I Paid the TDS Default — Why Is TRACES Still Showing the Demand?
By Murali Krishna Ravuri, Krishna & Associates, Bengaluru | Published: 28 September 2026
Last updated: 28 September 2026 | Applies to: TDS statements for FY 2025-26 and earlier (Income-tax Act, 1961) and Tax Year 2026-27 onwards (Income-tax Act, 2025)
📑 Contents
- Quick Read: the problem, the reason, the fix
- In Simple Words: Evening Chai Conversations
- Professional Deep-Dive
- Which law and which form applies
- Why a paid default keeps showing
- Diagnosis: identify the default type
- Two ways to correct: online and offline
- Step-by-step: clearing a paid default
- Time limits for correction
- Interest, fee, penalty and prosecution
- Judicial position on the late filing fee
- Deductor's checklist
- References
- Frequently Asked Questions
⚡ Quick Read
In this quick read
The problem: You paid the TDS default (interest, late fee or short payment) through a challan on the income-tax portal, but TRACES still shows the same default. Know your default type →
The reason: Paying the challan only puts money in the Government account. TRACES computes defaults from your TDS statement, and the statement does not yet know about that challan. Until the challan is tagged to the correct quarter's statement through a correction statement, the default stays. Why this happens →
What to do: A correction statement can be filed in two ways. Online correction is done on TRACES using your DSC. Offline correction is done by downloading the Conso file, preparing the statement in the RPU and uploading it. The Justification Report, which shows exactly what the default consists of, can be obtained through either route. Remember: a new challan cannot be added through offline correction. To tag the challan you paid for the default, use online correction with DSC. Do not pay again. Online vs offline → Step-by-step →
Deadline: Corrections can be filed only within two years from the end of the tax year in which the original statement was due [Section 397(3)(f), Income-tax Act, 2025, effective 1 April 2026]. Statements due in FY 2024-25 (including Q4 of FY 2023-24) can be corrected only up to 31 March 2027. All time limits →
Does this apply to you? Yes, if you deduct TDS (employer, business, firm, company, trust) and TRACES shows a default that you have already paid. What if I ignore it? →
🙂 In Simple Words: Evening Chai Conversations
In this conversation
Evening. The front lawn of Vijay's house in Bengaluru. Vijay sits in his cane chair, staring at his phone. His daughter Hadhya, a CA student, comes out with two cups of tea and sits beside him.
Vijay: Hadhya, see this. The TDS website still says I have a default of ₹6,400. I paid it last month itself! ₹4,000 late fee and ₹2,400 interest. I have the challan receipt right here. Is the Government taking money twice?
Hadhya: No, Appa. The Government has your money. It just doesn't know which return that money belongs to.
Vijay: What do you mean? I paid it against my own TAN.
Hadhya: Think of it like school fees. You go to the bank and pay ₹6,400 into the school's account. The money reaches the school. But the class teacher's register still shows "fees pending", because nobody told her the payment was for your son's Term 2 fees. You have to give the receipt to the office and say, "This is for Term 2." Only then is the register updated.
Vijay: So who is the class teacher here?
Hadhya: TRACES. It checks your quarterly TDS return, not your bank payments. Your default was calculated from the return you filed for, say, the October–December quarter. That return has no mention of the new challan. So TRACES keeps showing the default.
Vijay: Then how do I "tell the office"?
Hadhya: You file a correction return for that same quarter. You do it online on TRACES with your digital signature, because a new challan can't be added through the offline method. In it, you add the new challan and write "₹4,000 is late fee, ₹2,400 is interest" in the correct columns. TRACES re-checks the return, sees the payment and clears the default. This is called tagging the challan.
Vijay: And if I had defaults in three quarters, and paid all in one challan?
Hadhya: Then each quarter needs its own correction, using the right portion of the money. One quarter's correction doesn't fix another quarter's default. Better still, pay separately for each quarter. It keeps things clean.
Vijay: My accountant said, "Just pay it again, it will go away."
