How to claim TDS credit in ITR if the deductor did not deposit TDS?

A mismatch between the tax deducted from your income and the credit reflected in Form 26AS or the Annual Information Statement (AIS) can leave taxpayers worried about receiving an income tax demand. This situation usually arises when an employer or any other deductor deducts tax at source (TDS) but fails to deposit it with the government.

Tax experts say taxpayers should not forgo their rightful TDS credit merely because it is missing from Form 26AS or AIS. The Income Tax Act provides protection in such cases, provided the taxpayer can establish that tax was actually deducted from their income.

Claim the TDS credit in your ITR

According to tax experts, taxpayers should first approach the deductor and request them to deposit the TDS with the government and file the relevant TDS statement. However, if the deductor refuses or fails to do so, the taxpayer has no legal power to compel them.

"The ITR forms are annexure-less. Hence, a taxpayer cannot attach any supporting documents along with the ITR to support the TDS claim. Thus, it is advisable to file the ITR, claim TDS credit, and wait for its processing. Once the ITR is processed, the taxpayer will receive notice of a TDS mismatch," said Naveen Wadhwa, Vice President, Research and Advisory Division at Taxmann.

Since supporting documents cannot be uploaded while filing the return, taxpayers should preserve salary slips, Form 16 or Form 16A, bank statements reflecting the net amount credited after TDS deduction, TDS certificates, and any communication with the employer or deductor. These documents will be required while responding to a TDS mismatch notice.

"My advice is to claim the full TDS credit in your ITR regardless of what 26AS shows. Do not reduce your claim to avoid a mismatch, report the actual income and actual tax deducted, based on your salary slips, Form 16 or 16A, bank statements and the TDS certificate. If you under-claim, you surrender money that was rightfully yours," said CA Pravin Kakade.

What happens after you file the ITR?

If the TDS claimed in the return does not match the credit available with the Income Tax Department, the Centralised Processing Centre (CPC) may process the return with a tax demand. Taxpayers can then respond to the notice by submitting documentary evidence showing that TDS was actually deducted from their income.

This may include salary slips, Form 16 or Form 16A, bank statements showing the net amount received after TDS deduction, and other supporting records. If the Assessing Officer (AO) is satisfied with the documents, the TDS credit can be allowed and the demand raised by the CPC may be cancelled. If the claim is rejected despite sufficient evidence, the taxpayer may have to pursue legal remedies.

What does the law say?

According to Wadhwa, CBDT Instruction No. 275/29/2014, dated June 1, 2015, reiterates the protection available under Section 205 of the Income Tax Act. The provision states that where tax has already been deducted from a taxpayer's income, the department cannot recover the same tax again merely because the deductor failed to deposit it with the government. The instruction also directs assessing officers not to inconvenience taxpayers due to the deductor's default.

Kakade said the legal position has also been consistently upheld by courts.

"Section 205 of the Income Tax Act bars the department from recovering tax from the deductee to the extent it has already been deducted. Once TDS is deducted, the liability shifts to the deductor. The CBDT, through its Office Memorandum dated March 11, 2016, has instructed officers not to enforce such demands against the taxpayer. The courts agree the Bombay High Court in Yashpal Sahni vs ACIT and the Delhi High Court in Sanjay Sudan vs ACIT (2023) both held that the department must recover from the deductor, not the taxpayer," he said.

Experts advise taxpayers not to ignore a TDS mismatch notice or pay the demand in haste. Instead, they should respond to the notice or file a rectification request, submit documentary evidence showing that tax was deducted from their income, and cite the protection available under Section 205. Where the facts support the claim, the tax department can allow the TDS credit. If the claim is still denied, the taxpayer can challenge the decision before the appropriate judicial forum.