsp;</td></tr></tbody></table></figure>



<p>Let’s dive into each of these in detail.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Section_1391_Mandatory_and_Voluntary_Filing"></span>Section 139(1): Mandatory and Voluntary Filing <span class="ez-toc-section-end"></span></h2>



<p>This is the main provision for filing income tax returns.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Mandatory_Filing"></span>Mandatory Filing <span class="ez-toc-section-end"></span></h3>



<p>If the basic exemption limit is lesser than your income, you’re legally required to file ITR under this subsection. This includes salaried individuals, business owners, and freelancers.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Voluntary_Filing"></span>Voluntary Filing <span class="ez-toc-section-end"></span></h3>



<p>Even if your yearly income is below the pre-set limit of exemptions, you can still file voluntarily, especially if:&nbsp;</p>



<ul class="wp-block-list">
<li>You want to claim a refund </li>
</ul>



<ul class="wp-block-list">
<li>You need to show income for visa or loan processing </li>
</ul>



<ul class="wp-block-list">
<li>You have foreign income or assets </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Section_1393_Return_of_Loss"></span>Section 139(3): Return of Loss <span class="ez-toc-section-end"></span></h2>



<p>If you’re running a business and incur losses, particularly capital losses or business losses, this subsection lets you file returns to carry forward those losses to offset against future profits.&nbsp;</p>



<p>Important: You must file the return before the due date to avail this benefit.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Section_1394_Belated_Return"></span>Section 139(4): Belated Return <span class="ez-toc-section-end"></span></h2>



<p>Missed the due date? You’re not out of luck.&nbsp;</p>



<p>Under 139(4), you can still file your return after the due date but before the end of the relevant assessment year or within three months prior to the completion of assessment, whichever is earlier.&nbsp;</p>



<p><strong>Example</strong>: For FY 2024–25, you can file a belated return up to March 31, 2026.&nbsp;</p>



<p>But it comes with a cost:&nbsp;</p>



<ul class="wp-block-list">
<li>Late fee under Section 234F </li>
</ul>



<ul class="wp-block-list">
<li>Interest penalty under Section 234A </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Section_1395_Revised_Return"></span>Section 139(5): Revised Return <span class="ez-toc-section-end"></span></h2>



<p>Did you make a mistake in your original return? No worries.&nbsp;</p>



<p>You can file a revised return under Section 139(5) to correct:&nbsp;</p>



<ul class="wp-block-list">
<li>Income details </li>
</ul>



<ul class="wp-block-list">
<li>Deduction claims </li>
</ul>



<ul class="wp-block-list">
<li>Bank account or personal details </li>
</ul>



<p><strong>Deadline</strong>&nbsp;</p>



<p>Up to December 31 of the assessment year, i.e., for FY 2024–25, by December 31, 2025.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Section_1398A_Updated_Return"></span>Section 139(8A): Updated Return <span class="ez-toc-section-end"></span></h2>



<p>A relatively new and powerful tool introduced in Budget 2022.&nbsp;</p>



<p>This subsection allows taxpayers to file an updated return within two years from the end of the relevant assessment year—even if you did not file a return earlier or under-reported income.&nbsp;</p>



<p>But here’s the catch:&nbsp;</p>



<ul class="wp-block-list">
<li>You can’t use this to declare a loss or increase a refund. </li>
</ul>



<ul class="wp-block-list">
<li>You’ll have to pay an additional tax: 25% of tax and interest if filed in the first year, 50% if in the second year. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Section_1399_Defective_Return"></span>Section 139(9): Defective Return <span class="ez-toc-section-end"></span></h2>



<p>If the Income Tax Department finds your return incomplete or inconsistent, they’ll label it as defective and send a notice under 139(9). You’ll be given 15 days to rectify it.&nbsp;</p>



<p>Failing to do so means your return will be treated as invalid, and you’ll lose all benefits (like loss carry-forward or refund).&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Required_Documents_to_File_ITR"></span>Required Documents to File ITR <span class="ez-toc-section-end"></span></h2>



<p>Having the right paperwork makes filing seamless. Here’s what you’ll need:&nbsp;</p>



<ul class="wp-block-list">
<li>PAN and Aadhaar card </li>
</ul>



<ul class="wp-block-list">
<li>Bank account details (with IFSC codes) </li>
</ul>



<ul class="wp-block-list">
<li>Form 16 (for salaried individuals) </li>
</ul>



<ul class="wp-block-list">
<li>Interest certificates (FDs, savings, etc.) </li>
</ul>



<ul class="wp-block-list">
<li>Capital gains statements (if applicable) </li>
</ul>



<ul class="wp-block-list">
<li>Details of other income (rental, dividends, etc.) </li>
</ul>



<ul class="wp-block-list">
<li>Investment proofs (80C, 80D, etc.) </li>
</ul>



<ul class="wp-block-list">
<li>Previous year’s ITR (optional, but useful) </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Common_Mistakes_in_Filing_Returns_Under_Section_139"></span>Common Mistakes in Filing Returns Under Section 139  <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Mistake</strong>&nbsp;</td><td><strong>Impact</strong>&nbsp;</td><td><strong>Solution</strong>&nbsp;</td></tr><tr><td>Missing the due date&nbsp;</td><td>Penalties under 234F, interest, no loss carryforward&nbsp;</td><td>Use Section 139(4) to file belated return&nbsp;</td></tr><tr><td>Declaring wrong income&nbsp;</td><td>Notices, penalties&nbsp;</td><td>File a revised return under 139(5)&nbsp;</td></tr><tr><td>Not responding to defective return notice&nbsp;</td><td>Return marked invalid&nbsp;</td><td>Reply within 15 days of notice under 139(9)&nbsp;</td></tr><tr><td>Not reporting exempt income&nbsp;</td><td>Mismatch in AIS/Form 26AS&nbsp;</td><td>Report even tax-free income to avoid confusion&nbsp;</td></tr><tr><td>Choosing wrong ITR form&nbsp;</td><td>Rejection or defective status&nbsp;</td><td>Use Income Tax utility to pick the correct form&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion_Why_Section_139_Matters_for_Every_Taxpayer"></span>Conclusion: Why Section 139 Matters for Every Taxpayer <span class="ez-toc-section-end"></span></h2>



<p>Think of Section 139 as the navigation manual for your income tax return. Whether you’re filing on time, correcting a mistake, or fixing a defective return, each subsection gives you a path to compliance.&nbsp;</p>



<p>So, the next time you log in to file your ITR, know that you’re not just hitting “Submit”, you’re following a structured framework designed to keep your finances on track.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_for_Section_139_of_the_Income_Tax_Act"></span>FAQs for Section 139 of the Income Tax Act<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1753845792954"><strong class="schema-faq-question">What is Section 139(1)?</strong> <p class="schema-faq-answer">Section 139(1) is the primary provision for filing income tax returns. It mandates individuals, companies, and firms to file returns if their income exceeds the exemption limit or under specific conditions like foreign travel expenses or bank transactions.</p> </div> <div class="schema-faq-section" id="faq-question-1753845805071"><strong class="schema-faq-question">Can I revise my return under Section 139?</strong> <p class="schema-faq-answer">Yes, you can revise your return under Section 139(5) if you make a mistake in your original filing. The revised return must be submitted before December 31 of the assessment year.</p> </div> <div class="schema-faq-section" id="faq-question-1753845820657"><strong class="schema-faq-question">What happens if I miss the due date?</strong> <p class="schema-faq-answer">You can file a belated return under Section 139(4) until the end of the assessment year. However, it may attract a penalty under Section 234F and interest under 234A.</p> </div> <div class="schema-faq-section" id="faq-question-1753845834055"><strong class="schema-faq-question">What is an updated return under 139(8A)?</strong> <p class="schema-faq-answer">This allows you to voluntarily declare omitted income within two years from the end of the assessment year. It includes an additional tax of 25–50% on the total tax due.</p> </div> <div class="schema-faq-section" id="faq-question-1753845877272"><strong class="schema-faq-question">What is a defective return under 139(9)?</strong> <p class="schema-faq-answer">If your return is incomplete or has discrepancies, the ITD may classify it as defective. You’ll have 15 days to correct it. If not corrected, your return is treated as invalid.</p> </div> </div>



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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_is_Section_139_of_the_Income_Tax_Act" >What is Section 139 of the Income Tax Act? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#Who_is_Required_to_File_ITR_Under_Section_1391" >Who is Required to File ITR Under Section 139(1)? </a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-3" href="#Individuals" >Individuals </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-4" href="#Companies_Firms" >Companies &amp; Firms </a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Types_of_ITR_Filing_Under_Section_139" >Types of ITR Filing Under Section 139 </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Section_1391_Mandatory_and_Voluntary_Filing" >Section 139(1): Mandatory and Voluntary Filing </a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-7" href="#Mandatory_Filing" >Mandatory Filing </a></li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-8" href="#Voluntary_Filing" >Voluntary Filing </a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Section_1393_Return_of_Loss" >Section 139(3): Return of Loss </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#Section_1394_Belated_Return" >Section 139(4): Belated Return </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-11" href="#Section_1395_Revised_Return" >Section 139(5): Revised Return </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-12" href="#Section_1398A_Updated_Return" >Section 139(8A): Updated Return </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-13" href="#Section_1399_Defective_Return" >Section 139(9): Defective Return </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-14" href="#Required_Documents_to_File_ITR" >Required Documents to File ITR </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-15" href="#Common_Mistakes_in_Filing_Returns_Under_Section_139" >Common Mistakes in Filing Returns Under Section 139  </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-16" href="#Conclusion_Why_Section_139_Matters_for_Every_Taxpayer" >Conclusion: Why Section 139 Matters for Every Taxpayer </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-17" href="#FAQs_for_Section_139_of_the_Income_Tax_Act" >FAQs for Section 139 of the Income Tax Act</a></li></ul></nav></div>