Hadhya: Please don't! If you pay again without tagging, you'll have two unused challans and the default will still be there. The fix is paperwork, not more money.
Vijay: Is there a time limit?
Hadhya: Yes, and it's much shorter now. Earlier you had six years. From April 2026, you get only about two years. After that, TRACES won't accept a correction at all, and the default stays on your record. Deadline table →
Vijay: Okay. Finish your tea, then we'll go and see your uncle Krishna tomorrow.
Vijay's 6-point takeaway
1. Paying the challan is only half the job; the other half is the correction return.
2. Correction can be online (TRACES with DSC) or offline (Conso file + RPU), but a new challan can be added only online.
3. The correction must be filed for the same quarter that shows the default.
4. Late fee goes in the "Fee" column and interest in the "Interest" column.
5. Never pay again just because the default is still showing.
6. Corrections now have a two-year window. Act quickly.
📚 Professional Deep-Dive
In this deep-dive
- Which law and which form applies
- Why a paid default keeps showing: the legal mechanism
- Diagnosis: identify the default type before acting
- Two ways to correct: online and offline
- Step-by-step: clearing a paid default
- Time limits: the change that matters most now
- Interest, fee, penalty and prosecution
- Judicial position on the late filing fee
- Deductor's checklist
- References and attachments
1. Which law and which form applies
The Income-tax Act, 1961 was repealed with effect from 1 April 2026 by Section 536 of the Income-tax Act, 2025. For TDS, the governing Act depends on the date of credit or payment, whichever is earlier. If that event is on or before 31 March 2026, the 1961 Act applies. If it is on or after 1 April 2026, the 2025 Act applies (CBDT/Income Tax Department FAQ on TDS Compliance, Q1).
Correction statements for periods governed by the 1961 Act continue to be filed in the old forms (24Q, 26Q, 27Q, 27EQ), even if the correction is filed after 1 April 2026 (same FAQ, Q12). For Tax Year 2026-27 onwards, the quarterly statements are filed under Section 397(3)(b) read with Rule 219 of the Income-tax Rules, 2026:
| Nature | Up to FY 2025-26 (1961 Act) | Tax Year 2026-27 onwards (2025 Act) |
|---|---|---|
| TDS on salary | Form 24Q | Form 138 |
| TDS on resident non-salary payments | Form 26Q | Form 140 |
| TDS on payments to non-residents | Form 27Q | Form 144 |
| TCS | Form 27EQ | Form 143 |
| Challan-cum-statement (property, rent by individuals, 194M-type payments, VDA) | Forms 26QB / 26QC / 26QD / 26QE | Form 141 (common form) |
2. Why a paid default keeps showing: the legal mechanism
Every TDS statement, including a correction statement, is processed by CPC-TDS under Section 200A of the 1961 Act, now Section 399 of the 2025 Act. Under clause (d) of Section 399(1), the sum payable by the deductor is determined after adjusting the interest and fee computed against amounts paid under Sections 397(3), 398 or 427, and any other amount paid as tax, interest or fee.
In practice, CPC-TDS can adjust only against challans that are reported in the statement and matched with OLTAS (the bank-side challan database). A challan paid after the intimation is issued sits in OLTAS as an unconsumed challan. It is not linked to any statement, so processing does not reduce the default. The default is cleared only when a correction statement for that quarter reports the challan, with the amount allocated to the Interest or Fee column. Reprocessing then brings the challan into the Section 399(1)(d) / 200A(1)(d) adjustment.
This is also why the TRACES FAQs direct deductors, after paying the default, to add the challan to the statement using "Online Correction — Add Challan to Statement" and fill the relevant columns.
