‘Taxpayers paying twice...’: Expert flags TDS credit anomalies under new Income Tax Act

The landmark Income-tax Act, 2025, which replaced the six-decade-old 1961 law, promised simplicity by eliminating provisos and explanations. But according to O.P. Yadav, former Principal Commissioner of Income Tax and noted tax evangelist, outdated procedural rules—especially those governing TDS—are threatening to undo these gains.

Yadav argued that while the new Act makes the substantive law clearer, the Income-tax Rules continue to impose “avoidable compliance hurdles and financial stress” on honest taxpayers. He pointed in particular to TDS credit mismatches, overlapping TDS and TCS on NRI property transactions, and cumbersome filing procedures that have persisted despite legislative reforms.

“Taxpayers continue to be denied TDS credit because of deductor defaults. The law clearly says that once tax is deducted, it cannot be collected again from the deductee. But the Rules often operate in contradiction,” Yadav wrote in a column.

TDS credit

Section 401 of the new law (earlier Section 205) provides that once tax is deducted at source, the government cannot recover it again from the taxpayer. Similarly, Section 391 (earlier Section 191) limits the taxpayer’s liability to the extent tax has not been deducted.

However, Rule 37BA still allows TDS credit only when the deducted tax is actually deposited by the deductor. This means that if the deductor fails to deposit or misreports, the taxpayer is denied credit, refunds are withheld, and demands are raised—even though the law requires the government to recover from the deductor," Yadav explained. 

“This contradiction leaves genuine taxpayers trapped between the law and the Rules. They often end up paying tax twice, or waiting months for refunds. The Rules need to be aligned with the spirit of Sections 391 and 401,” Yadav observed.

He suggested introducing a new rule to allow credit based on evidence like payslips or Form 16/16A when the deductor fails to deposit TDS. This, he argued, would offer immediate relief and restore fairness.

NRI property sales

Another major issue Yadav highlighted is the overlapping application of TDS and TCS in NRI property sale transactions. Under Section 393(2), buyers must deduct TDS at 12.5% on the gross sale consideration. Later, when the NRI remits sale proceeds abroad, banks may levy TCS at 20% on the remittance exceeding ₹10 lakh.

“The same transaction can attract TCS or not, depending entirely on the mode of payment,” Yadav explained.

He illustrated this with a residential property sale of ₹1 crore. If payment is made into an NRO account, TDS plus TCS collections can amount to ₹28 lakh—about 3.5 times the actual tax liability. If the buyer pays directly in foreign currency, the collection is ₹12.5 lakh, or double the liability. In both cases, NRIs must later claim refunds, leading to significant funds being blocked.

Yadav suggested that the government use its powers under Section 400(1) to notify that no TCS should apply where TDS has already been deducted. Alternatively, he proposed inserting a new sub-section in Section 394 to exempt such transactions explicitly.

Procedural delays

Yadav also flagged delays in TDS/TCS deposits due to the current seven-day remittance window. He recommended mandating same-day or next-day online deposits to ensure timely credit and reduce defaults.

Further, he called for replacing quarterly TDS/TCS statements with a universal Challan-cum-statement system to reduce penalties, errors, and credit delays.

Finally, he criticised the continued requirement for CA certificates to relieve deductors under Section 398, despite the department having digital access to ITRs.

“In an era of real-time data, insisting on manual certificates is unnecessary. System-based verification of ITRs should be the norm, with CA certification required only in exceptional cases,” he argued.

Yadav cautioned that unless these procedural rules are modernised, the benefits of the New Income-tax Act risk being overshadowed by compliance bottlenecks—especially for taxpayers awaiting TDS credit.