Section 476 · Offences
Section 476 of the Income-tax Act, 2025 — Failure to Pay TDS/TCS to the Credit of the Central Government (Offence & Prosecution)
By CA Rajat Agrawal
Updated 05 Jul 2026
Chapter XXII
📜 What the law says — Section 476, Income-tax Act 2025
476. 22[(1) If a person fails to—
(a) pay the tax deducted at source by him to the credit of the Central Govern-
ment, as required by or under the provisions of Chapter XIX-B; or
(b) pay tax or ensure payment of tax to the credit of the Central Government
in respect of––
(A) any income by way of winnings from online games as referred in
section 393(3) [Table: Sl. No. 2], excluding such winnings which are
wholly in kind, as referred to in Note 2 to the said Table; or
(B) any sum by way of consideration for transfer of a virtual digital asset
as referred in section 393(1) [Table: Sl. No. 8(vi)], excluding such
consideration which is wholly in kind, as referred to in Note 6 to the
said Table,
he shall be punishable––
(i) with simple imprisonment for a term up to two years, or with fine, or with
both, where the amount of such tax exceeds fifty lakh rupees; or
(ii) with simple imprisonment for a term up to six months, or with fine, or
with both, where the amount of such tax exceeds ten lakh rupees but does
not exceed fifty lakh rupees; or
(iii) with fine, in any other case.]
(2) The provisions of this section shall not apply if the payment referred to in
sub-section (1)(a) has been made to the credit of the Central Government on or
before the time prescribed for filing the statement under section 397(3)(b) in
respect of such payment.
Failure to pay tax collected at source.
In plain language
What Section 476 is about
Section 476 of the Income-tax Act, 2025 (in force from 1 April 2026) is the prosecution provision for a person who deducts (or collects) tax but fails to deposit it with the Government. In simple words: if a company, employer, business or any deductor takes TDS out of a payment — or collects TCS — that money never belonged to them. It is public money held in trust. If they keep it, delay it, or divert it instead of paying it to the credit of the Central Government under Chapter XIX-B (the TDS/TCS chapter), that is not merely a penalty default — it is treated as a criminal offence.
This section carries forward, in a single consolidated form, what were Section 276B (failure to pay TDS) and Section 276BB (failure to pay TCS) under the old Income-tax Act, 1961.
Who it applies to
- Employers deducting TDS on salaries under the salary-TDS rules.
- Businesses and firms deducting TDS on contractor payments, rent, professional fees, commission, interest, etc.
- Buyers/sellers collecting TCS (e.g. on scrap, certain goods, foreign remittances).
- Deductors of TDS on winnings, online gaming, benefits/perquisites, and virtual digital asset (crypto) transfers.
- In case of a company, the principal officer, directors and persons responsible can be held liable.
The core offence — Section 476(1)
- 476(1)(a): failure to pay to the Government the tax deducted at source as required under Chapter XIX-B.
- 476(1)(b): failure to pay or ensure payment of tax required under the specified notes to Section 393 (which covers TCS-type and special collection situations).
Punishment: the offence is punishable with rigorous imprisonment of not less than 3 months, extendable up to 7 years, together with a fine. This is the same rigorous minimum-to-maximum band that existed under the 1961 Act.
The safe harbour — Section 476(2)
This is the most important relief for honest deductors who were merely late. Section 476(2) says the offence under 476(1)(a) does not apply if the deducted tax has actually been paid to the credit of the Central Government on or before the time prescribed for filing the TDS statement under Section 397(3)(b) (broadly, the quarterly TDS return due date). So a short delay that is fully cured before the return deadline generally escapes prosecution.
- The safe harbour protects only 476(1)(a) failures (TDS). It does not automatically extend to 476(1)(b) failures.
- The relief is from prosecution. Interest under the late-deposit provisions and late-payment consequences can still apply.
How it interacts with other sections
- Non-cognizable: Section 492 makes the Section 476 offence non-cognizable — police cannot arrest without a warrant, and prosecution runs through the specified process.
- Sanction/authorisation: prosecution is launched only with sanction of the prescribed income-tax authority; it is not filed by every officer casually.
- Interest and penalty: late deposit still attracts interest and disallowance-type consequences — Section 476 is on top of, not instead of, those.
Finance Act, 2026 — move toward proportionate punishment
As part of the Government's decriminalisation drive, the Finance Act, 2026 reforms the prosecution framework so that punishment is more graded and proportionate to the quantum of tax not deposited, and moves in the direction of simple rather than mandatory rigorous imprisonment for smaller defaults. The intent is to reserve the harshest treatment for large, wilful diversion of trust money while easing exposure for small, cured defaults. Because the fine-print of the graded slabs is still being finalised in the amended text, the exact bands should be confirmed against the latest departmental version before relying on them.