3. Diagnosis: identify the default type before acting
The Justification Report for the quarter, requested from TRACES and available under both the online and offline correction routes (Section 4), breaks the demand into components. Each component has a different root cause and fix:
| Default in Justification Report | Usual cause | Correct fix |
|---|---|---|
| Short payment | Challan not matched (wrong BSR code, date, serial number or amount in the statement); challan overbooked; challan genuinely short | If the challan exists, correct the challan details or move deductee rows ("Resolution of Overbooked Challan"). If it is genuinely short, pay the difference and tag the new challan. Do not pay again for a mere mismatch. |
| Short deduction | Invalid or missing PAN (higher rate applied), wrong section or payment code, lower-deduction certificate not quoted | Correct the PAN, section or certificate details in a correction. If deduction was genuinely short, pay the difference with interest and update the deductee rows. |
| Interest on late deduction | Date of deduction later than the date of credit or payment | Pay the interest and tag it in the Interest column. Also correct the dates if they were entered wrongly. |
| Interest on late payment | Deposit made after the due date; challan date later than due date | Pay the interest and tag it in the Interest column. |
| Late filing fee | Statement filed after the due date | Pay the fee and tag it in the Fee / Levy column. The fee itself cannot be corrected away because the delay is a fact. |
| Interest on demand (Section 220(2) / Section 411) | Intimated demand not paid within the time allowed | Pay and tag under the "Interest u/s 220" category in online correction. |
4. Two ways to correct: online and offline
A TDS correction statement can be filed in two modes:
Option 1: Online correction (TRACES, with DSC). The correction is made directly on the TRACES deductor login and submitted with a registered Digital Signature Certificate. No utility or file upload is needed.
Option 2: Offline correction (Conso file + RPU). The latest Consolidated (Conso) file is requested from TRACES, the correction is prepared in the Return Preparation Utility (RPU), validated through the File Validation Utility (FVU), and the correction file is uploaded.
Justification Report in both routes. The Justification Report can be requested on TRACES whether you correct online or offline. Use it before correcting, to identify the exact default components (see Section 3), and again after processing, to confirm closure.
Important restriction: no new challan through offline correction. A challan that is not already part of the statement cannot be added through an offline (RPU) correction by a non-government deductor. It must be added through online correction with DSC, using the "Add Challan to Statement" facility. The TRACES FAQs allow government deductors to add a challan through the RPU as well. Once the challan has been added online, any further changes to that statement can be made offline using the latest Conso file.
So, where you have paid a fresh challan for interest, late fee or short payment, online correction is the only route for a non-government deductor. Offline correction suits other errors, such as PAN corrections, deductee row changes, section or payment codes, and adjusting amounts within challans already in the statement.
5. Step-by-step: clearing a paid default
Step 1: Confirm the payment. Check the challan in OLTAS through TRACES or the e-filing portal (Challan Status Inquiry). Note the BSR code, date of deposit, challan serial number, amount and minor head.
Step 2: Check the challan particulars. TRACES FAQs prescribe payment of default amounts through ITNS 281 under minor head 400 (TDS/TCS regular assessment). Also check the year (AY for 1961 Act periods; Tax Year for 2026-27 onwards) and the section. For challans paid online, a wrong financial year, minor head (200/400), major head or section code (except section code 195) can be corrected through the OLTAS Challan Correction facility in the TRACES deductor login.
Step 3: Add the challan through online correction (DSC). In TRACES: Defaults → Request for Correction → select the quarter and form → category "Pay 220I, LP, LD, Interest, Late Filing Levy" → add the challan to the statement → enter the amount in the Interest column (and "Amount claimed as Interest") and/or the Fee / Levy column → submit with DSC.
Step 4: Any further changes (optional, offline). If other errors in the same statement also need fixing after the challan is added, such as PAN, deductee rows or section codes, request the latest Conso file. Prepare the correction in the RPU, validate it through the FVU and upload the correction statement. The offline route cannot add a new challan, so complete Step 3 first.
Step 5: Track and close. Track the correction status on TRACES. After processing, request a fresh Justification Report and confirm the demand is nil. Keep the challan, the correction acknowledgement and both Justification Reports (before and after) on file.
6. Time limits: the change that matters most now
Correction statements. Before 1 April 2025, there was no time limit. The Finance (No. 2) Act, 2024 inserted a proviso to Section 200(3) (and to Section 206C(3B) for TCS), with effect from 1 April 2025. It barred correction statements after six years from the end of the financial year in which the statement was to be delivered.
