What is this notice?
After you file a TDS return (Form 26Q / new Form 140), the Centralised Processing Centre (CPC-TDS) at Ghaziabad processes it and sends an intimation under Section 399. This is not a demand or allegation — it is an automated computational result showing the difference between what you declared in your TDS return and what CPC-TDS has calculated.
You will receive this as a computer-generated intimation showing any tax payable, interest payable under Section 398, or refund due. It is sent to your registered email and is available on TRACES.
Common reasons you receive a Section 399 intimation
- Short deduction — TDS deducted at a lower rate than applicable (e.g., 2% instead of 10%)
- Short payment — TDS deducted but deposited late, causing an interest mismatch
- Wrong PAN — Deductee PAN does not match income tax database; TDS treated as unmatched
- Challan mismatch — TDS amount paid does not match the challan details reported in the return
- Incorrect section code — Old section numbers used instead of new payment codes post April 2026
- TDS on wrong amount — Tax deducted on net amount rather than gross amount
What does the intimation contain?
The intimation tabulates: (1) amount of TDS as per return filed by you; (2) amount computed by CPC-TDS including any adjustments for fee, interest, or arithmetic errors; and (3) the resultant tax payable or refund.
Step-by-step response
This is a formal demand notice. Section 398 declares you an "assessee in default" for failure to deduct TDS, short deduction, or failure to deposit deducted TDS to the government. It carries both the principal demand and mandatory interest.
What triggers a Section 398 order?
- Failure to deduct TDS at all on a payment where TDS was legally required
- Short deduction — deducting at a lower rate (e.g., treating a vendor as an individual when it is a company)
- Failure to deposit the TDS deducted to the government treasury within the due date
- TDS deducted but reported incorrectly and the AO has determined that the deductee did not include the income in their return
Interest under Section 398
| Default | Interest Rate | Period |
|---|---|---|
| Failure to deduct TDS (non-deduction) | 1% per month (or part) | From date on which TDS was deductible to date of actual deduction |
| Deducted but not deposited to government | 1.5% per month (or part) | From date of deduction to date of actual payment to government |
Note: If the deductee has already declared the income in their ITR and paid tax thereon, the deductor can apply for a nil/lower deduction certificate or furnish proof to the AO that tax has been paid by the deductee. In such cases, the AO may not hold the deductor in default for non-deduction (only interest under the 1% limb may still apply).
Time limit for Section 398 proceedings
The Assessing Officer can pass an order under Section 398 within 7 years from the end of the financial year in which the TDS return for the relevant period was due to be filed. This long limitation period means old TDS defaults can be reopened years later.
Step-by-step response
What is Section 427 fee?
Section 427 imposes a mandatory fee of ₹200 per day for every day the TDS/TCS return remains unfiled after the due date. This fee accrues automatically — it is not a penalty at the AO's discretion, but a statutory fee baked into the processing of your return. It appears in your Section 399 intimation as a line item.
| Parameter | Details |
|---|---|
| Fee amount | ₹200 per day of delay |
| Maximum cap | Total fee cannot exceed the total TDS amount reportable in the return |
| Period of levy | From the day after the TDS return due date until the date of filing |
| Included in | Section 399 processing intimation (included in demand automatically) |
TDS Return Due Dates (for reference)
| Quarter | Period | Due Date (Form 26Q / Form 140) |
|---|---|---|
| Q1 | April – June | 31 July |
| Q2 | July – September | 31 October |
| Q3 | October – December | 31 January |
| Q4 | January – March | 31 May |
Can Section 427 fee be waived?
Unlike interest under Section 398, the Section 427 fee was held to be mandatory and not waivable by the Supreme Court in its ruling (arising from various High Court challenges under old S. 234E). However, the fee is capped at the TDS amount, so a zero-TDS return filed late would attract a capped fee.
The only practical remedy is to file the TDS return immediately to stop the fee clock, then verify that the computed fee in the Section 399 intimation is arithmetically correct.
What is Section 448 penalty?
Section 448 is a penalty provision — distinct from interest (Section 398). It empowers the Joint Commissioner of Income Tax to levy a penalty equal to the amount of TDS that was not deducted or not paid. This is over and above the TDS demand and interest.
| Default | Penalty Amount |
|---|---|
| Failure to deduct TDS entirely | Amount equal to the TDS not deducted |
| Failure to deposit deducted TDS to government | Amount equal to the TDS not deposited |
Key Supreme Court position (Hindustan Coca Cola Beverages): The Supreme Court, in the context of old Section 271C, held that where the deductee has paid tax on the income in question, a penalty on the deductor for non-deduction may not be warranted. However, interest under Section 398 would still apply. This principle is likely to continue under IT Act 2025.
How Section 448 penalty proceedings begin
The AO first passes an order under Section 398 declaring you in default. After that, a separate notice for penalty under Section 448 is issued by the Joint Commissioner. You get a show-cause notice asking why penalty should not be imposed. You have an opportunity to explain before the penalty is confirmed.
What you can do on TRACES as a Deductor
- View & download Section 399 intimations — all years, all quarters
- Justification Report — download detailed row-wise reasons for discrepancies identified by CPC-TDS
- Correction statements — file C1 (PAN corrections), C2 (challan corrections), C3 (deductee corrections), C5 (amount corrections)
- TDS certificates — generate Form 16 / 16A for deductees
- Challan status — verify whether your ITNS 281 payment has been matched
- Lower/Nil deduction certificates — check validity of Form 15G/15H submitted by deductees
- Online grievance — raise disputes regarding demands, unmatched challans, or incorrect processing
Most common TRACES demands and their fixes
| Demand Type | Common Cause | Fix |
|---|---|---|
| Challan mismatch demand | Wrong BSR code, challan no., or amount entered in TDS return | File C2 correction to rectify challan details |
| PAN mismatch demand | Incorrect PAN of deductee entered in return | File C1 correction to update deductee PAN |
| Short deduction demand | TDS rate applied was lower than mandated rate | Pay shortfall via ITNS 281 + file correction return |
| Late payment interest demand | TDS deposited after 7th of following month | Pay interest @ 1.5%/month; demand is generally not contestable |
| Section 427 fee demand | TDS return filed after due date | Verify computation (days × ₹200, capped at TDS amount); pay if correct |
TDS Notice Sections — Old vs. New
With the IT Act 2025 in force from 1 April 2026, all section numbers in TDS notices have changed. Use this table when reading older notices or correspondence.
| Old Section (IT Act 1961) | New Section (IT Act 2025) | Subject |
|---|---|---|
| Section 200A | Section 399 | Processing of TDS return / Intimation |
| Section 201 / 201(1A) | Section 398 | Consequences of failure — default order + interest |
| Section 234E | Section 427 | Fee for late filing of TDS return (₹200/day) |
| Section 271C | Section 448 | Penalty for failure to deduct TDS |
| Section 276B | Section 476 | Prosecution for failure to pay TDS to government |
| Section 206AA | (Equivalent in Ch. XIX) | Higher rate for no-PAN/Aadhaar (20% or higher) |
| Section 206AB | — Omitted — | Higher rate for non-filers (omitted from 1 April 2025) |
| Section 192 | Section 392 | TDS on Salary |
| Sections 193–194T | Section 393 | TDS on all non-salary payments to residents |
| Section 195 | Section 393(2) | TDS on payments to non-residents |
| Section 206C | Section 394 | Tax Collected at Source (TCS) |
| Section 246A (appeal to CIT-A) | Section 357 | Appeal against TDS orders |
→ View complete Old vs. New section mapping for all provisions