Practical implications
- Pay TDS/TCS on time — always before the quarterly statement due date — to stay inside the Section 476(2) safe harbour.
- Never use TDS money as working capital. A cash crunch is not a defence; wilful retention of deducted tax is exactly what this section targets.
- Directors and principal officers are personally exposed, so companies should build TDS-deposit controls and calendar alerts.
💡 Example
Worked example 1 — inside the safe harbour. ABC Pvt Ltd deducts ₹2,40,000 TDS on contractor payments during the quarter ending 30 June 2026. Due to a banking issue it misses the monthly deposit date but pays the full ₹2,40,000 (with interest) on 25 July 2026, before the quarterly TDS statement due date. Because the tax reached the Central Government's credit before the Section 397(3)(b) statement deadline, Section 476(2) shields ABC from prosecution under Section 476(1)(a). Interest for late deposit still applies, but the criminal exposure is avoided.
Worked example 2 — outside the safe harbour. XYZ Ltd deducts ₹18,00,000 TDS from employee salaries over several months but uses the cash to fund operations and never deposits it, even after the statement due date passes. Here the safe harbour is not available. The company and its responsible directors can be prosecuted under Section 476(1), facing rigorous imprisonment of 3 months up to 7 years plus a fine, in addition to interest and recovery of the ₹18,00,000.
A relatable story. Meera runs a small design studio and deducts ₹40,000 TDS on a freelancer's fee. Money is tight that month, and a friend tells her "just deposit it next quarter." Her CA stops her: "That ₹40,000 was never yours — it's the freelancer's tax held in trust. Deposit it before the quarterly return and you are safe under 476(2). Keep sitting on it and you're not looking at a penalty, you're looking at a criminal case." Meera pays it the same week — and sleeps easy.
| Aspect | Position under Section 476, Income-tax Act 2025 |
|---|
| What triggers it | Failure to pay deducted TDS [476(1)(a)] or specified collected tax [476(1)(b)] to the credit of the Central Government under Chapter XIX-B |
| 1961 Act equivalent | Section 276B (TDS) and Section 276BB (TCS) |
| Punishment | Rigorous imprisonment: minimum 3 months, maximum 7 years, plus fine |
| Safe harbour [476(2)] | No offence under 476(1)(a) if TDS paid before the statement due date under Section 397(3)(b); does not extend to 476(1)(b) |
| Nature of offence | Non-cognizable (via Section 492) |
| Effective from | 1 April 2026 |
| Finance Act 2026 direction | Graded / proportionate punishment linked to quantum; move toward simple imprisonment for smaller defaults (confirm final slabs) |
Related sections
Section 393 — Deduction/collection of tax at source (TDS/TCS charging framework) Section 397 — Statements (TDS/TCS returns) and prescribed due dates Section 492 — Certain offences (including Section 476) to be non-cognizable Section 475 — Failure to deduct or collect tax at source (related offence) Section 479 — Wilful attempt to evade tax, penalty or interest Section 480 — Failure to furnish returns of income (offence)
Frequently asked questions
What exactly does Section 476 punish?
It punishes a deductor or collector who fails to pay the TDS deducted (or specified tax collected) to the credit of the Central Government as required under Chapter XIX-B. It is a criminal offence, not just a penalty default.
Is late deposit of TDS always a crime?
No. Under Section 476(2), if you deposit the deducted TDS before the due date for filing the relevant quarterly TDS statement (Section 397(3)(b)), the prosecution under Section 476(1)(a) does not apply. Interest for late deposit can still be charged.
What is the punishment under Section 476?
Rigorous imprisonment for a minimum of 3 months up to a maximum of 7 years, together with a fine. The Finance Act, 2026 is moving toward more graded and proportionate punishment based on the amount involved.
Which old law does Section 476 replace?
It consolidates Sections 276B (failure to pay TDS) and 276BB (failure to pay TCS) of the Income-tax Act, 1961.
Can company directors be jailed for the company's TDS default?
Yes. Where a company defaults, the principal officer and persons responsible for the company's affairs, including directors, can be held liable and prosecuted, subject to the usual defences and sanction requirements.
Is a cash shortage a valid defence?
Generally no. The deducted tax is money held in trust for the Government; using it as working capital and failing to deposit it is precisely the wilful conduct Section 476 targets.
Does the safe harbour cover TCS failures too?
The Section 476(2) relief is written for the 476(1)(a) TDS failure and does not automatically extend to 476(1)(b) failures. Collectors should not assume the same protection applies to TCS.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 05 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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