Section 139 of the Income Tax Act: Meaning, Types of Returns & Subsections 


<p>Ever wondered what happens when the tax department notices an unexpected credit in your account and you don’t have a solid explanation for it? That’s where Section 68 of the Income Tax Act steps in. It’s one of those key provisions used by tax authorities to plug tax evasion loopholes, especially in cases where income is concealed as “loans”, “gifts”, or even “capital”.&nbsp;</p>



<p>If you&#8217;re a business owner, startup founder, salaried professional, or even someone who just received a hefty loan or gift, Section 68 can apply to you. The consequences? A tax at 60% plus an additional surcharge and cess, with no deductions allowed, and often, a legal headache.&nbsp;</p>



<p>Let’s decode this provision in a way that’s easy to understand, actionable, and keeps you on the right side of the taxman.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_Section_68_of_the_Income_Tax_Act"></span>What Is Section 68 of the Income Tax Act? <span class="ez-toc-section-end"></span></h2>



<p>Section 68 is all about unexplained credits found in your books of accounts. If any sum is found credited and you either&nbsp;</p>



<ul class="wp-block-list">
<li>Don’t explain the nature and source of the credit, or </li>
</ul>



<ul class="wp-block-list">
<li>Give an explanation that the Assessing Officer (AO) finds unsatisfactory. </li>
</ul>



<p>Then the entire amount is treated as your income and taxed accordingly.&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Applies_to"></span>Applies to <span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li>Individuals </li>
</ul>



<ul class="wp-block-list">
<li>Hindu Undivided Families (HUFs) </li>
</ul>



<ul class="wp-block-list">
<li>Partnership Firms </li>
</ul>



<ul class="wp-block-list">
<li>LLPs and Companies </li>
</ul>



<p>Even if you think it’s just a friendly loan from your cousin or a gift from your uncle abroad, without proper documentation and explanation proving the source and genuineness, it can become taxable under Section 68.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="When_Does_Section_68_Apply"></span>When Does Section 68 Apply? <span class="ez-toc-section-end"></span></h2>



<p>Let’s look at some situations where this section comes into play.&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Unsecured loans</strong> that don’t have proper lender details </li>
</ul>



<ul class="wp-block-list">
<li><strong>Gifts</strong> received without valid documentation </li>
</ul>



<ul class="wp-block-list">
<li><strong>Share capital and premium</strong> in private companies without proof of source </li>
</ul>



<ul class="wp-block-list">
<li><strong>Credits in books</strong> during tax scrutiny with no justifiable source </li>
</ul>



<ul class="wp-block-list">
<li><strong>Sudden deposits in bank accounts</strong> that don’t match declared income </li>
</ul>



<p>It’s not just about money received, but also about proving where it came from and that the source itself had the capacity to give it to you.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Burden_of_Proof_Who_Has_to_Justify_the_Cash_Credit"></span>Burden of Proof: Who Has to Justify the Cash Credit? <span class="ez-toc-section-end"></span></h2>



<p>The onus is on you, the assessee, to prove:&nbsp;</p>



<ol start="1" class="wp-block-list">
<li><strong>Identity of the creditor or donor</strong> </li>
</ol>



<p>&nbsp;(E.g., PAN, Aadhaar, or Passport)&nbsp;</p>



<ol start="2" class="wp-block-list">
<li><strong>Genuineness of the transaction</strong> </li>
</ol>



<p>&nbsp;(Bank statement showing the transaction)&nbsp;</p>



<ol start="3" class="wp-block-list">
<li><strong>Creditworthiness of the lender/donor</strong> </li>
</ol>



<p>&nbsp;(ITR, salary proof, or financials)&nbsp;</p>



<p>If you fail to prove any of these three, the AO is well within their rights to treat the amount as your income under Section 68.&nbsp;</p>



<p>However, for share application money/share capital/share premium in private companies, not only the company but also the person in whose name such credit is recorded must satisfactorily explain the source, except in cases involving registered venture capital funds or companies.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Key_Judicial_Interpretations_of_Section_68"></span>Key Judicial Interpretations of Section 68 <span class="ez-toc-section-end"></span></h2>



<p><strong>1. CIT v. Orissa Corporation Pvt. Ltd.</strong>&nbsp;</p>



<p>If the assessee provides basic information and the creditor doesn’t respond to summons, the assessee cannot be penalized.&nbsp;</p>



<p><strong>2. CIT v. Precision Finance Pvt. Ltd.</strong>&nbsp;</p>



<p>The creditor’s identity and capacity must be proven, not just the fact that money came in.&nbsp;</p>



<p><strong>3. CIT v. Divine Leasing &amp; Finance Ltd.</strong>&nbsp;</p>



<p>In the case of share capital in closely held companies, the company must establish the identity, genuineness, and creditworthiness of shareholders.&nbsp;</p>



<p>Recent cases reaffirm that documentation and substantial evidence are essential for additions under Section 68. The Supreme Court and High Courts have held that simply filing documents is not enough if transactions lack substance or genuineness. Additions solely based on investigation reports without substantive evidence have been set aside.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Tax_Implications_Under_Section_68"></span>Tax Implications Under Section 68 <span class="ez-toc-section-end"></span></h2>



<p>Once the AO invokes Section 68, the sum is treated as income for the year. But here’s the real sting:&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Taxation_under_Section_115BBE"></span>Taxation under Section 115BBE <span class="ez-toc-section-end"></span></h3>



<ul class="wp-block-list">
<li>Flat Tax Rate: 60% </li>
</ul>



<ul class="wp-block-list">
<li><strong>Surcharge: </strong>25% of tax </li>
</ul>



<ul class="wp-block-list">
<li><strong>Health &amp; Education Cess: </strong>4% on total of above </li>
</ul>



<ul class="wp-block-list">
<li><strong>Total Effective Tax Rate:</strong> up to 78% </li>
</ul>



<ul class="wp-block-list">
<li>No deduction for any expenditure, allowance, or loss is allowed against this income. </li>
</ul>



<ul class="wp-block-list">
<li>If the undisclosed income is found during search/assessment and not disclosed voluntarily, an additional penalty of 10% under Section 271AAC may be levied, raising the total liability to as much as 84%–137% in certain cases. </li>
</ul>



<ul class="wp-block-list">
<li>For all intents and purposes, it’s treated as black money. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_to_Avoid_Section_68_Notices"></span>How to Avoid Section 68 Notices <span class="ez-toc-section-end"></span></h2>



<p>If you’re receiving money—be it loans, gifts, or capital—you need to:&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Maintain all supporting documents</strong> (bank statements, gift deeds, affidavits) </li>
</ul>



<ul class="wp-block-list">
<li><strong>Verify the identity and capacity</strong> of the person providing funds </li>
</ul>



<ul class="wp-block-list">
<li><strong>Use legal and banking channels</strong> (avoid cash) </li>
</ul>



<ul class="wp-block-list">
<li><strong>Ensure all records are available during scrutiny</strong> </li>
</ul>



<ul class="wp-block-list">
<li><strong>File disclosures proactively</strong> in your ITR where needed </li>
</ul>



<p>In short, don’t just receive money. Be ready to explain it.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Documents_Required_to_Justify_a_Cash_Credit"></span>Documents Required to Justify a Cash Credit <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Type of Credit</strong>&nbsp;</td><td><strong>Required Documents</strong>&nbsp;</td></tr><tr><td>Loan from individual&nbsp;</td><td>PAN, Aadhaar, ITR, Bank statement, Loan agreement&nbsp;</td></tr><tr><td>Gift from relative&nbsp;</td><td>Gift deed, PAN of donor, occasion of gift&nbsp;</td></tr><tr><td>Share capital&nbsp;</td><td>Investor KYC, ITR, source of investment, Bank statement, Share certificate, Board Resolution &amp; Allotment Letter, PAS 3 filed with ROC, Share valuation report if applicable&nbsp;</td></tr><tr><td>Deposits in business books&nbsp;</td><td>Source proof, invoice (if sales), bank entries&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Section_68_vs_Related_Sections_69_69A_69B_69C"></span>Section 68 vs Related Sections: 69, 69A, 69B, 69C <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Section</strong>&nbsp;</td><td><strong>Nature of Income</strong>&nbsp;</td><td><strong>When It Applies</strong>&nbsp;</td></tr><tr><td><strong>68</strong>&nbsp;</td><td>Unexplained cash credit in books&nbsp;</td><td>Found during scrutiny of accounts&nbsp;</td></tr><tr><td><strong>69</strong>&nbsp;</td><td>Unexplained investments&nbsp;</td><td>Not recorded in books&nbsp;</td></tr><tr><td><strong>69A</strong>&nbsp;</td><td>Unexplained money/assets&nbsp;</td><td>Found during raids/search&nbsp;</td></tr><tr><td><strong>69B</strong>&nbsp;</td><td>Investment amount understated&nbsp;</td><td>AO believes it cost more than declared&nbsp;</td></tr><tr><td><strong>69C</strong>&nbsp;</td><td>Unexplained expenses&nbsp;</td><td>Expenses not justified with source&nbsp;</td></tr></tbody></table></figure>



