Published 19 October 2026
The usual first sign of a TDS problem is an intimation from the Centralised Processing Cell (TDS) demanding a sum the deductor does not recognise. Sometimes it is a deductee complaining that his credit is missing from the annual statement. Both trace back to the same cause: the quarterly statement does not match the challans, the PANs or the law. This guide explains how statements are processed, what each default means, how to find its cause in the justification report, and how a correction statement fixes it. It also covers the new, much shorter time limit for corrections.
Which Act applies
Processing was governed by section 200A of the 1961 Act, and corrections by the first proviso to section 200(3), for statements under that Act. From 1 April 2026, processing is under section 399 and corrections are under section 397(3)(f) of the 2025 Act. Section 397(3)(f) applies expressly to statements delivered under the 2025 Act “or under section 200 of the Income-tax Act, 1961”. TRACES now keeps the two apart. Its October 2026 notice says challan correction for tax year 2026-27 is available directly, while corrections for “earlier financial years (up to FY 2025-26)” are made under its “Compliance under the Income-tax Act, 1961” area.
How a statement is processed
Section 399(1) sets out the steps:
- the sums deductible are computed after adjusting “any arithmetical error in the statement” or “an incorrect claim apparent from any information in the statement”;
- interest is computed on the sums deductible as reflected in the statement;
- the fee is computed under section 427;
- the result is set off against amounts already paid, and an intimation of the sum payable or refundable is sent.
Section 402(3) defines an “incorrect claim apparent” as a claim, on the basis of an entry in the statement, either inconsistent with another entry in it, or “in respect of rate of deduction of tax at source or rate of collection of tax at source, where such rate is not as per the provisions of the Act”. The Explanation to section 200A(1) of the 1961 Act was to the same effect. The intimation must issue within one year from the end of the tax year in which the statement is filed (section 399(2)).
The common defaults and what lies behind them
Each default below follows from a step in that computation.
| Default | What the system has found | Usual cause |
|---|---|---|
| Short payment | Tax shown against deductees exceeds the challans matched to the statement | Challan details mistyped (BSR code, date, serial number, amount); challan paid under the wrong year, section code or minor head; one challan used beyond its balance |
| Short deduction | Tax deducted is below what the stated rate or the higher rate requires | Wrong section or rate; no valid PAN, triggering 20 per cent under section 397(2); a lower-deduction certificate quoted outside its amount or period |
| Interest on late payment | Challan date is later than the due date | Late deposit; 1.5 per cent a month under section 398(3)(a)(ii) |
| Interest on late deduction | Date of deduction is later than the date of credit or payment | Late deduction; 1 per cent a month under section 398(3)(a)(i) |
| Late filing fee | Statement filed after the due date | Rs 200 a day under section 427 |
| PAN errors | PAN invalid, inoperative or missing for a deductee | Credit cannot go to the deductee, and the higher-rate rule applies |
Interest under section 398(3) is payable “before furnishing the statement” (section 398(3)(b)). Where the statement shows it unpaid, it becomes part of the demand.
Reading the justification report
The intimation shows totals. The justification report shows the transaction-level detail. The incometaxindia.gov.in page on the report describes it as a document of “various defaults / errors that needs to be rectified by the deductor by filing correction statements and payment of the necessary interest / fees / other dues”. Its steps are:
- The deductor logs in to TRACES.
- Go to the Default tab.
- Select “Request for Justification Report Download”.
- Choose the financial year, quarter and form type.
- When the request shows as available, download it.
- Open it with the “TRACES Justification Report Generation Utility”, which renders it in Excel.
The report pinpoints each deductee row or challan behind the default. That shows whether the fix is a payment, a correction, or both.
The correction statement
What it can do. Section 397(3)(f) lets the deductor “correct any discrepancy or update the information furnished” by delivering a correction statement. The fixes include:
- re-tagging challans;
- correcting deductee PANs, amounts, dates or section codes;
- adding deductee rows left out;
- adding the certificate number for a lower deduction;
- adding Form No. 121 declarations;
- for salary, revising the fourth-quarter annexures that feed Form No. 130.