The Income-tax Act, 2025 reduced this further. Under Section 397(3)(f), effective 1 April 2026, a correction statement may be delivered only within two years from the end of the tax year in which the statement is required to be delivered. This expressly covers statements under Section 200 of the 1961 Act as well. CBDT announced that corrections for Q4 of FY 2018-19, all quarters of FY 2019-20 to FY 2022-23, and Q1 to Q3 of FY 2023-24 could be filed only up to 31 March 2026.
| Statements due during | Quarters covered | Last date for correction |
|---|---|---|
| FY 2024-25 | Q4 of FY 2023-24; Q1 to Q3 of FY 2024-25 | 31 March 2027 |
| FY 2025-26 | Q4 of FY 2024-25; Q1 to Q3 of FY 2025-26 | 31 March 2028 |
| Tax Year 2026-27 | Q4 of FY 2025-26; Q1 to Q3 of Tax Year 2026-27 | 31 March 2029 |
Conflict to note. Several commentaries still quote the six-year limit under the Finance (No. 2) Act, 2024. That limit applied only from 1 April 2025 to 31 March 2026 and has been overridden by Section 397(3)(f). Any advice based on six years is now outdated. For the 31 March 2026 cut-off, see our earlier article Last Chance to Correct TDS Returns.
Processing intimation. An intimation under Section 399 (earlier Section 200A) must be sent within one year from the end of the tax year in which the statement is filed [Section 399(2)].
Assessee-in-default orders. Under Section 398(5), such an order cannot be passed after the later of (i) six years from the end of the tax year in which tax was deductible or collectible, or (ii) two years from the end of the tax year in which the correction statement is delivered. Note that filing a correction statement can therefore extend the Department's window to pass an order.
7. Interest, fee, penalty and prosecution
| Consequence | Income-tax Act, 1961 | Income-tax Act, 2025 (from 1 April 2026) | Quantum |
|---|---|---|---|
| Interest: failure to deduct | Section 201(1A)(i) | Section 398(3)(a)(i) | 1% per month or part, from the date deductible to the date of deduction |
| Interest: failure to deposit after deduction | Section 201(1A)(ii) | Section 398(3)(a)(ii) | 1.5% per month or part, from the date of deduction to the date of payment |
| Late filing fee | Section 234E | Section 427 | ₹200 per day, capped at the TDS amount; payable before filing the statement |
| Penalty: non-filing or incorrect statement | Section 271H | Section 461 | ₹10,000 to ₹1,00,000. No penalty for delay if tax, fee and interest are paid and the statement is filed within one month of the due date [Section 271H(3), period reduced from one year to one month by the Finance (No. 2) Act, 2024 w.e.f. 1 April 2025]. The relief does not cover an incorrect statement. |
| Penalty: failure to deduct | Section 271C | Section 448 | Equal to the tax not deducted or paid |
| Disallowance of expense | Section 40(a)(ia) | Section 35(b)(i) | 30% of the sum paid to a resident, where TDS was not deducted or not deposited by the due date of the return |
| Interest on unpaid demand | Section 220(2) | Section 411 | 1% per month |
| Delay in issuing TDS certificate | Section 272A(2)(g) | — | ₹100 per day, capped at the tax deductible (FY 2025-26 certificates remain under the 1961 Act) |
| Prosecution: tax deducted but not deposited | Section 276B | Section 476 | Rigorous imprisonment from 3 months to 7 years, with fine. No prosecution where the tax is deposited on or before the due date for filing the TDS statement of that quarter. |
Once a default has been intimated, paying it without tagging does not stop recovery follow-up. TRACES and CPC-TDS reminders, adjustment against refunds, and interest on the outstanding demand continue on the basis of the recorded default until the correction is processed. For older defaults that can no longer be corrected, see How to Resolve TDS Outstanding Defaults After 31st March 2026.
