Section 40(a)(ia) 30% Expenditure Disallowance for Non-Deduction of TDS: Form 26A Relief

A business that pays a contractor, professional, or vendor without deducting the applicable TDS doesn't just risk a TDS demand and interest — it can lose the tax deduction for the underlying expense itself, inflating its taxable profit. Section 40(a)(ia) of the Income Tax Act, 1961 (the law currently governing FY 2025-26/AY 2026-27 filings; the Income Tax Act, 2025 applies to income earned from Tax Year 2026-27 onward, 1 April 2026, and carries the equivalent disallowance provision under its own renumbered structure) is the mechanism that enforces this.

1. What Section 40(a)(ia) Actually Says

Where an assessee is liable to deduct TDS on a payment covered under Chapter XVII-B (contractor payments under Section 194C, professional/technical fees under 194J, commission/brokerage under 194H, rent under 194-I, and several other categories) and either:

• Fails to deduct TDS altogether, or
• Deducts TDS but fails to deposit it with the government by the due date for filing the income tax return,

then 30% of the amount of such expenditure is disallowed while computing business income — meaning 30% of that payment is added back to taxable profit, even though the payment itself was genuine and business-related.

Note on the 30% (Not 100%) Rule: Since the Finance Act 2015 amendment, the disallowance for non-deduction/non-deposit of TDS on domestic payments is capped at 30% of the expenditure, not the full 100% that applied under the pre-2015 provision. The 100% disallowance still applies to payments made to non-residents where TDS under Section 195 was not deducted — this distinction is frequently missed and materially changes the exposure calculation.

2. The Relief Mechanism: Second Proviso and Form 26A

The law recognises that disallowing the expense entirely (or even 30% of it) is a harsh, disproportionate consequence where the recipient has, independently, already paid tax on that income through their own return. The second proviso to Section 40(a)(ia) (read with the analogous proviso to Section 201(1)) provides that the payer is deemed not to be in default — and the disallowance does not apply — if the recipient (payee):

1. Has furnished their return of income under Section 139,
2. Has taken the relevant payment into account in computing their income in that return,
3. Has paid the tax due on the income declared in that return, and
4. Furnishes a certificate to this effect from a practicing Chartered Accountant in Form No. 26A.

Form 26A is filed electronically by the payee's Chartered Accountant, certifying the above four conditions with supporting computation. Once accepted, the payer's expenditure is treated as if TDS compliance was met, and the 30% disallowance is reversed.

3. Step-by-Step: Claiming Form 26A Relief

1. Identify the specific payments where TDS was either not deducted or not deposited on time, and quantify the 30% disallowance exposure for tax audit (Form 3CD, Clause 21) reporting purposes.
2. Approach the recipient(s) to confirm whether they have already included the payment in their own filed income tax return and paid tax on it — this is a factual verification the payer cannot assume; it must be obtained from the payee.
3. Engage a Chartered Accountant to prepare and file Form 26A on the income tax portal on behalf of the payee, certifying the four conditions with reference to the payee's actual filed return and tax payment.
4. Retain the accepted Form 26A acknowledgment as the payer's supporting documentation — this is the evidence that should be produced if the disallowance is questioned during assessment or scrutiny.
5. Report correctly in Form 3CD: The tax auditor reporting under Clause 21(a)/(b) of Form 3CD should reflect the disallowance position net of any Form 26A relief actually obtained and verifiable at the time of audit — claiming relief in the return without the underlying Form 26A in place is a common ground for disallowance being upheld at assessment.

4. Where Form 26A Relief Is Not Available

• Payments to non-residents without TDS under Section 195 attract 100% disallowance under Section 40(a)(i), and the Form 26A relief mechanism (designed for domestic Chapter XVII-B defaults) does not apply in the same way — non-resident TDS defaults require a different remedial route, typically involving the payee filing a return in India (where feasible) or the payer regularising the TDS default directly with interest.
• Where the payee has not actually filed a return or paid tax on the relevant income, no Form 26A certificate can validly be issued — a CA cannot certify conditions that are not factually true, and doing so exposes both the CA and the payer to serious consequences if discovered during assessment.
• The disallowance itself does not eliminate the underlying TDS default — Form 26A relief addresses the expenditure disallowance consequence for the payer; it does not retrospectively cure the payer's separate liability for interest under Section 201(1A) for the period the TDS remained undeducted/undeposited, nor does it prevent a Section 271C penalty proceeding for the TDS default itself.

5. Practical Prevention

The far cheaper alternative to navigating Form 26A relief after the fact is preventing the default in the first place: maintaining a TDS applicability matrix mapped to vendor categories (contractor, professional, rent, commission), reviewing new vendor onboarding for TDS section applicability before the first payment, and reconciling TDS deducted-versus-deposited monthly rather than only discovering gaps at year-end during tax audit preparation.

Related Advisory Services & Practice Guides

• Access expert statutory assistance for TDS return filing with our senior Chartered Accountants.
• Access expert statutory assistance for Tax audit services with our senior Chartered Accountants.