When it can be filed. The FAQs on Forms 138, 140, 143 and 144 state that a correction may be filed “once the previously submitted statement has been processed by CPC-TDS”.
The time limit, now two years. Section 397(3)(f) allows a correction “within two years from the end of the tax year in which such statement is required to be delivered”. The FAQ example is a third-quarter tax year 2026-27 statement, due by 31 January 2027, which is correctable up to 31 March 2029. The 1961 Act, under the second proviso to section 200(3) inserted from 1 April 2025, allowed “six years from the end of the financial year in which the statement … is required to be delivered”. The two-year limit is not confined to new statements. The text of section 397(3)(f) applies it to statements “required to be delivered under the said clauses or under section 200 of the Income-tax Act, 1961”. This guide found no saving that keeps the six-year period alive: section 536(2) of the 2025 Act contains no clause preserving the 1961 Act’s correction period, and no transitional notification on the point was located. On that text, a fourth-quarter statement for financial year 2024-25, due on 31 May 2025, can be corrected up to 31 March 2028, and statements due in financial year 2023-24 or earlier are already past the limit.
Preparing it. The correction statement is prepared with the RPU and validated with the FVU, as for the original (see Quarterly TDS and TCS Statements). For Form No. 141, the FAQ on that form says a correction may be filed for any schedule within the same two-year limit.
What the official material describes. The incometaxindia.gov.in FAQs on Forms 138, 140, 143 and 144 describe the correction statement as the way to “correct or update the details in an already submitted” statement. The FAQs on Forms 130 and 131 say an error in a certificate is fixed by a revised statement, after which the corrected certificate is downloaded. The Form No. 141 FAQ allows a correction “to rectify errors in any schedule”. The justification report page pairs correction statements with “payment of the necessary interest / fees / other dues”. Separately, TRACES’s October 2026 notice states that challan correction for tax year 2026-27 is available on the portal, with earlier years under its “Compliance under the Income-tax Act, 1961” area.
Paying the balance. Where the cause is a genuine shortfall, the deductor deposits the tax, interest or fee on a fresh challan, ITNS 281N for tax year 2026-27 or ITNS 281 for earlier years, and tags it to the statement. A demand already raised is paid under minor head 400, per the e-filing portal’s challan manual.
Defaults that a correction cannot cure
- A failure to deduct. A correction adds the transaction, but the deductor remains an “assessee in default” under section 398(1). The way out is the payee’s return and an accountant’s certificate in Form No. 149 (section 398(2), rule 221). The Form No. 149 FAQ describes the steps: the request starts on TRACES, passes to the e-filing portal, the chartered accountant issues Annexure A there, and the deductor then submits the form. Interest up to the date of the payee’s return still applies.
- Time-barred matters. No order deeming a person in default for failure to deduct may be made after six years from the end of the tax year in which the tax was deductible, or two years from the end of the tax year in which a correction statement is delivered, whichever is later (section 398(5)). A late correction can therefore reopen the period.
- Penalties. Section 461 (formerly section 271H) penalises “incorrect information” in a statement, at Rs 10,000 to Rs 1,00,000, subject to the reasonable-cause defence in section 470.
The deductee’s position
A deductee whose tax was deducted but not credited is protected by section 401, formerly section 205: “the assessee shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income”. The credit itself, however, is given on the deductor’s information (rule 203(1)). So the practical remedy is still a correction by the deductor. For the deductee’s reconciliation, see Reconciling AIS, TIS and Form 26AS. Where the department adjusts a demand against a refund, see Responding to an Outstanding Demand.
Summary
- Read the processing intimation, then download the justification report from TRACES (Default tab).
- Sort each default by cause: challan mismatch, PAN, rate, late deduction or payment, late filing.
- Pay any genuine shortfall, interest or fee on a fresh challan of the right Act.
- File a correction statement once the original has been processed, or use the TRACES challan correction facility where the error is in the challan.
- File the correction within two years from the end of the tax year in which the statement was due, and check older periods against that limit.
- For a failure to deduct where the payee has paid, file Form No. 149 instead of relying on a correction.
This is the last guide in the TDS set. The ITR walkthroughs show how the resulting credits are claimed in a return.