<p>All above sections (68 to 69C) attract tax at 60% + 25% surcharge + 4% cess if the income is deemed under these sections, with no deductions or set-off allowed.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Common_Mistakes_That_Lead_to_Section_68_Scrutiny"></span>Common Mistakes That Lead to Section 68 Scrutiny <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Mistake</strong>&nbsp;</td><td><strong>Impact</strong>&nbsp;</td></tr><tr><td>Accepting large cash without documentation&nbsp;</td><td>Treated as income under 68&nbsp;</td></tr><tr><td>Not verifying PAN or financials of lenders&nbsp;</td><td>Burden of proof fails&nbsp;</td></tr><tr><td>Mixing personal and business accounts&nbsp;</td><td>Creates confusion in source tracing&nbsp;</td></tr><tr><td>Failing to respond to AO notices&nbsp;</td><td>Leads to automatic addition to income&nbsp;</td></tr><tr><td>Ignoring KYC of share investors&nbsp;</td><td>Can attract Section 68 even if money is received in bank&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="DOs_and_DONTs_to_Stay_Compliant"></span>DOs and DON’Ts to Stay Compliant <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>DOs</strong>&nbsp;</td><td><strong>DON’Ts</strong>&nbsp;</td></tr><tr><td>Use banking channels for loans and gifts&nbsp;</td><td>Accept or lend cash beyond ₹20,000&nbsp;</td></tr><tr><td>Keep documentation for all credits&nbsp;</td><td>Enter oral agreements or keep undocumented receipts&nbsp;</td></tr><tr><td>Respond to AO notices on time&nbsp;</td><td>Ignore small discrepancies; they add up&nbsp;</td></tr><tr><td>Conduct investor/lender due diligence&nbsp;</td><td>Assume PAN is enough. Verify ITR too&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion_Transparency_is_Your_Best_Friend"></span>Conclusion: Transparency is Your Best Friend <span class="ez-toc-section-end"></span></h2>



<p>Section 68 may sound harsh, but it’s not meant to penalize honest taxpayers. It targets those trying to hide income under the guise of loans, gifts, or investments. In an age of digital banking and real-time scrutiny, staying transparent isn’t just good practice—it’s essential.&nbsp;</p>



<p>Whether you’re a startup raising funds, a salaried person receiving a large gift, or a business accepting capital—have your paperwork ready, stay honest, and file smart.&nbsp;</p>



<p>A little caution today could save you a tax nightmare tomorrow.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_for_Section_68_of_Income_Tax_Act"></span>FAQs for Section 68 of Income Tax Act<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1753753817274"><strong class="schema-faq-question">What types of credits are questioned under Section 68?</strong> <p class="schema-faq-answer">Unsecured loans, gifts, share capital, sudden deposits, and any unexplained sum found in your books of accounts can attract scrutiny under Section 68.</p> </div> <div class="schema-faq-section" id="faq-question-1753753831130"><strong class="schema-faq-question">Is Section 68 applicable to individuals or only businesses?</strong> <p class="schema-faq-answer">It applies to everyone—individuals, HUFs, firms, LLPs, and companies. If you have unexplained credits, you&#8217;re liable.</p> </div> <div class="schema-faq-section" id="faq-question-1753753846314"><strong class="schema-faq-question">Can gifts be taxed under Section 68?</strong> <p class="schema-faq-answer">Yes, if the gift isn’t backed by a valid gift deed, PAN, and donor’s financials, the AO may invoke Section 68.</p> </div> <div class="schema-faq-section" id="faq-question-1753753857597"><strong class="schema-faq-question">What is the tax rate under Section 115BBE for Section 68 additions?</strong> <p class="schema-faq-answer">The income is taxed at 60%, plus a 25% surcharge on the tax and a 4% cess, leading to an effective tax of up to 78%. If the income is discovered and not disclosed voluntarily, penalties up to 10% can be levied, leading to an even higher tax burden.</p> </div> <div class="schema-faq-section" id="faq-question-1753753868830"><strong class="schema-faq-question">Can I revise my return if assessed under Section 68?</strong> <p class="schema-faq-answer">Yes, but only before the due date or before scrutiny begins. Once an assessment is done, options become limited.</p> </div> </div>



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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_Is_Section_68_of_the_Income_Tax_Act" >What Is Section 68 of the Income Tax Act? </a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-2" href="#Applies_to" >Applies to </a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#When_Does_Section_68_Apply" >When Does Section 68 Apply? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Burden_of_Proof_Who_Has_to_Justify_the_Cash_Credit" >Burden of Proof: Who Has to Justify the Cash Credit? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Key_Judicial_Interpretations_of_Section_68" >Key Judicial Interpretations of Section 68 </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Tax_Implications_Under_Section_68" >Tax Implications Under Section 68 </a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-7" href="#Taxation_under_Section_115BBE" >Taxation under Section 115BBE </a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#How_to_Avoid_Section_68_Notices" >How to Avoid Section 68 Notices </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Documents_Required_to_Justify_a_Cash_Credit" >Documents Required to Justify a Cash Credit </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#Section_68_vs_Related_Sections_69_69A_69B_69C" >Section 68 vs Related Sections: 69, 69A, 69B, 69C </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-11" href="#Common_Mistakes_That_Lead_to_Section_68_Scrutiny" >Common Mistakes That Lead to Section 68 Scrutiny </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-12" href="#DOs_and_DONTs_to_Stay_Compliant" >DOs and DON’Ts to Stay Compliant </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-13" href="#Conclusion_Transparency_is_Your_Best_Friend" >Conclusion: Transparency is Your Best Friend </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-14" href="#FAQs_for_Section_68_of_Income_Tax_Act" >FAQs for Section 68 of Income Tax Act</a></li></ul></nav></div>


Section 68 of Income Tax Act: Tax on Unexplained Cash Credits 


<p>When businesses or professionals pay commission or brokerage, they must deal with a lesser known but crucial provision in Indian tax law named Section 194H of the Income Tax Act. This section mandates Tax Deducted at Source (TDS) on payments related to commissions or brokerages.&nbsp;</p>



<p>Whether you&#8217;re a startup paying referral commissions or a real estate company disbursing broker fees, this provision can significantly impact your compliance obligations and cash flow. In this guide, you&#8217;ll learn what Section 194H covers, the current TDS rates, exemptions, and how to stay compliant.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Section_194H_of_the_Income_Tax_Act"></span>What is Section 194H of the Income Tax Act? <span class="ez-toc-section-end"></span></h2>



<p>Section 194H governs the deduction of TDS on payments made as commission or brokerage (excluding insurance commissions covered under Section 194D).&nbsp;</p>



<h3 class="wp-block-heading"><span class="ez-toc-section" id="Definition_of_Commission_and_Brokerage"></span>Definition of Commission and Brokerage <span class="ez-toc-section-end"></span></h3>



<p>As per the Act, commission or brokerage includes any payment received or receivable—directly or indirectly—by a person acting as an agent for&nbsp;</p>



<ul class="wp-block-list">
<li>Selling or buying goods, </li>
</ul>



<ul class="wp-block-list">
<li>Rendering services, </li>
</ul>



<ul class="wp-block-list">
<li>Facilitating any transaction. </li>
</ul>



<p>This also includes referral commissions and marketing incentives, making it widely applicable across industries.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Who_is_Required_to_Deduct_TDS_Under_Section_194H"></span>Who is Required to Deduct TDS Under Section 194H? <span class="ez-toc-section-end"></span></h2>



<p>The following entities are liable to deduct TDS under Section 194H:&nbsp;</p>



<ul class="wp-block-list">
<li>Individuals or Hindu Undivided Families (HUFs) under tax audit in the previous financial year </li>
</ul>



<ul class="wp-block-list">
<li>Partnership firms </li>
</ul>



<ul class="wp-block-list">
<li>Companies </li>
</ul>



<ul class="wp-block-list">
<li>LLPs </li>
</ul>



<ul class="wp-block-list">
<li>Trusts and Associations of Persons (AOPs) </li>
</ul>



<p><strong>Not Required to Deduct If</strong>&nbsp;</p>



<ul class="wp-block-list">
<li>You&#8217;re an individual or HUF not covered under audit provisions of Section 44AB. </li>
</ul>



