Direct Payment of Tax When TDS Is Not Deducted: Section 391 of the Income Tax Act 2025
Under section 391 of the Income-tax Act, 2025, you pay tax on an income directly when the Act has no TDS provision for it, or when TDS was due but was not deducted. Section 391(3) adds a second half: a deductor who did not deduct or pay the tax is treated as an "assessee in default" if you also did not pay it yourself.
This guide explains what "direct payment" means, the two cases in section 391(1), the special rule for start-up employee shares in section 391(2), and what the deductor risks under section 391(3) and section 398. Every point is taken from the Act as amended by the Finance Act, 2026. Last reviewed against that text on 10 November 2026.
What does "direct payment" of tax mean under section 391?
Direct payment means the person who earned the income pays the tax on it, instead of a payer deducting it at source. Section 391(1) says income-tax on any income is payable directly by the assessee (the person liable to tax) in two situations.
| Case | Section | What it means |
|---|---|---|
| No TDS provision | 391(1)(a) | Nothing in this Chapter requires deduction on that income at the time of payment. |
| TDS not deducted | 391(1)(b) | Tax has not been deducted as the Chapter requires, so it was missed or skipped. |
| Start-up employee shares | 391(2) | Tax on specified securities or sweat equity shares from an eligible start-up is paid on the timing in section 289(3). |
| Deductor in default | 391(3) | The deductor is deemed an assessee in default if neither the deductor nor the assessee pays. |
The section does not give a form or a due date for direct payment itself. The tax is paid through the usual routes (advance tax, self-assessment tax). See our guide to advance tax for those dates.
Which decision applies to a payment you receive?
When is there no TDS provision on an income?
TDS applies only to the payments listed in the Chapter, mostly in the table in section 393, and often only above a limit. If a payment is not listed, or falls below the limit, section 391(1)(a) puts the tax on you. Many ordinary incomes work this way.
Real-life example 1. Ravi lets a flat to a tenant for Rs 40,000 a month. The TDS-on-rent entries in section 393 (Table Sl. No. 2) have a threshold of Rs 50,000 for a month or part of a month, so on Rs 40,000 a month the tenant is not required to deduct. Ravi cannot ignore the income, because section 391(1)(a) makes the tax payable by him directly. He includes the rent in his return and pays through advance tax or self-assessment tax. See TDS on rent under the Income Tax Act 2025 for the exact thresholds.
What if TDS was due but not deducted?
Section 391(1)(b) covers the second case: the Chapter did require deduction, but the payer did not deduct. The tax does not vanish. The assessee is still liable to pay it directly, and the deductor has its own exposure under section 398.
Real-life example 2. Meena runs a small design studio. A client pays her a fee on which TDS was required, but the client forgets and pays the full amount. Meena sees the full amount in her bank account and no TDS shown against it. She cannot claim a credit for tax that was never deducted. She adds the fee to her income and pays the tax herself, through advance tax or before filing.
What is the special rule for start-up employee shares in section 391(2)?
Section 391(2) applies to an employee whose income includes the value of specified securities or sweat equity shares under section 17(1)(d), when the current employer is an eligible start-up referred to in section 140. Direct payment of tax in that case follows section 289(3), not the normal timing.
Under section 289(3), the tax or interest on that income, once it appears in a notice of demand, is payable within 14 days after the earliest of three events:
- the expiry of 60 months from the end of the relevant tax year; or
- the date the assessee sells the shares; or
- the date the assessee stops being an employee of the employer that allotted or transferred the shares.
On the employer side, section 392(3) tells the eligible start-up to deduct or pay tax on this income at the rates in force for the tax year of allotment or transfer, within the same timing.
Worked example 1 (dates). Shares are allotted to Arjun, an employee of an eligible start-up, in tax year 2026-27 (1 April 2026 to 31 March 2027).
| Step | Event | Date |
|---|---|---|
| 1 | End of tax year 2026-27 | 31 March 2027 |
| 2 | 60 months after that date (event 1) | 31 March 2032 |
| 3 | Assume Arjun leaves the company (event 3) | 15 January 2029 |
| 4 | Assume he has not sold the shares (event 2 has not happened) | No date |
| 5 | Earliest event is his exit on 15 January 2029; 14 days after | 29 January 2029 |
Assumptions: the notice of demand has been served and the dates above are hypothetical. If Arjun sold the shares on 10 June 2028, that earlier sale would start the 14 days instead, and the tax would fall due on 24 June 2028.
