CBDT FAQ Deep-Dive #12: Section 40(a)(ia) TDS Disallowance Before the September 30, 2026 Tax Audit and the Move to Section 35(b) of the Income-tax Act 2025

The Section 40(a)(ia) disallowance is one of the most common and most avoidable adjustments a tax auditor flags before the 30 September 2026 tax audit deadline. If your company deducted tax at source late, deducted under the wrong provision, or did not deduct at all on a payment to a resident, Section 40(a)(ia) disallows 30 per cent of that expense in the year of default. This CBDT FAQ Deep-Dive, the twelfth in our Income-tax Act 2025 transition series, explains exactly how the disallowance works for the current audit under the 1961 Act, and how the same rule carries forward, largely unchanged in effect, into Section 35(b) of the Income-tax Act 2025 from 1 April 2026. It sits alongside our companion pieces on Section 43B actual-payment deductions (FAQ Deep-Dive #7) and bad-debts write-off (FAQ Deep-Dive #11).

Period note: the tax audit you are finalising now is for FY 2025-26 (AY 2026-27). The operative statute for that year is the Income-tax Act 1961. The Income-tax Act 2025 governs FY 2026-27 onward. Both are covered below, clearly labelled, so you cite the right law for the right year.

Quick Summary: Key Takeaways

Section 40(a)(ia) of the 1961 Act disallows 30 per cent of any sum payable to a resident where tax was deductible at source under Chapter XVII-B and was either not deducted, or deducted but not paid on or before the due date for filing the return under Section 139(1).
Section 40(a)(i) deals with payments to non-residents (interest, royalty, fees for technical services and other chargeable sums): the disallowance there is 100 per cent, not 30 per cent.
The disallowed 30 per cent is allowed back in the later year in which the TDS is finally deducted and paid.
A second proviso saves you from disallowance if the resident payee has itself filed its return, included the sum, and paid tax on it. You certify this through a Chartered Accountant in Form 26A.
From 1 April 2026 the rule moves to Section 35(b) of the Income-tax Act 2025: 30 per cent for resident payments, full disallowance for non-resident and foreign-company payments, with the return due date now in Section 263(1) and TDS in Chapter XIX-B.

What Does Section 40(a)(ia) Actually Disallow?

Section 40(a)(ia) of the Income-tax Act 1961 reads that the following shall not be deducted in computing business income:

“thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139.”

Read that carefully, because three separate triggers are packed into one sentence:

Non-deduction: you were required to deduct TDS on a payment to a resident and did not deduct at all.
Short deduction is only a partial trigger: the courts have read the section as biting on the amount on which tax “has not been deducted”, so a genuine short deduction leads to disallowance only on the proportion not covered, not the whole invoice. Full non-deduction, by contrast, exposes 30 per cent of the entire sum.
Deducted but not paid in time: you deducted correctly but did not deposit the TDS with the Government on or before your Section 139(1) return-filing due date. This is the trap that catches otherwise-compliant companies at year end.

The consequence is a flat 30 per cent add-back of that expense to your taxable profit for FY 2025-26. On a Rs 50 lakh contractor bill where TDS was missed, that is Rs 15 lakh added to income, and tax on it.

Section 40(a)(i): The 100 Per Cent Rule for Non-Resident Payments

Payments outside India or to a non-resident are treated far more harshly. Section 40(a)(i) covers “any interest, royalty, fees for technical services or other sum chargeable under this Act” paid to a non-resident (or paid outside India) where TDS under Chapter XVII-B was not deducted or, after deduction, not paid by the Section 139(1) due date. Here the disallowance is the entire 100 per cent of the sum, not 30 per cent.

This asymmetry matters at audit: a missed TDS on a Rs 20 lakh payment to an Indian vendor costs you a Rs 6 lakh add-back, but the same miss on a Rs 20 lakh payment to a foreign software or consultancy vendor costs you the full Rs 20 lakh. Non-resident payments deserve the closest scrutiny in your Form 3CD reconciliation.

The Two Provisos That Can Save You

First proviso: the disallowance is not permanent

The section itself provides that where the tax is deducted in a subsequent year, or was deducted during the year but paid after the return due date, “thirty per cent of such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.” So the 30 per cent is deferred, not lost forever. If you deposit the missed TDS in FY 2026-27, you claim that 30 per cent as a deduction in FY 2026-27.

Second proviso: the Form 26A escape

The second proviso is the one practitioners most often overlook. It says that where an assessee fails to deduct TDS but is not deemed to be an assessee in default under the first proviso to Section 201(1), then it is deemed that the assessee deducted and paid the tax on the date the payee furnished its return of income. In plain terms: if your resident vendor has filed its return, offered the payment as income, and paid tax on it, you are not treated as in default and Section 40(a)(ia) does not disallow the expense. You establish this by obtaining a certificate from a Chartered Accountant in Form 26A and furnishing it electronically. Getting Form 26A in place before you finalise the audit can rescue an otherwise-disallowable expense.

How Section 40(a)(ia) Shows Up in Your Tax Audit

In Form 3CD, non-deduction and late-payment of TDS are reported under Clause 21(b), which requires a payment-wise disclosure of amounts inadmissible under Section 40(a). The tax auditor is expected to reconcile the TDS returns (Forms 26Q and 27Q) against the expense ledger and report every sum where tax was not deducted, was short-deducted, or was deducted but deposited after the Section 139(1) due date. This is precisely the reconciliation to run now, in September, not in the last week before 30 September. For a full clause-by-clause walkthrough of the Form 3CD hot spots, see our FY 2025-26 tax audit sprint under Section 44AB.