<ul class="wp-block-list">
<li>The total commission or brokerage paid does not exceed ₹15,000 in a financial year (for payments made up to March 31, 2025). For payments on or after April 1, 2025, the threshold is increased to ₹20,000 in a financial year. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="TDS_Rate_Under_Section_194H_Latest"></span>TDS Rate Under Section 194H (Latest) <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Condition</strong>&nbsp;</td><td><strong>Applicable TDS Rate</strong>&nbsp;</td></tr><tr><td>Recipient has furnished PAN&nbsp;</td><td>5% (up to September 30, 2024), 2% (from October 1, 2024, onwards)&nbsp;</td></tr><tr><td>PAN not furnished&nbsp;</td><td>20% (Section 206AA applies)&nbsp;</td></tr><tr><td>Payment in cash (no separate exemption)&nbsp;</td><td>Still applicable at above rates&nbsp;</td></tr></tbody></table></figure>



<p><strong>Note:</strong> No surcharge or cess is added to the TDS rate under this section. The new lower rate of 2% applies to payments/credits from October 1, 2024.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Exemptions_and_Exceptions_Under_Section_194H"></span>Exemptions and Exceptions Under Section 194H <span class="ez-toc-section-end"></span></h2>



<p>Section 194H offers a few exemptions and exceptions, which include&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Threshold Exemption:</strong> TDS is not required if the total amount paid or credited during the financial year to a person does not exceed ₹15,000 (before April 1, 2025) or ₹20,000 (on/after April 1, 2025). </li>
</ul>



<ul class="wp-block-list">
<li><strong>Personal Transactions:</strong> Commission or brokerage paid for personal purposes by an individual or HUF is not subject to TDS. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Insurance Commission:</strong> Governed by Section 194D, not 194H. </li>
</ul>



<ul class="wp-block-list">
<li><strong>Reimbursement of Expenses:</strong> Not considered commission if backed by invoices. </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Time_of_Deduction_and_Payment_to_Government"></span>Time of Deduction and Payment to Government <span class="ez-toc-section-end"></span></h2>



<p>TDS must be deducted at the time of credit to the payee’s account or payment, whichever is earlier.&nbsp;</p>



<p><strong>Due Dates for TDS Deposit:</strong>&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Month of Deduction</strong>&nbsp;</td><td><strong>Due Date for Deposit</strong>&nbsp;</td></tr><tr><td>April–February&nbsp;</td><td>7th of the following month&nbsp;</td></tr><tr><td>March&nbsp;</td><td>30th April of the next FY&nbsp;</td></tr></tbody></table></figure>



<p>The deposit must be made using Challan 281.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="TDS_Return_Filing_and_Form_16A_Issuance"></span>TDS Return Filing and Form 16A Issuance <span class="ez-toc-section-end"></span></h2>



<p>Once TDS is deducted and deposited, you must file quarterly TDS returns using Form 26Q.&nbsp;</p>



<p><strong>Due Dates for Form 26Q</strong>&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Quarter</strong>&nbsp;</td><td><strong>Due Date</strong>&nbsp;</td></tr><tr><td>April–June&nbsp;</td><td>31st July&nbsp;</td></tr><tr><td>July–September&nbsp;</td><td>31st October&nbsp;</td></tr><tr><td>October–December&nbsp;</td><td>31st January&nbsp;</td></tr><tr><td>January–March&nbsp;</td><td>31st May&nbsp;</td></tr></tbody></table></figure>



<p>Also, issue Form 16A (TDS certificate) within 15 days from the due date of filing the return.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Penalties_and_Consequences_of_Non-compliance"></span>Penalties and Consequences of Non-compliance <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Type of Default</strong>&nbsp;</td><td><strong>Consequence</strong>&nbsp;</td></tr><tr><td>Failure to deduct TDS&nbsp;</td><td>Disallowance of expense under Section 40(a)(ia)&nbsp;</td></tr><tr><td>Late deposit of TDS&nbsp;</td><td>Interest @1.5% per month&nbsp;</td></tr><tr><td>Non-filing of TDS return&nbsp;</td><td>Penalty of ₹200 per day (Section 234E)&nbsp;</td></tr><tr><td>Non-issuance of Form 16A&nbsp;</td><td>Penalty up to ₹100 per day&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Best_Practices_for_Section_194H_Compliance"></span>Best Practices for Section 194H Compliance <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Practice</strong>&nbsp;</td><td><strong>Why It Matters</strong>&nbsp;</td></tr><tr><td>Maintain vendor agreements&nbsp;</td><td>Clearly define whether the payout is commission or fees&nbsp;</td></tr><tr><td>PAN verification of payees&nbsp;</td><td>Avoid 20% TDS rate due to non-furnishing of PAN&nbsp;</td></tr><tr><td>Automated accounting and TDS tracking&nbsp;</td><td>Prevent missed deductions or late filings&nbsp;</td></tr><tr><td>Quarterly internal audit of TDS compliance&nbsp;</td><td>Stay prepared for scrutiny and avoid last-minute hassles&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Section_194H_at_a_Glance"></span>Section 194H at a Glance <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Aspect</strong>&nbsp;</td><td><strong>Details</strong>&nbsp;</td></tr><tr><td>Applicability&nbsp;</td><td>Commission/Brokerage &gt; ₹15,000 (before April 1, 2025); &gt; ₹20,000 (from April 1, 2025)&nbsp;</td></tr><tr><td>TDS Rate (with PAN)&nbsp;</td><td>5% (up to Sept 30, 2024); 2% (from Oct 1, 2024 onwards)&nbsp;</td></tr><tr><td>TDS Rate (without PAN)&nbsp;</td><td>20%&nbsp;</td></tr><tr><td>Time of Deduction&nbsp;</td><td>Credit or Payment—whichever is earlier&nbsp;</td></tr><tr><td>Form for TDS Return&nbsp;</td><td>Form 26Q&nbsp;</td></tr><tr><td>Certificate Issued&nbsp;</td><td>Form 16A&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Final_Thoughts_Stay_Proactive_Stay_Compliant"></span>Final Thoughts: Stay Proactive, Stay Compliant <span class="ez-toc-section-end"></span></h2>



<p>TDS under Section 194H may seem like a minor detail in your accounts payable, but failing to handle it properly can have major repercussions—ranging from tax disallowances to hefty penalties. As your business scales and vendor relationships grow, proactive TDS compliance isn&#8217;t just good practice—it&#8217;s a financial safeguard.&nbsp;</p>



<p>Need a quick way to manage TDS? Use digital TDS filing tools or consult a tax advisor to automate the process.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_for_Section_194H"></span>FAQs for Section 194H<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1753653698489"><strong class="schema-faq-question">Is GST included in commission for TDS calculation?</strong> <p class="schema-faq-answer">No, if GST is shown separately in the invoice, TDS should be deducted on the base commission amount excluding GST.</p> </div> <div class="schema-faq-section" id="faq-question-1753653712460"><strong class="schema-faq-question">Can TDS under 194H be adjusted later?</strong> <p class="schema-faq-answer">Yes, the recipient can claim the TDS credit while filing their income tax return using Form 26AS as proof.</p> </div> <div class="schema-faq-section" id="faq-question-1753653724173"><strong class="schema-faq-question">Does 194H apply to discounts given to dealers?</strong> <p class="schema-faq-answer">Pure trade discounts may not attract TDS, but performance-based incentives or target-based discounts may be construed as commission.</p> </div> <div class="schema-faq-section" id="faq-question-1753653735756"><strong class="schema-faq-question">Can freelancers receive commission payments?</strong> <p class="schema-faq-answer">Yes, but if such payments fall under “fees for professional services,” Section 194J may apply instead.</p> </div> </div>



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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_is_Section_194H_of_the_Income_Tax_Act" >What is Section 194H of the Income Tax Act? </a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class="ez-toc-link ez-toc-heading-2" href="#Definition_of_Commission_and_Brokerage" >Definition of Commission and Brokerage </a></li></ul></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Who_is_Required_to_Deduct_TDS_Under_Section_194H" >Who is Required to Deduct TDS Under Section 194H? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#TDS_Rate_Under_Section_194H_Latest" >TDS Rate Under Section 194H (Latest) </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Exemptions_and_Exceptions_Under_Section_194H" >Exemptions and Exceptions Under Section 194H </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Time_of_Deduction_and_Payment_to_Government" >Time of Deduction and Payment to Government </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#TDS_Return_Filing_and_Form_16A_Issuance" >TDS Return Filing and Form 16A Issuance </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#Penalties_and_Consequences_of_Non-compliance" >Penalties and Consequences of Non-compliance </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Best_Practices_for_Section_194H_Compliance" >Best Practices for Section 194H Compliance </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#Section_194H_at_a_Glance" >Section 194H at a Glance </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-11" href="#Final_Thoughts_Stay_Proactive_Stay_Compliant" >Final Thoughts: Stay Proactive, Stay Compliant </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-12" href="#FAQs_for_Section_194H" >FAQs for Section 194H</a></li></ul></nav></div>


TDS on Commission and Brokerage under Section 194H

TDS on Commission and Brokerage under Section 194H: Applicability, Rate & Compliance 


<p>Tax season often brings a big question to mind: Which tax regime should you pick? With the introduction of the new tax regime under Section 115BAC of the Income Tax Act, things have changed significantly. This alternative system offers lower tax rates but limits your ability to claim most deductions and exemptions. So, how does it work, and how do you decide which one benefits you more?&nbsp;</p>



<p>In this blog, you’ll explore the new tax regime in detail and understand its slabs, who it suits, what deductions are allowed (if any), and how it compares to the old tax regime.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_Is_Section_115BAC"></span>What Is Section 115BAC? <span class="ez-toc-section-end"></span></h2>