One return-form point from the Income-tax Rules, 2026: rule 164(3)(m) makes a person ineligible for ITR-1 if tax payment or deduction was deferred under section 391(2) or section 392(3). The rule 164(6)(n) condition rules out ITR-4 for this income as well.
What happens to a deductor who did not deduct or pay?
Section 391(3) applies where a person required to deduct tax (or an employer under section 392(2)(a)) does not deduct it, or deducts but does not pay it, and the assessee has also not paid the tax directly. That person is deemed an assessee in default under section 398(1), on top of any other consequence in the Act.
Section 398 then sets the money consequences.
| Item | Rule | Reference |
|---|---|---|
| Interest while tax is not deducted | 1% per month or part of a month, from the date tax was deductible to the date it is deducted | 398(3)(a)(i) |
| Interest after deduction, before payment | 1.5% per month or part of a month, from the date of deduction to the date of payment | 398(3)(a)(ii) |
| Relief when the payee paid the tax | No default if the payee filed the return, included the income and paid the tax, and the deductor gets an accountant's certificate | 398(2) |
| Interest in the relief case | Only the 1% interest, up to the date the payee furnished the return | 398(3)(c) |
| Charge on assets | Unpaid deducted tax plus interest is a charge on all the deductor's assets | 398(4) |
| Time limit for the default order | Not after 6 years from the end of the tax year in which tax was deductible; or 2 years from the end of the tax year of a correction statement, whichever is later | 398(5) |
For the full picture of penalty and disallowance, read TDS non-deduction and late payment: interest, penalty and disallowance.
How much interest does a deductor owe? Two worked examples
Worked example 2 (tax deducted late, paid later). Assumptions: tax of Rs 20,000 should have been deducted on 30 June 2026. It was actually deducted on 15 September 2026 and deposited on 10 November 2026.
| Step | Period | Months (or part) | Calculation | Interest |
|---|---|---|---|---|
| 1 | 30 June to 15 September 2026 | 3 (30 Jun to 30 Jul, to 30 Aug, then part of a month) | 20,000 x 1% x 3 | Rs 600 |
| 2 | 15 September to 10 November 2026 | 2 (15 Sep to 15 Oct, then part of a month) | 20,000 x 1.5% x 2 | Rs 600 |
| Total | Rs 1,200 |
Under section 398(3)(b) this interest is paid before the TDS statement is furnished.
Worked example 3 (the payee paid the tax). Assumptions: the same Rs 20,000 was never deducted. The payee furnished the return on 20 August 2027, included the income and paid all tax due, and the deductor obtained the accountant's certificate required by section 398(2). Because of section 398(2), the deductor is not an assessee in default. Interest at 1% runs from 30 June 2026 to 20 August 2027, which is 14 months or part of a month (30 June 2026 to 30 June 2027 is 12, then 30 July and part of August).
| Step | Calculation | Result |
|---|---|---|
| 1 | Tax not deducted | Rs 20,000 |
| 2 | Months or part, 30 June 2026 to 20 August 2027 | 14 |
| 3 | 20,000 x 1% x 14 | Rs 2,800 |
Real-life example 3. Kiran, a trader, pays a contractor Rs 5 lakh and misses a deduction that was required. He finds out nine months later. He checks whether the contractor filed a return and paid the tax. If so, Kiran can seek the accountant's certificate and limit his exposure to the 1% interest. If the contractor did not pay either, section 391(3) makes Kiran an assessee in default.
Can you ask the payer not to deduct TDS at all?
Yes, in some cases. Many readers searching "payment without TDS" mean this route, not direct payment under section 391. Under section 393(6), a payer must not deduct tax if you give a written declaration, in duplicate, that tax on your estimated total income for the tax year will be nil. The declaration covers the payments listed in the section 393(6) Table:
| Who can give it | Payments covered |
|---|---|
| A resident individual (Sl. No. 1) | Accumulated balance due to an employee (section 392(7)), insurance commission, rent, income from units, interest, life insurance policy payments, and dividend (section 393(1) Table entries as listed) |
| Any other person who is not a company, a firm or such an individual (Sl. No. 2) | The same list, except dividend |
The Note to the Table adds a limit. Apart from a resident individual aged 60 or more at any time in the tax year, the declaration does not work if the covered income, credited or paid or likely to be, exceeds the maximum amount not chargeable to tax.