The Move to Section 35(b) of the Income-tax Act 2025

From 1 April 2026 (FY 2026-27 onward) the disallowance sits in Section 35 of the Income-tax Act 2025, titled “Amounts not deductible in certain circumstances.” The operative language of Section 35(b) reads:

“30% of any sum payable to a resident, on which tax is deductible at source under Chapter XIX-B and during the tax year, such tax has not been deducted or, after deduction, has not been paid up to the due date specified in section 263(1).”

The substance is the same 30 per cent rule you know from Section 40(a)(ia), with three drafting changes to note: the TDS chapter is now Chapter XIX-B (not XVII-B), the return-filing due date is now in Section 263(1) (the successor to Section 139(1)), and the Act now uses “tax year” instead of “previous year.” Section 35(b)(ii) carries forward the non-resident and foreign-company rule (the successor to Section 40(a)(i)), and Section 35(c) preserves the disallowance for salary paid outside India or to a non-resident without TDS.

A numbering warning: do not confuse the two Section 35s

This is a genuine transition trap. Under the 1961 Act, Section 35 was the scientific-research and R&D deduction, and that provision moves to Section 45 of the 2025 Act (covered in our FAQ Deep-Dive #8). Under the 2025 Act, Section 35 is instead “Amounts not deductible,” the successor to the old Section 40. So “Section 35” means R&D in the old law and TDS disallowance in the new law. Always state the Act.

Old-to-new mapping table

Concept	Income-tax Act 1961	Income-tax Act 2025
30% disallowance, resident payment, TDS default	Section 40(a)(ia)	Section 35(b)(i)
100% disallowance, non-resident / foreign company	Section 40(a)(i)	Section 35(b)(ii)
Salary paid abroad without TDS	Section 40(a)(iii)	Section 35(c)
TDS chapter	Chapter XVII-B	Chapter XIX-B
Return-filing due date reference	Section 139(1)	Section 263(1)
Assessee-in-default relief	First proviso to Section 201(1)	Corresponding provision in Chapter XIX-B

Compliance Checklist Before 30 September 2026

Reconcile every expense head that attracts TDS against Forms 26Q and 27Q for all four quarters of FY 2025-26.
Flag any payment where TDS was not deducted, short-deducted, or deducted but deposited after your Section 139(1) due date.
For resident payments in default, quantify the 30 per cent add-back for Clause 21(b) of Form 3CD.
For non-resident payments, quantify the 100 per cent add-back and check tax-treaty rates and any lower-deduction certificate under Section 197.
Where a resident vendor has already paid tax on the sum, obtain and e-file Form 26A to invoke the second-proviso relief.
Deposit any still-pending TDS now, so the deferred 30 per cent becomes claimable in FY 2026-27 under the first proviso.
Document your position in the audit file, because Clause 21(b) disclosures are a standard scrutiny trigger.

Frequently Asked Questions

Is the disallowance under Section 40(a)(ia) 30 per cent or 100 per cent?

For payments to a resident, it is 30 per cent of the sum. For payments to a non-resident or paid outside India, Section 40(a)(i) disallows 100 per cent of the sum.

Does late payment of TDS trigger Section 40(a)(ia) even if I deducted correctly?

Yes. If you deducted the tax but paid it to the Government after your Section 139(1) return-filing due date, 30 per cent of that expense is disallowed for the year. It is allowed back in the year you actually pay.

What is Form 26A and how does it help?

Form 26A is a Chartered Accountant certificate confirming that your resident payee has filed its return, included the payment as income, and paid the tax due. Filing it invokes the second proviso to Section 40(a)(ia), so you are not treated as in default and the expense is not disallowed.

Which section replaces Section 40(a)(ia) under the Income-tax Act 2025?

Section 35(b)(i) of the Income-tax Act 2025 carries the 30 per cent resident-payment rule from 1 April 2026, with the return due date now referenced in Section 263(1) and TDS in Chapter XIX-B. Do not confuse it with the old Section 35 (R&D), which moves to Section 45.

If I miss the deduction now, can I still claim the expense later?

Yes, partly. The disallowed 30 per cent is allowed as a deduction in the later year in which you finally deduct and pay the TDS, under the first proviso. The tax cost is the deferral, not a permanent loss.

Talk to an Expert

A single missed TDS deposit can add lakhs to your taxable income right before the audit. If you want your FY 2025-26 TDS reconciliation and Form 3CD Clause 21(b) position reviewed by experienced professionals before 30 September, schedule a strategy session with Tax Update India. We help founders and finance teams close the gaps before the auditor finds them.

Disclaimer: This article is for general information only and is not legal, tax or professional advice. Statutory provisions are cited period-aware: the Income-tax Act 1961 for FY 2025-26 (AY 2026-27) and the Income-tax Act 2025 for FY 2026-27 onward. Verify every citation against the primary source and consult a qualified professional before acting on any position. Reviewed by experienced tax professionals at Tax Update India.

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CA Adityavikram Banka

Founder & Director at A S Banka Advisors Private Limited

The author is Founder of A. S. Banka Advisors Private Limited & Partner at Dhiraj & Dheeraj.

You can reach out to the author on : info@asbanka.com

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