TDS Deducted But Not Deposited by Your Employer: Section 205, Missing Form 26AS Credit, and How to Fight the Demand (AY 2026-27)

Your payslips show Rs 8,500 deducted as TDS every month. Your bank statement confirms you received the net amount. But when you open Form 26AS in July, only four months of TDS appear instead of twelve, and the tax portal is now asking you to pay Rs 68,000 that was already taken out of your salary.

This is one of the most distressing situations a salaried taxpayer can face, and it is far more common than most people realise, especially at startups under cash stress, small proprietorships, and companies going through a shutdown or acquisition.

The good news is that the law is squarely on your side. Section 205 of the Income Tax Act says that once tax has been deducted from your income, you cannot be asked to pay it again. The bad news is that the automated processing system does not apply Section 205 on its own, so you have to assert it.

This guide explains exactly why the gap appears, what your legal position is for AY 2026-27 (FY 2025-26), and the precise sequence of steps to claim your full credit and get any demand cancelled.

Why TDS Goes Missing: Deduction and Deposit Are Two Separate Acts

Most people assume that deducting TDS and depositing it with the government are a single event. They are not. Your employer performs three distinct obligations, and each one can fail independently.

Your Form 26AS and AIS are built from step 3. If your employer deducted the money but skipped step 2 or step 3, the tax department has no record that anything was ever paid on your behalf, even though your salary was genuinely reduced.

The most frequent causes are a cash crunch where the deducted amount gets used as working capital, a quarterly Form 24Q filed with your PAN mistyped or left blank, an employer who deposited the tax but never filed the statement, and payroll errors after a merger where a new TAN is used mid-year.

Step One: Confirm What Is Actually Missing

Before assuming the worst, reconcile four documents against each other. Read our detailed guide on Form 26AS, AIS and TIS if you are unsure how to pull them.

• Monthly payslips. These prove the deduction happened and give you a month-by-month figure.
• Bank statements. These prove you received only the net salary, which corroborates the payslips.
• Form 16 Part A. This is generated from TRACES and only shows tax that was actually deposited and reported. If Part A shows less than your payslips, the shortfall is real.
• Form 26AS and AIS. Compare quarter by quarter, not just the annual total.

A useful distinction: if Form 16 Part B shows Rs 1,02,000 of TDS but Part A and Form 26AS show Rs 34,000, your employer has effectively admitted in writing that Rs 1,02,000 was deducted while depositing only a third of it. That contradiction is powerful evidence.

Sometimes the problem is simpler than non-deposit. The tax may have been deposited against a wrong PAN, reported in the wrong quarter, or filed under a TAN you do not recognise because your employer changed entities. These are correctable by the employer with a revised Form 24Q, and they resolve far faster than a genuine non-deposit.

Your Legal Protection: Section 205

Section 205 is short and unambiguous. Where tax is deductible at source, the taxpayer "shall not be called upon to pay the tax himself to the extent to which tax has been deducted from that income."

There is a genuine tension in the statute. Section 199 read with Rule 37BA says credit for TDS is given only when the tax has reached the government account, which is why the automated system withholds credit. Section 205 says the department cannot come after you for tax already deducted. Courts and the CBDT have resolved this in favour of the taxpayer.

CBDT Instruction No. 275/29/2014-IT(B) dated 1 June 2015 directs assessing officers not to enforce demands against a deductee where the deductor has deducted tax but failed to deposit it, and to recover the amount from the deductor instead. The CBDT reiterated this position in a follow-up office memorandum in March 2016.

Sanjay Sudan v. ACIT (2023) 452 ITR 107 (Delhi HC) went further and held that the department cannot adjust unpaid-but-deducted TDS against a refund otherwise due to the taxpayer. Once deduction has occurred, the liability shifts to the deductor, and recovery must be pursued there.

The practical meaning is this: you are entitled to full credit for tax that was deducted from you, whether or not your employer honoured its obligations, provided you can prove the deduction happened.

What Your Employer Is Actually Facing

It helps to know the leverage you hold when you approach your employer, because these consequences are severe and personal to the directors and principal officers.

Section 276B is not theoretical. Retaining deducted tax is treated as withholding money held in trust for the government, and prosecutions are launched every year. A polite written reminder that quotes Section 276B often produces a deposit within days.

Step Two: Put Pressure on the Employer in Writing

Email, not a phone call. You need a documented trail, and the email itself becomes evidence later.

Ask for four specific things: the challan identification number (CIN) for each month's deposit, the acknowledgement number of each quarterly Form 24Q, a corrected Form 16 Part A once the position is regularised, and a written timeline for depositing any shortfall.