<p>Section 115BAC, introduced in the Union Budget 2020, with the aim to simplify the income tax structure for individual taxpayers and Hindu Undivided Families (HUFs), facilitates taxpayers to choose to pay tax at lower rates with the condition that they forgo most deductions and exemptions available under the old regime.&nbsp;</p>



<p>It aims to reduce the compliance burden for salaried individuals and freelancers who may not claim many deductions but want to benefit from lower rates.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="New_Tax_Regime_Slabs_for_FY_2024-25_AY_2025-26"></span>New Tax Regime Slabs for FY 2024-25 (AY 2025-26) <span class="ez-toc-section-end"></span></h2>



<p>Income is taxed under the new regime as follows:&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Income Slab</strong>&nbsp;</td><td><strong>Tax Rate</strong>&nbsp;</td></tr><tr><td>Up to ₹3,00,000&nbsp;</td><td>Nil&nbsp;</td></tr><tr><td>₹3,00,001–₹7,00,000&nbsp;</td><td>5%&nbsp;</td></tr><tr><td>₹7,00,001–₹10,00,000&nbsp;</td><td>10%&nbsp;</td></tr><tr><td>₹10,00,001–₹12,00,000&nbsp;</td><td>15%&nbsp;</td></tr><tr><td>₹12,00,001–₹15,00,000&nbsp;</td><td>20%&nbsp;</td></tr><tr><td>Above ₹15,00,000&nbsp;</td><td>30%&nbsp;</td></tr></tbody></table></figure>



<p><strong>Surcharge and Cess</strong>&nbsp;</p>



<ul class="wp-block-list">
<li><strong>Surcharge</strong>: Ranges from 10% to 25% for income above ₹50 lakhs </li>
</ul>



<ul class="wp-block-list">
<li><strong>Health &amp; Education Cess</strong>: 4% on income tax and surcharge </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Rebate_Under_Section_87A"></span>Rebate Under Section 87A <span class="ez-toc-section-end"></span></h2>



<p>If your total income does not exceed ₹7 lakh under the new regime, you are eligible for a rebate of up to ₹25,000 under Section 87A, making your tax liability zero.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Key_Features_of_the_New_Tax_Regime"></span>Key Features of the New Tax Regime <span class="ez-toc-section-end"></span></h2>



<ul class="wp-block-list">
<li>Lower income tax rates </li>
</ul>



<ul class="wp-block-list">
<li>No requirement to invest in tax-saving instruments </li>
</ul>



<ul class="wp-block-list">
<li>No documentation required for exemptions </li>
</ul>



<ul class="wp-block-list">
<li>Suitable for individuals with fewer deductions or investments </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Deductions_Exemptions_Disallowed_in_the_New_Tax_Regime"></span>Deductions &amp; Exemptions Disallowed in the New Tax Regime <span class="ez-toc-section-end"></span></h2>



<p>One major trade-off is that you lose access to about 70 deductions and exemptions allowed under the old regime. Here are some important ones you can’t claim:&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Not Allowed in New Regime</strong>&nbsp;</td></tr><tr><td>Section 80C (LIC, PPF, ELSS, etc.)&nbsp;</td></tr><tr><td>Section 80D (Health insurance premium)&nbsp;</td></tr><tr><td>House Rent Allowance (HRA)&nbsp;</td></tr><tr><td>Leave Travel Allowance (LTA)&nbsp;</td></tr><tr><td>Standard Deduction (for FY 2023–24 only)*&nbsp;</td></tr><tr><td>Interest on home loan (Section 24b)&nbsp;</td></tr><tr><td>Deductions for education loan (80E)&nbsp;</td></tr></tbody></table></figure>



<p><strong>Note</strong>: From FY 2023–24 onwards, a standard deduction of ₹50,000 is now allowed under the new regime for salaried individuals and pensioners.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Deductions_and_Exemptions_Allowed_Under_Section_115BAC"></span>Deductions and Exemptions Allowed Under Section 115BAC <span class="ez-toc-section-end"></span></h2>



<p>While most deductions are not permitted, a few still remain:&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Allowed Deductions</strong>&nbsp;</td></tr><tr><td>Standard Deduction (₹50,000) for salary/pension&nbsp;</td></tr><tr><td>Employer’s contribution to NPS under 80CCD(2)&nbsp;</td></tr><tr><td>EPF contributions by the employer&nbsp;</td></tr><tr><td>Agniveer Corpus Fund (80CCH)&nbsp;</td></tr><tr><td>Transport allowance for disabled&nbsp;</td></tr><tr><td>Conveyance allowance for work travel&nbsp;</td></tr></tbody></table></figure>



<p>So, if your employer contributes to NPS or EPF, those benefits are not lost under the new regime.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Old_Regime_vs_New_Tax_Regime_A_Quick_Comparison"></span>Old Regime vs New Tax Regime: A Quick Comparison <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Feature</strong>&nbsp;</td><td><strong>Old Regime</strong>&nbsp;</td><td><strong>New Regime (115BAC)</strong>&nbsp;</td></tr><tr><td><strong>Tax Rates</strong>&nbsp;</td><td>Higher&nbsp;</td><td>Lower&nbsp;</td></tr><tr><td><strong>Deductions Allowed</strong>&nbsp;</td><td>Yes (80C, 80D, HRA, etc.)&nbsp;</td><td>Mostly no&nbsp;</td></tr><tr><td><strong>Standard Deduction</strong>&nbsp;</td><td>Yes&nbsp;</td><td>Yes (only from FY 2023–24)&nbsp;</td></tr><tr><td><strong>Complexity</strong>&nbsp;</td><td>High&nbsp;</td><td>Low&nbsp;</td></tr><tr><td><strong>Best For</strong>&nbsp;</td><td>Individuals with investments&nbsp;</td><td>Individuals with few deductions&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Who_Should_Choose_the_New_Tax_Regime"></span>Who Should Choose the New Tax Regime? <span class="ez-toc-section-end"></span></h2>



<ul class="wp-block-list">
<li>You don’t have many investments in tax-saving instruments like PPF, ELSS, insurance, etc. </li>
</ul>



<ul class="wp-block-list">
<li>You’re a freelancer or self-employed without access to salary-based exemptions </li>
</ul>



<ul class="wp-block-list">
<li>You prefer a simplified system without tracking bills and receipts </li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_to_opt_for_the_New_Tax_Regime"></span>How to opt for the New Tax Regime? <span class="ez-toc-section-end"></span></h2>



<p><strong>Salaried Individuals</strong>&nbsp;</p>



<p>You can choose the new tax regime every year while filing your ITR. Employers may also allow you to select it at the beginning of the financial year.&nbsp;</p>



<p><strong>Non-salaried (Self-employed or Freelancers)</strong>&nbsp;</p>



<p>You need to file Form 10-IE before the due date of ITR if you want to opt in or out. Once opted out, you cannot return to the new regime for the same business income unless you discontinue the business.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_to_Evaluate_Which_Regime_Is_Better_for_You"></span>How to Evaluate Which Regime Is Better for You? <span class="ez-toc-section-end"></span></h2>



<p>Here’s a simple checklist to decide:&nbsp;</p>



<ol start="1" class="wp-block-list">
<li>Calculate your gross income </li>
</ol>



<ol start="2" class="wp-block-list">
<li>Deduct all eligible investments and deductions under the old regime </li>
</ol>



<ol start="3" class="wp-block-list">
<li>Compare tax payable under both regimes using an income tax calculator </li>
</ol>



<ol start="4" class="wp-block-list">
<li>Choose the one with the lower tax liability </li>
</ol>



<p>Example:&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Income Category</strong>&nbsp;</td><td><strong>Old Regime (₹)</strong>&nbsp;</td><td><strong>New Regime (₹)</strong>&nbsp;</td></tr><tr><td>Gross Salary&nbsp;</td><td>15,00,000&nbsp;</td><td>15,00,000&nbsp;</td></tr><tr><td>Deductions (80C, 80D etc.)&nbsp;</td><td>2,00,000&nbsp;</td><td>0&nbsp;</td></tr><tr><td>Taxable Income&nbsp;</td><td>13,00,000&nbsp;</td><td>15,00,000&nbsp;</td></tr><tr><td>Tax Payable&nbsp;</td><td>1,76,200&nbsp;</td><td>1,62,500&nbsp;</td></tr></tbody></table></figure>



<p>In this case, the new regime is slightly better.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Common_Mistakes_to_Avoid_When_Opting_for_New_Tax_Regime"></span>Common Mistakes to Avoid When Opting for New Tax Regime <span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Mistake</strong>&nbsp;</td><td><strong>Why It Matters</strong>&nbsp;</td><td><strong>Solution</strong>&nbsp;</td></tr><tr><td>Not comparing both regimes&nbsp;</td><td>You may miss out on savings&nbsp;</td><td>Always use a calculator or consult a CA&nbsp;</td></tr><tr><td>Missing Form 10-IE (non-salaried)&nbsp;</td><td>Could default to old regime&nbsp;</td><td>File Form 10-IE before ITR due date&nbsp;</td></tr><tr><td>Assuming all deductions are disallowed&nbsp;</td><td>Some are still allowed (EPF, 80CCD(2), standard deduction)&nbsp;</td><td>Check the latest updates and circulars&nbsp;</td></tr><tr><td>Changing regime without planning&nbsp;</td><td>May affect your monthly TDS and budgeting&nbsp;</td><td>Inform employer at start of FY if salaried&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Final_Thoughts_Choose_Smart_Not_Fast"></span>Final Thoughts: Choose Smart, Not Fast <span class="ez-toc-section-end"></span></h2>



