TDS deducted from salary but missing in Form 26AS? What the law says about your tax liability

If your salary slip shows Tax Deducted at Source (TDS) but the amount is missing from your Form 26AS, you could end up receiving a tax demand notice despite having paid the tax through your employer. However, tax experts say the Income Tax Act and CBDT instructions protect salaried employees from being held liable for an employer's failure to deposit TDS.

A mismatch between the TDS shown on salary slips and the amount reflected in Form 26AS is one of the issues salaried taxpayers should watch out for before filing their Income Tax Return (ITR) for FY 2025-26 (AY 2026-27).

The issue has come into focus following a case involving thousands of former Byju's employees. Tax expert and Tax Buddy founder Sujit Bangar highlighted on social media that around 23,621 employees allegedly faced situations where TDS had been deducted from their salaries but was not deposited with the government by the employer, resulting in tax demands from the Centralised Processing Centre (CPC).

What does the law say?

According to Section 205 of the Income Tax Act, once tax has been deducted at source from an employee's salary, the employee cannot be asked to pay that tax again.

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The provision effectively shifts the responsibility for depositing the deducted tax to the employer. If the employer fails to deposit the TDS with the government, the liability remains with the employer and not the employee.

Bangar noted that this legal protection ensures salaried taxpayers cannot be penalised for an employer's default.

CBDT instructions back taxpayers

The Central Board of Direct Taxes (CBDT) has also issued instructions supporting this position.

CBDT Instruction No. 275/29/2014-IT(B), dated June 1, 2015, states that tax demands arising solely because of a mismatch in TDS credit should not be enforced against employees where tax has already been deducted from their salaries.

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The instruction also clarifies that deduction of tax from salary is deemed payment of tax by the employee.

In addition, a CBDT Office Memorandum issued in 2016 reiterates that no recovery should be made from an employee merely because the employer failed to deposit the deducted TDS. According to Bangar, taxpayers should cite both the CBDT instruction and the Office Memorandum while responding to tax notices.

Tribunal ruling offers relief

Bangar also referred to an Income Tax Appellate Tribunal (ITAT) ruling involving a taxpayer identified as Ajay, where the tribunal granted full TDS credit and deleted the tax demand.

The ITAT relied on the Gauhati High Court's judgment in Om Prakash Gattani vs CIT, which held that an employer's failure to deposit TDS cannot be transferred to the employee.

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What taxpayers should do

Experts advise salaried taxpayers to compare the TDS shown in all monthly salary slips with Form 26AS before filing their ITR.

If there is a mismatch because the employer failed to deposit the deducted tax, taxpayers may still claim the full TDS credit based on their salary slips, while retaining supporting documents such as salary slips, Form 16, appointment letter and bank statements showing salary credits.

If CPC subsequently raises a tax demand, taxpayers can file a rectification application under Section 154 of the Income Tax Act, enclosing documentary evidence and citing Section 205, CBDT Instruction No. 275/29/2014, the 2016 Office Memorandum and the relevant judicial precedents.

Tax professionals, however, advise taxpayers to seek professional guidance where facts are disputed or documentation is incomplete.

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