Keep the tone factual. State the months affected, the amount per month as shown in your payslips, and the amount visible in Form 26AS. If you have left the company, send it to both the payroll contact and a director, since payroll staff frequently have no authority to release funds.

If the employer does not respond, you can escalate to the Assessing Officer (TDS) who has jurisdiction over the employer's TAN. A written complaint there triggers proceedings under Section 201, and you can also raise a grievance through the e-Nivaran facility on the income tax portal under the Grievances menu.

Step Three: File Your ITR Claiming the Full TDS

This is the decision most taxpayers get wrong.

Do not reduce your TDS claim to match Form 26AS. If you claim only the deposited portion, you are voluntarily paying tax that was already taken from you, and you forfeit the Section 205 argument entirely. Claim the full amount shown in your payslips and Form 16 Part B, and be ready to defend it.

When you file with 49Tax, the tax credits pulled from your Form 26AS and AIS are reconciled against the TDS shown in your Form 16 before the return is submitted, so a shortfall of this kind surfaces as an explicit mismatch you can document up front rather than as a demand that lands months later.

Enter the deductor's TAN, the correct financial year, and the full deducted amount in the TDS schedule. Expect the return to be processed with the credit restricted to Form 26AS. That is normal, and it is the start of the process, not the end of it.

Before you file, assemble this evidence pack and keep it for at least seven years.

Step Four: Respond When the Demand Arrives

You will most likely receive an intimation under Section 143(1) restricting your TDS credit and raising a demand. Our guide on reading a Section 143(1) intimation explains the format in detail.

Do two things.

Disagree with the demand rather than ignoring it. On the income tax portal, go to Pending Actions, then Response to Outstanding Demand, and select the option to disagree with the demand in full or in part. In the reason field, state that the TDS was deducted from salary but not deposited by the deductor, and that Section 205 read with CBDT Instruction No. 275/29/2014-IT(B) bars recovery from you. Upload the payslips, bank statements and Form 16.

File a rectification application under Section 154. Do this from the Services menu on the portal, choosing the tax credit mismatch category. Attach the same evidence pack. A rectification application must generally be filed within four years from the end of the financial year in which the order was passed, so there is time, but do not let it drift.

If the demand survives both routes, the next step is an appeal to the Commissioner (Appeals) in Form 35. Section 205 cases are among the more winnable appeals because the legal position is settled, and the CBDT instruction is binding on the department.

An unresolved demand also blocks refunds in later years through automatic adjustment under Section 245, which is precisely what the Delhi High Court held impermissible in Sanjay Sudan. Cite that decision in your response if an adjustment is proposed.

Special Situations Worth Knowing

Your employer has shut down or vanished. The Section 205 protection does not depend on the employer still existing. Your payslips and bank statements remain sufficient proof of deduction. Pursue the rectification and demand-response route, and mention in your submission that the deductor is no longer traceable so recovery must be pursued under Section 201 rather than against you.

The deductor is a bank, tenant or client rather than an employer. The same principles apply to TDS on FD interest, rent under Section 194-IB, or professional fees under Section 194J. Your proof is the interest certificate, the payment advice, or the invoice and bank credit showing a net payment. The absence of a Form 16A does not extinguish your right to credit.

TDS was deposited but reported in a different year. Where tax is deducted in a later year on income you already offered to tax in an earlier year, Section 155(20) allows you to apply for credit in the correct year using Form 71 through the portal, rather than losing the credit altogether.

The TDS is showing under someone else's PAN. This is a reporting error, not a non-deposit. The employer can fix it by filing a correction statement for the relevant quarter, and it usually reflects in Form 26AS within two to three weeks of the correction being processed.

What Not to Do

Do not pay the demand just to make it disappear. Once paid, recovering that money requires a refund claim on top of everything else, and you have implicitly conceded the point.

Do not skip filing your return because the numbers do not reconcile. Late filing adds interest under Sections 234A and 234B and a fee under Section 234F, all of which are entirely avoidable and none of which your employer will reimburse.

Do not rely on a verbal assurance that payroll will "sort it out next quarter." Get the CIN and the Form 24Q acknowledgement number, or treat the assurance as worthless.

Key Takeaway

Reconcile your payslips against Form 26AS in April or May, not in the week your return is due. If the two disagree, claim the full deducted amount in your return, keep the payslip and bank statement evidence pack, and respond to any resulting demand by citing Section 205 and CBDT Instruction No. 275/29/2014-IT(B). The money was taken from you once, and the law does not permit the department to take it a second time.