<p>The new tax regime under Section 115BAC offers clarity and simplicity but isn’t a one-size-fits-all solution. Whether it’s better for you depends on how you save, spend, and structure your income. Review your finances annually, simulate both options using online tax calculators, and pick the regime that aligns with your financial goals, not just your tax bill.&nbsp;</p>



<p>Remember, you can switch between regimes (if salaried) every year. So, evaluate wisely and file confidently.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_for_Deductions_Exemptions_Under_Section_115BAC"></span>FAQs for Deductions &amp; Exemptions Under Section 115BAC<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1753653018266"><strong class="schema-faq-question">Can I claim HRA under the new tax regime?</strong> <p class="schema-faq-answer">No, HRA (House Rent Allowance) exemption is not available under the new tax regime.</p> </div> <div class="schema-faq-section" id="faq-question-1753653030040"><strong class="schema-faq-question">Is the standard deduction available under the new regime?</strong> <p class="schema-faq-answer">Yes, from FY 2023–24, the standard deduction of ₹50,000 is available under the new regime for salaried and pensioned individuals.</p> </div> <div class="schema-faq-section" id="faq-question-1753653042858"><strong class="schema-faq-question">Can I switch between the new and old tax regimes?</strong> <p class="schema-faq-answer">Salaried taxpayers can switch every year. However, business and self-employed taxpayers can only switch once unless they discontinue their business.</p> </div> <div class="schema-faq-section" id="faq-question-1753653054544"><strong class="schema-faq-question">Is the new regime mandatory?</strong> <p class="schema-faq-answer">No, it’s optional. Taxpayers can choose between the old and new regimes while filing ITR.</p> </div> <div class="schema-faq-section" id="faq-question-1753653065859"><strong class="schema-faq-question">Is Form 10-IE required for salaried individuals?</strong> <p class="schema-faq-answer">No, salaried individuals don’t need to file Form 10-IE. They can opt for the regime directly while filing their ITR.</p> </div> </div>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_Is_Section_115BAC" >What Is Section 115BAC? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#New_Tax_Regime_Slabs_for_FY_2024-25_AY_2025-26" >New Tax Regime Slabs for FY 2024-25 (AY 2025-26) </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Rebate_Under_Section_87A" >Rebate Under Section 87A </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Key_Features_of_the_New_Tax_Regime" >Key Features of the New Tax Regime </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Deductions_Exemptions_Disallowed_in_the_New_Tax_Regime" >Deductions &amp; Exemptions Disallowed in the New Tax Regime </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Deductions_and_Exemptions_Allowed_Under_Section_115BAC" >Deductions and Exemptions Allowed Under Section 115BAC </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#Old_Regime_vs_New_Tax_Regime_A_Quick_Comparison" >Old Regime vs New Tax Regime: A Quick Comparison </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#Who_Should_Choose_the_New_Tax_Regime" >Who Should Choose the New Tax Regime? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#How_to_opt_for_the_New_Tax_Regime" >How to opt for the New Tax Regime? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#How_to_Evaluate_Which_Regime_Is_Better_for_You" >How to Evaluate Which Regime Is Better for You? </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-11" href="#Common_Mistakes_to_Avoid_When_Opting_for_New_Tax_Regime" >Common Mistakes to Avoid When Opting for New Tax Regime </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-12" href="#Final_Thoughts_Choose_Smart_Not_Fast" >Final Thoughts: Choose Smart, Not Fast </a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-13" href="#FAQs_for_Deductions_Exemptions_Under_Section_115BAC" >FAQs for Deductions &amp; Exemptions Under Section 115BAC</a></li></ul></nav></div>


Deductions & Exemptions Under Section 115BAC

What is the New Tax Regime? Slabs, Deductions & Exemptions Under Section 115BAC 


<p>If you&#8217;re paying contractors or subcontractors for work done, there&#8217;s a good chance you&#8217;re required to deduct tax at source (TDS) under Section 194C of the Income Tax Act. Whether you’re running a business, managing a partnership, or heading an organization, understanding this section can help you avoid penalties and stay tax compliant. Let’s break it down for you, clearly and thoroughly.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Section_194C_of_the_Income_Tax_Act"></span>What is Section 194C of the Income Tax Act?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Section 194C governs TDS on payments made to residents for carrying out any work, including the supply of labor, under a contract. It’s primarily aimed at ensuring that taxes are collected at the time of payment for services, especially when large amounts are involved.&nbsp;</p>



<p>This section applies not just to traditional “contractors” but also to many types of services in the business and professional domain.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Who_is_Liable_to_Deduct_TDS_Under_Section_194C"></span>Who is Liable to Deduct TDS Under Section 194C?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Not everyone is required to deduct TDS under Section 194C. Here&#8217;s who must:&nbsp;</p>



<ul class="wp-block-list">
<li>Any person other than an individual or Hindu Undivided Family (HUF).&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Individuals and HUFs are liable only if:&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>They were subject to a tax audit in the previous financial year.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Their turnover exceeded ₹1 crore (business) or ₹50 lakh (profession).&nbsp;</li>
</ul>



<p>So, if you’re a salaried individual hiring a contractor for home repairs, you’re not liable. But if you run a business that has exceeded turnover thresholds, you are.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="When_Does_Section_194C_Apply"></span>When Does Section 194C Apply?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>This section applies when:&nbsp;</p>



<ul class="wp-block-list">
<li>There is a written or verbal contract.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Payment is being made for:&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Carrying out any work (including labor supply),&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Or a sub-contract,&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Related to advertising, broadcasting, transport, catering, etc.&nbsp;</li>
</ul>



<p><strong>Example</strong>: You hire a digital marketing agency to run ads for your business, and the annual contract is ₹3,00,000. You must deduct TDS under Section 194C.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="TDS_Rates_Under_Section_194C"></span>TDS Rates Under Section 194C&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Here’s a breakdown of applicable rates:&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Nature of Payment</strong>&nbsp;</td><td><strong>Recipient</strong>&nbsp;</td><td><strong>TDS Rate</strong>&nbsp;</td></tr><tr><td>Contractual payment&nbsp;</td><td>Individual or HUF&nbsp;</td><td>1%&nbsp;</td></tr><tr><td>Contractual payment&nbsp;</td><td>Others (firm, company)&nbsp;</td><td>2%&nbsp;</td></tr><tr><td>Sub-contract payments&nbsp;</td><td>All types&nbsp;</td><td>1%&nbsp;</td></tr><tr><td>PAN not available&nbsp;</td><td>All recipients&nbsp;</td><td>20% (as per Section 206AA)&nbsp;</td></tr></tbody></table></figure>



<p>GST is excluded from TDS calculation if mentioned separately in the invoice.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Threshold_Limits_for_TDS_Deduction"></span>Threshold Limits for TDS Deduction&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>TDS under Section 194C is not applicable unless:&nbsp;</p>



<ul class="wp-block-list">
<li>Single payment exceeds ₹30,000&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Aggregate in FY exceeds ₹1,00,000&nbsp;</li>
</ul>



<p>If either threshold is crossed, TDS will apply.&nbsp;</p>



<p><strong>Example</strong>: You pay a contractor ₹25,000 five times a year (total ₹1,25,000). Even though no single payment crosses ₹30,000, the annual limit is breached, and TDS must be deducted on the entire ₹1,25,000.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_a_%E2%80%98Work_Contract_Under_Section_194C"></span>What is a ‘Work Contract’ Under Section 194C?&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>“Work” includes:&nbsp;</p>



<ul class="wp-block-list">
<li>Advertising&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Broadcasting and telecasting&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Carriage of goods/passengers (excluding railways)&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Catering&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Manufacturing or supplying a product where raw material is provided by the payer&nbsp;</li>
</ul>



<p><strong>Excluded</strong>: sale of goods (with no labor element), personal payments, and contracts not qualifying as “work”.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Time_of_Deduction_and_Payment_of_TDS"></span>Time of Deduction and Payment of TDS&nbsp;<span class="ez-toc-section-end"></span></h2>



<p><strong>When to deduct TDS</strong>&nbsp;</p>



<p>At the earlier of the following:&nbsp;</p>



<ul class="wp-block-list">
<li>Credit to the contractor&#8217;s account, or&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Actual payment (by cash, check, or transfer)&nbsp;</li>
</ul>



<p><strong>Due date for TDS deposit</strong>&nbsp;</p>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Month of Deduction</strong>&nbsp;</td><td><strong>Due Date</strong>&nbsp;</td></tr><tr><td>April–February&nbsp;</td><td>7th of the next month&nbsp;</td></tr><tr><td>March&nbsp;</td><td>30th April of next FY&nbsp;</td></tr></tbody></table></figure>