8. Judicial position on the late filing fee
In Fatheraj Singhvi v. Union of India (Karnataka High Court, Division Bench, Writ Appeal Nos. 2648–2653 of 2015 and connected matters; reported at 142 DTR 281 (Kar)), the Court upheld the constitutional validity of Section 234E. It also held that the power to compute and demand the fee through a Section 200A intimation arose only from 1 June 2015. Therefore, 200A intimations levying the fee for periods before that date were without authority of law. Deductors who had already paid without protest could not reopen the issue.
Conflicting view: In Rajesh Kourani v. Union of India (Gujarat High Court, 20 June 2017), the Court expressly disagreed with the Karnataka view. It held that the fee was leviable under Section 234E even before 1 June 2015. Deductors in Karnataka are bound by Fatheraj Singhvi. Elsewhere, the position depends on the jurisdictional High Court.
Practical relevance today: This controversy concerns only periods before 1 June 2015, which are now well outside the correction window. For current periods, the fee is correctly leviable through processing, and the only remedy against a wrong computation is appeal (Section 246A of the 1961 Act, before the Commissioner (Appeals)) or rectification.
9. Deductor's checklist
1. Pay each quarter's default through a separate challan under minor head 400, with the correct AY or Tax Year.
2. Before paying, check whether the "default" is merely a challan mismatch. If it is, correct the statement instead of paying.
3. File the correction for the same quarter and same form that carries the default. Use old forms for 1961 Act periods. A fresh challan can be added only through online correction with DSC, not offline.
4. Allocate the challan correctly: Fee column for late fee, Interest column for interest. An amount left in the "Others" field does not close a fee or interest default.
5. Request the Justification Report before and after correction, and keep both on file.
6. Diarise 31 March 2027 as the last date to correct statements due in FY 2024-25.
7. For Tax Year 2026-27 statements, use the new section and payment codes under Section 393. The Department's FAQ confirms that quoting old section numbers (e.g. 194C) will need a correction statement.
10. References and attachments
Income-tax Act, 2025: Sections 393, 397(3)(b), 397(3)(f), 398, 399, 427 and 536.
Income-tax Act, 1961: Sections 200(3) with proviso (inserted by the Finance (No. 2) Act, 2024 w.e.f. 1-4-2025), 200A, 201(1A), 234E, 271H and 276B.
Income-tax Rules, 2026: Rule 219; Forms 138, 140, 141, 143 and 144.
Finance (No. 2) Act, 2024: amendments to Sections 200(3), 206C(3B), 271H(3) and 276B.
Income Tax Department: TDS Compliance FAQs (Income-tax Act, 2025)
Income Tax Department: Tax Payments FAQs
TRACES FAQ: Late Payment default
TRACES FAQ: Late Filing fee default
TRACES FAQ: Challan correction
Frequently Asked Questions
I paid the TDS default. Why does TRACES still show it?
TRACES computes defaults from your TDS statement. The new challan is not reported in that statement, so it is not adjusted. File a correction for the same quarter through TRACES online correction with DSC (a new challan cannot be added offline), adding the challan and filling the Interest or Fee column.
Should I pay the default again?
No. Paying again creates another unconsumed challan and does not clear the default. Tag the challan you have already paid.
Which minor head should be used to pay a TDS default?
TRACES FAQs prescribe ITNS 281 under minor head 400 (TDS/TCS regular assessment). A wrong minor head on an online challan can be corrected through OLTAS challan correction on TRACES.
What is the time limit for filing a TDS correction statement?
Under Section 397(3)(f) of the Income-tax Act, 2025, effective 1 April 2026, within two years from the end of the tax year in which the original statement was required to be delivered. This applies to 1961 Act statements as well.
Can one challan clear defaults of several quarters?
A challan can be used across statements only up to its available balance, and each quarter needs its own correction. Separate challans per quarter avoid overbooking and mismatch.
This article is for general information and is based on the law as on 28 September 2026. It is not professional advice for any specific case. Portal functionality on TRACES changes frequently; verify the current screens before filing.
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