The declaration is made in Form No. 121, electronically after verification or on paper (rule 211(1) and (2)). The payer allots a unique identification number to each declaration every quarter (rule 211(3)) and reports it in the TDS statement under rule 219 even if no tax was deducted that quarter (rule 211(4)). Under section 393(7) the payer delivers the declarations to the prescribed authority by the seventh day of the month after each quarter. An income-tax authority may ask for a declaration within seven years from the end of the tax year of receipt (rule 211(5)).
A separate route is a lower or nil deduction certificate from the Assessing Officer under section 395(1), where your total income justifies it. The payer then deducts at the certificate rate, or nothing, while it is valid. A Form 121 declaration only states that your tax will be nil. A certificate is issued after the authority is satisfied.
Real-life example 4. Sunita, a resident individual aged 62, has bank interest and no other taxable income. She gives her bank a Form 121 declaration. The bank does not deduct TDS on her interest and reports the declaration in its quarterly statement. She still shows the interest in her return.
Common mistakes
- Treating "no TDS" as "no tax". Under section 391(1)(a) the tax is still payable by you directly.
- Claiming credit for tax that was never deducted. Credit follows deduction; with no deduction you pay directly.
- Assuming the payee's payment ends the deductor's problem automatically. Relief under section 398(2) needs the payee's return, inclusion of the income, payment of tax and the accountant's certificate.
- Using ITR-1 or ITR-4 after a deferral under section 391(2). Rule 164(3)(m) and rule 164(6)(n) bar those forms.
- Giving a nil-tax declaration when income is above the limit. The Note to the section 393(6) Table blocks it, except for a resident individual aged 60 or more.
- Counting interest in whole months only. Section 398(3) charges "every month or part of a month".
- Missing the 14-day window for start-up shares. Count from the earliest of the three events in section 289(3), not the latest.
Where this is in the Act
- Section 391(1)(a) and (b): direct payment by the assessee
- Section 391(2): start-up specified security and sweat equity shares
- Section 391(3): deductor deemed an assessee in default
- Section 17(1)(d): perquisite value of specified securities and sweat equity shares
- Section 289(3): 14-day payment rule; section 140: eligible start-up
- Section 392(3): start-up employer's deduction or payment
- Section 393(6) and (7): declaration for no deduction; section 395(1) and (6): lower or nil deduction certificate
- Rule 211: Form No. 121 and the payer's reporting duties
- Section 398(1) to (5): default, interest, relief, charge and time limit
- Rule 164(3)(m) and (6)(n): ITR eligibility
How do CA firms track direct payments across clients?
For a CA firm, the hard part is spotting which client incomes carry no TDS and which need advance tax, plus which deductor clients missed a deduction. Finexo's practice management software keeps these deadlines and follow-ups across your client book. It does not compute tax or file returns for you.
This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.
Frequently Asked Questions
What is direct payment of tax under section 391?
It means the assessee pays the tax on an income personally, instead of the payer deducting it. Section 391(1) applies when the Chapter has no TDS provision for the income, or when TDS was required but not deducted.
What happens if my client did not deduct TDS from my payment?
You remain liable to pay the tax directly under section 391(1)(b). Include the income in your return and pay the tax. The deductor may be treated as an assessee in default under section 391(3) and section 398.
When is tax on start-up employee shares payable?
Under section 391(2) and section 289(3), within 14 days after the earliest of 60 months from the end of the tax year, the sale of the shares, or the employee leaving the employer. This applies to specified securities or sweat equity shares from an eligible start-up.
What interest does a deductor pay for not deducting TDS?
Under section 398(3)(a), 1% per month or part of a month from the date tax was deductible until it is deducted, and 1.5% per month or part of a month from deduction until payment.
Can a deductor escape default if the payee paid the tax?
Yes, under section 398(2), if the payee furnished the return, included the income and paid the tax, and the deductor furnishes an accountant's certificate in the prescribed form. Interest at 1% still runs up to the payee's return date under section 398(3)(c).
How can I receive a payment without TDS being deducted?
Under section 393(6), a resident individual or other eligible person can give the payer a Form No. 121 declaration that tax on the estimated total income will be nil. Alternatively, apply for a lower or nil deduction certificate under section 395(1).