<p><strong>TDS Certificate (Form 16A)</strong>&nbsp;</p>



<p>Form 16A must be issued quarterly within 15 days of the due date for filing TDS returns.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_to_File_TDS_on_Contractor_Payments_Form_26Q"></span>How to File TDS on Contractor Payments (Form 26Q)&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Section 194C payments must be reported via Form 26Q, filed quarterly. Here’s the process:&nbsp;</p>



<ol start="1" class="wp-block-list">
<li>Calculate total payments and applicable TDS.&nbsp;</li>
</ol>



<ol start="2" class="wp-block-list">
<li>Generate a challan on the TRACES or NSDL portal.&nbsp;</li>
</ol>



<ol start="3" class="wp-block-list">
<li>Pay TDS using Challan ITNS 281.&nbsp;</li>
</ol>



<ol start="4" class="wp-block-list">
<li>File Form 26Q for the relevant quarter.&nbsp;</li>
</ol>



<ol start="5" class="wp-block-list">
<li>Generate Form 16A for the contractor.&nbsp;</li>
</ol>



<p><strong>Pro Tip:</strong> Use TDS software or a chartered accountant if you have many vendors.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Penalties_and_Consequences_for_Non-compliance"></span>Penalties and Consequences for Non-compliance&nbsp;<span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Non-compliance</strong>&nbsp;</td><td><strong>Penalty/Consequence</strong>&nbsp;</td></tr><tr><td>Not deducting TDS&nbsp;</td><td>Disallowance of 30% of the expense u/s 40(a)(ia)&nbsp;</td></tr><tr><td>Late payment&nbsp;</td><td>Interest @ 1–1.5% per month&nbsp;</td></tr><tr><td>Non-filing of TDS return&nbsp;</td><td>₹200/day u/s 234E (max equal to TDS amount)&nbsp;</td></tr><tr><td>Not issuing Form 16A&nbsp;</td><td>₹100/day per certificate&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Recent_Updates_or_Clarifications_from_CBDT"></span>Recent Updates or Clarifications from CBDT&nbsp;<span class="ez-toc-section-end"></span></h2>



<ul class="wp-block-list">
<li>CBDT has clarified that GST should be excluded from the TDS amount if shown separately.&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Transport contractors (with 10 or fewer owned goods carriages) are exempt from TDS under certain conditions (Declaration + PAN must be furnished).&nbsp;</li>
</ul>



<ul class="wp-block-list">
<li>Digital payments and reporting through new TDS compliance portals have been emphasized.&nbsp;</li>
</ul>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Common_Mistakes_to_Avoid_While_Deducting_TDS_Under_Section_194C"></span>Common Mistakes to Avoid While Deducting TDS Under Section 194C&nbsp;<span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td><strong>Mistake</strong>&nbsp;</td><td><strong>Impact</strong>&nbsp;</td><td><strong>Solution</strong>&nbsp;</td></tr><tr><td>Deducting TDS including GST&nbsp;</td><td>Excess deduction&nbsp;</td><td>Exclude GST if separately mentioned&nbsp;</td></tr><tr><td>Missing thresholds&nbsp;</td><td>Unnecessary deduction&nbsp;</td><td>Monitor cumulative payments per contractor&nbsp;</td></tr><tr><td>Not verifying PAN&nbsp;</td><td>20% TDS rate&nbsp;</td><td>Always collect and validate PAN&nbsp;</td></tr><tr><td>Delayed TDS deposit&nbsp;</td><td>Interest + penalty&nbsp;</td><td>Set automated reminders for due dates&nbsp;</td></tr><tr><td>Improper categorization&nbsp;</td><td>Wrong rate applied&nbsp;</td><td>Classify contractor vs sub-contractor correctly&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion_Why_Section_194C_Compliance_Matters"></span>Conclusion: Why Section 194C Compliance Matters&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Staying compliant with Section 194C ensures your business expenses remain deductible, and your tax audits remain clean. Contractors form a vital part of operations for businesses across industries, and timely TDS deduction protects both parties from downstream tax issues.&nbsp;</p>



<p>The key? Set up a process—verify contracts, monitor thresholds, exclude GST smartly, and file TDS returns quarterly without delay. With a little discipline, TDS on contractor payments becomes a routine task instead of a last-minute scramble.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_About_Section_194C"></span>FAQs About Section 194C<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1753175814616"><strong class="schema-faq-question">What is the TDS rate under Section 194C for individual contractors? </strong> <p class="schema-faq-answer">The TDS rate under Section 194C is 1% for individual/HUF contractors and 2% for all other contractors (e.g., companies or firms).</p> </div> <div class="schema-faq-section" id="faq-question-1753175826719"><strong class="schema-faq-question">Is TDS applicable on transport contracts?</strong> <p class="schema-faq-answer">Yes, but contractors owning fewer than 10 goods carriages and providing PAN may be exempt. </p> </div> <div class="schema-faq-section" id="faq-question-1753175847067"><strong class="schema-faq-question">Do I need to deduct TDS if the contract is for ₹25,000 only?</strong> <p class="schema-faq-answer">No, unless total payments to the contractor in the same FY exceed ₹1,00,000.</p> </div> <div class="schema-faq-section" id="faq-question-1753175856501"><strong class="schema-faq-question">Is GST included while calculating TDS?</strong> <p class="schema-faq-answer">No, GST should be excluded if it is mentioned separately in the invoice.</p> </div> <div class="schema-faq-section" id="faq-question-1753175870918"><strong class="schema-faq-question">Can TDS be deducted without a contract in writing?</strong> <p class="schema-faq-answer">Yes. Section 194C applies even to verbal agreements or implied contracts.</p> </div> </div>



<figure class="wp-block-pullquote"><blockquote><p>Discover fixed income investments with&nbsp;<strong>Jiraaf</strong>, a SEBI registered online bonds platform that educates and brings access to a wide array of bonds.&nbsp;<a href="https://www.jiraaf.com/app/signup?referrer=JR7542">Sign up</a>&nbsp;today to explore diversified fixed income investment opportunities to support your goal-based wealth creation journey. Start investing!</p></blockquote></figure>
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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_is_Section_194C_of_the_Income_Tax_Act" >What is Section 194C of the Income Tax Act?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#Who_is_Liable_to_Deduct_TDS_Under_Section_194C" >Who is Liable to Deduct TDS Under Section 194C?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#When_Does_Section_194C_Apply" >When Does Section 194C Apply?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#TDS_Rates_Under_Section_194C" >TDS Rates Under Section 194C&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#Threshold_Limits_for_TDS_Deduction" >Threshold Limits for TDS Deduction&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#What_is_a_%E2%80%98Work_Contract_Under_Section_194C" >What is a ‘Work Contract’ Under Section 194C?&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#Time_of_Deduction_and_Payment_of_TDS" >Time of Deduction and Payment of TDS&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#How_to_File_TDS_on_Contractor_Payments_Form_26Q" >How to File TDS on Contractor Payments (Form 26Q)&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-9" href="#Penalties_and_Consequences_for_Non-compliance" >Penalties and Consequences for Non-compliance&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-10" href="#Recent_Updates_or_Clarifications_from_CBDT" >Recent Updates or Clarifications from CBDT&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-11" href="#Common_Mistakes_to_Avoid_While_Deducting_TDS_Under_Section_194C" >Common Mistakes to Avoid While Deducting TDS Under Section 194C&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-12" href="#Conclusion_Why_Section_194C_Compliance_Matters" >Conclusion: Why Section 194C Compliance Matters&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-13" href="#FAQs_About_Section_194C" >FAQs About Section 194C</a></li></ul></nav></div>


[Section 194C] TDS on Payment to Contractor: Applicability, Rate & Rules 


<p>Imagine being assured that your money is secure, easily accessible, and well managed when you walk into your bank and deposit your pay cheque. However, have you ever questioned how exactly banks strike a balance between protecting your money and making loans to boost the economy? &nbsp;<br>&nbsp;<br>That&#8217;s where the Statutory Liquidity Ratio (SLR) enters the picture, an index that operates behind the scenes and has a significant impact on how banks function, how much they may lend, and even how inflation is controlled. Understanding SLR helps you learn more about how India&#8217;s banking system operates and why it affects your wallet, regardless of whether you&#8217;re an inquisitive saver, an aspiring investor, or someone simply attempting to figure out why loan rates fluctuate.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="What_is_Statutory_Liquidity_Ratio_SLR"></span>What is Statutory Liquidity Ratio (SLR)?&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>When you hear the term SLR in banking, it&#8217;s referring to the Statutory Liquidity Ratio—a tool that central banks like the Reserve Bank of India (RBI) use to manage money flow and ensure stability. By definition, SLR is the minimum portion of a bank&#8217;s net demand and time liabilities (NDTL) that must be held as liquid assets—such as cash, gold, or government-approved securities—before a bank can extend credit.&nbsp;</p>



