A S BANKA ADVISORS

Most founders think of the tax audit as a formality their accountant handles in the last week of September. Then a single line in the report turns a real, paid business expense into taxable income, and the tax bill climbs for a reason that had nothing to do with how the business performed. The cause is almost always the same: a TDS entry that was missed, deducted short, or deposited late.

For the audit due on 30 September 2026 (financial year 2025-26), this is worth an hour of your attention now rather than a surprise later. Here is what the rule actually does and how to close the gap before your auditor finds it.

The expense does not vanish. It becomes income.

When you pay a resident vendor and fail to deduct TDS, or you deduct it but deposit it after your return-filing due date, the law disallows 30 percent of that expense. Disallowed means it is added back to your taxable income. A genuine cost you have already paid now inflates your profit on paper.

The arithmetic is blunt. A resident contractor bill of Rs 50 lakh with TDS missed adds Rs 15 lakh straight to taxable income. This is not a penalty levied separately; it is your own expense working against you.

Cross-border payments carry the harsher rule

If the payment goes to a non-resident or is made outside India, interest, royalty, and fees for technical services included, the disallowance is not 30 percent. It is 100 percent. A Rs 20 lakh payment to a foreign vendor with a TDS default means the entire Rs 20 lakh is disallowed, against Rs 6 lakh for the same default on a resident vendor.

For any startup paying overseas SaaS providers, foreign consultants, or an offshore development partner, this is the expensive corner. Before you wire a foreign vendor, confirm the applicable tax-treaty rate and whether a lower-deduction certificate applies. One unchecked foreign invoice can cost you the whole deduction.

Two reliefs most founders leave on the table

Form 26A is the escape hatch. If your resident vendor has already filed its own return, included your payment as income, and paid tax on it, you are not treated as a defaulter. Obtain a Chartered Accountant certificate in Form 26A, e-file it, and the disallowance falls away. It is the most under-used relief in the entire tax audit.

The 30 percent is deferral, not a permanent loss. The amount disallowed on a resident payment becomes deductible in the year you finally deposit the missed TDS. So the practical move is to deposit every pending TDS now, unlocking the deduction next year instead of leaving it stuck.

Where the auditor looks, and what to reconcile

Every non-deduction and short-deduction is disclosed in your tax audit report at Form 3CD, clause 21(b). To get ahead of it, reconcile each TDS-attracting expense head against your quarterly returns, Form 26Q for residents and Form 27Q for non-residents, across all four quarters, and flag three things: TDS not deducted, TDS deducted short, and TDS deducted but deposited late.

The rule follows you into the Income-tax Act 2025

This year’s audit runs under the Income-tax Act 1961. From financial year 2026-27, the Income-tax Act 2025 governs, in force from 1 April 2026. The 30 percent and 100 percent disallowance logic carries forward unchanged, but the section numbers move to a new home in the new Act, so verify the successor provision at the primary source before you cite a number in any filing. The obligation does not change; only its address does. We covered the same theme for ICDS under the new Act.

Your 13-day checklist

1. Reconcile all four quarters of Form 26Q and 27Q against your expense ledger.
2. Quantify the 30 percent and 100 percent add-backs for clause 21(b).
3. File Form 26A wherever a resident vendor has already paid tax on the sum.
4. Deposit every pending TDS before the 30 September 2026 audit.

We built a nine-slide breakdown of this trap, with the worked numbers and the reconciliation steps, that you can save and share with your finance team.

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Not sure where your file stands with 13 days to the audit? Book a quick call and we will pressure-test your TDS position before your auditor does. A S Banka Advisors Private Limited.