<p>Put simply, if a bank has ₹100 in deposits, and the SLR is 18%, the bank must maintain ₹18 in liquid assets—not loan out that portion, this rule plays a crucial role in maintaining liquidity, mitigating inflation, and ensuring that banks have sufficient resources to meet withdrawal demands.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="SLR_Meaning_and_Why_It_Matters"></span>SLR Meaning and Why It Matters&nbsp;&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>As the country&#8217;s principal monetary authority, the RBI is in charge of managing cash flows, inflation, and price levels.&nbsp;<br>The RBI has numerous tools at its disposal to efficiently carry out its tasks. These include the repo rate, reverse repo rate, bank rate, CRR, SLR, marginal standing facility, open market operations, moral suasion, and a few others. &nbsp;<br>&nbsp;<br>In numerous ways, SLR improves the RBI&#8217;s ability to regulate inflation. Raising SLR causes banks to lodge more money in government securities, reducing the amount of cash in the economy. This contributes to higher price levels and inflation in the economy. Doing the contrary helps to keep capital flowing through the economy. Reducing the SLR increases bank liquidity, which can stimulate economic development and demand.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Statutory_Liquidity_Ratio_Formula_Calculation"></span>Statutory Liquidity Ratio Formula &amp; Calculation&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Understanding the statutory liquidity ratio formula is straightforward:&nbsp;</p>



<p>SLR = (Liquid Assets / NDTL) × 100&nbsp;</p>



<ul class="wp-block-list">
<li>Liquid Assets: Includes cash in the vault, gold at market value, government securities like treasury bills and bonds, and RBI-approved state development loans. </li>
</ul>



<ul class="wp-block-list">
<li>NDTL: Comprises all demand (savings/current) and time fixed deposits or recurring deposits, minus interbank deposits. </li>
</ul>



<p>To understand this better with an example, if a bank has ₹1,000 crore in NDTL and ₹200 crore in liquid assets, then:&nbsp;</p>



<p>SLR = (₹200 / ₹1,000) × 100 = 20%&nbsp;</p>



<p>This surpasses the RBI-mandated 18%, meaning the bank remains compliant with a 2% buffer.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Importance_of_SLR_in_Banking_Operations"></span>Importance of SLR in Banking Operations&nbsp;<span class="ez-toc-section-end"></span></h2>



<ol start="1" class="wp-block-list">
<li><strong>Assures stability and solvency</strong>: SLR increases a bank&#8217;s resilience and overall strength to withdrawal demands and financial shocks by mandating liquid reserves. </li>
</ol>



<ol start="2" class="wp-block-list">
<li><strong>Regulates the credit growth</strong>: An increase in SLR forces banks to invest more in non-lending assets, which restricts the amount of money they can lend, tightening liquidity and reducing inflation. </li>
</ol>



<ol start="3" class="wp-block-list">
<li><strong>Encourages government debt</strong>: Banks help control government debt and ensure steady funding for public projects since they hold government securities. </li>
</ol>



<ol start="4" class="wp-block-list">
<li><strong>Promotes prudent asset management</strong>: Banks can maintain the security and liquidity of their investment portfolios by holding gold and government securities. </li>
</ol>



<ol start="5" class="wp-block-list">
<li><strong>Prevents over-liquidation in banks</strong>: When banks experience an increase in the Cash Reserve Ratio (CRR) and want money immediately, SLR helps prevent over-liquidation. The RBI makes sure banks stay solvent and stable by requiring that a percentage of deposits be maintained in liquid assets. In order to support long-term financial objectives, it also promotes investing in government securities. </li>
</ol>



<ol start="6" class="wp-block-list">
<li><strong>Controls the movement of bank credit</strong>: SLR is a technique that the RBI utilises to control the amount of credit available in the economy. In order to limit bank lending and manage the money supply during inflation, it boosts the SLR. On the other hand, in order to increase lending and stimulate the economy during a recession, the RBI may cut the SLR. </li>
</ol>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="How_SLR_Affects_Credit_Availability_and_Inflation"></span>How SLR Affects Credit Availability and Inflation&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>Lending and general economic activity are impacted by SLR:&nbsp;</p>



<ul class="wp-block-list">
<li>Banks have less money to lend when the SLR gets higher. This slows down the corporate/business and consumer borrowing, limits the availability of credit, and contributes to managing inflation.  </li>
</ul>



<ul class="wp-block-list">
<li>More money is available for lending when SLR declines, which can spur economic expansion but, if not well controlled, might also raise inflation. </li>
</ul>



<p>You will therefore be aware that the next time you hear an SLR adjustment, it refers to the deliberate action taken by the RBI to balance inflation and credit flow.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Difference_Between_SLR_and_CRR"></span>Difference Between SLR and CRR&nbsp;<span class="ez-toc-section-end"></span></h2>



<figure class="wp-block-table"><table class="has-fixed-layout"><tbody><tr><td>Feature&nbsp;</td><td>SLR&nbsp;</td><td>CRR&nbsp;</td></tr><tr><td><strong>Meaning</strong>&nbsp;</td><td>Liquid assets that banks hold in their vaults.&nbsp;</td><td>Cash banks must keep with the RBI.&nbsp;</td></tr><tr><td><strong>Asset type</strong>&nbsp;</td><td>Cash, gold, government securities.&nbsp;</td><td>Cash.&nbsp;</td></tr><tr><td><strong>Interest</strong>&nbsp;</td><td>Banks earn interest on SLR holdings.&nbsp;</td><td>None.&nbsp;</td></tr><tr><td><strong>Control mechanism</strong>&nbsp;</td><td>Broader liquidity/credit supply management.&nbsp;</td><td>RBI’s cash balance control.&nbsp;</td></tr><tr><td><strong>Ratio calculation</strong>&nbsp;</td><td>The percentage of NDTL.&nbsp;</td><td>The percentage of total deposits.&nbsp;</td></tr><tr><td><strong>Typical rate in India</strong>&nbsp;</td><td><a href="https://cleartax.in/s/slr" target="_blank" rel="noreferrer noopener">~18%</a>&nbsp;</td><td><a href="https://cleartax.in/s/cash-reserve-ratio-crr" target="_blank" rel="noreferrer noopener">4</a>%&nbsp;</td></tr></tbody></table></figure>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="Conclusion"></span>Conclusion&nbsp;<span class="ez-toc-section-end"></span></h2>



<p>SLR is more than a banking rule; it is a precisely calibrated economic lever. Enforcing liquid-asset reserves guarantees your bank can fulfil its promises. It gives the RBI significant influence over money supply, inflation, and credit. It also helps to fund public debt while encouraging prudent risk management. Whether you are a borrower, saver, or investor, understanding how SLR works allows you to forecast how policy changes will affect lending rates, liquidity, and the economy. So, the next time the RBI announces changes, you&#8217;ll be well prepared to understand their real-world implications.&nbsp;</p>



<h2 class="wp-block-heading"><span class="ez-toc-section" id="FAQs_About_SLR"></span>FAQs About SLR<span class="ez-toc-section-end"></span></h2>



<div class="schema-faq wp-block-yoast-faq-block"><div class="schema-faq-section" id="faq-question-1753185440905"><strong class="schema-faq-question">What is the current SLR rate in India?</strong> <p class="schema-faq-answer">As of June 2025, the current SLR rate in India is 18.00%.</p> </div> <div class="schema-faq-section" id="faq-question-1753185455431"><strong class="schema-faq-question">How is the statutory liquidity ratio calculated?</strong> <p class="schema-faq-answer">The statutory liquidity ratio (SLR) is the percentage of a bank&#8217;s net demand and time liabilities (NDTL) that must be held in the form of eligible assets. It is computed by dividing the total value of eligible assets owned by the bank by its NDTL, then multiplying by 100.</p> </div> <div class="schema-faq-section" id="faq-question-1753185468147"><strong class="schema-faq-question">Why is SLR important for banks?</strong> <p class="schema-faq-answer">SLR&#8217;s significance in banking stems from its function as a vital statutory liquidity ratio instrument for monetary policy that maintains financial stability while balancing loan availability. It supports regulated economic growth and assists banks in managing liquidity, as mandated by the Reserve Bank of India (RBI).</p> </div> <div class="schema-faq-section" id="faq-question-1753185480179"><strong class="schema-faq-question">What happens if a bank fails to maintain SLR?</strong> <p class="schema-faq-answer">If a bank fails to maintain the required SLR, RBI charges a penalty of 3% above the bank rate on the shortfall for the first working day, increasing to 5% above the bank rate if the default continues the next day. The penalty is calculated daily on the shortfall amount.</p> </div> </div>



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<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-1" href="#What_is_Statutory_Liquidity_Ratio_SLR" >What is Statutory Liquidity Ratio (SLR)?&nbsp;&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-2" href="#SLR_Meaning_and_Why_It_Matters" >SLR Meaning and Why It Matters&nbsp;&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-3" href="#Statutory_Liquidity_Ratio_Formula_Calculation" >Statutory Liquidity Ratio Formula &amp; Calculation&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-4" href="#Importance_of_SLR_in_Banking_Operations" >Importance of SLR in Banking Operations&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-5" href="#How_SLR_Affects_Credit_Availability_and_Inflation" >How SLR Affects Credit Availability and Inflation&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-6" href="#Difference_Between_SLR_and_CRR" >Difference Between SLR and CRR&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-7" href="#Conclusion" >Conclusion&nbsp;</a></li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class="ez-toc-link ez-toc-heading-8" href="#FAQs_About_SLR" >FAQs About SLR</a></li></ul></nav></div>
