TDS Credit Mismatch in Form 26AS: Section 205 Protects You

Last reviewed: 10 September 2026. A recurring and genuinely frustrating grievance for salaried employees and vendors alike: tax was clearly deducted at source — it shows on the payslip, the Form 16, or a contract note — yet it never appears in Form 26AS or the Annual Information Statement (AIS), because the deductor failed to deposit it or failed to file an accurate TDS return. When the taxpayer’s return is then processed, the mismatch triggers a demand, or a denied refund, for tax the taxpayer never actually kept. Section 205 of the Income-tax Act, reinforced by recent ITAT orders on the evidentiary weight of Form 26AS, exists precisely to stop the Department from recovering that shortfall from the wrong person.

What Section 205 actually says

Once tax is deductible under the Act and has in fact been deducted at source, Section 205 explicitly bars the Department from recovering that amount again from the person whose income the tax was withheld from — the deductee. The remedy for a deposit or filing default lies against the deductor, the employer or payer, including through the default machinery under Section 201. This is a matter of statute, not a discretionary concession, and it does not depend on the deductee proving anything beyond the fact that the tax was actually deducted.

Why this keeps happening despite the law being settled

The revenue’s practical position is largely mechanical rather than a genuine dispute of legal principle: return processing at the Centralised Processing Centre (CPC) is automated and cross-checks the TDS credit claimed in a return against what is actually reflected in Form 26AS/AIS/TRACES. If the deductor’s TDS return does not reflect a credit — because it was not deposited, or was filed late, incompletely, or incorrectly — the system denies the credit or raises a demand by default, even though the deductee did nothing wrong. The gap is a reconciliation failure between the deductor’s compliance and the deductee’s assessment, not a considered revenue position that the deductee should bear the loss.

The taxpayer’s position is that, since Section 205 already settles the legal principle, this should not require litigation to resolve. Recent ITAT orders have reinforced this, including one directing that Form 26AS is not conclusive or final evidence, and that TDS credit can be granted based on Form 16, salary slips, and other corroborating proof despite a deductor’s default — a taxpayer should not be made to suffer for a payer’s compliance failure.

What protects you and what doesn't

A worked example

Suppose a salaried employee’s Form 16 for FY 2025-26 shows gross salary of Rs 18,00,000 and TDS deducted of Rs 2,40,000, with the net salary credited to the employee’s bank account each month clearly reflecting the post-TDS amount. The employer, facing cash-flow difficulties, did not deposit part of the TDS with the government and also filed the 24Q TDS return late and incorrectly for two quarters, so only Rs 1,50,000 of the Rs 2,40,000 shows up in the employee’s Form 26AS/AIS. On processing the employee’s return, where the full Rs 2,40,000 was correctly claimed as TDS credit matching Form 16, the CPC raises a demand for the Rs 90,000 “excess” credit claimed but not reflected in 26AS.

Under Section 205, the Department cannot recover this Rs 90,000 shortfall from the employee, because the tax was in fact deducted, as evidenced by Form 16 and the net salary actually credited. The correct remedy: the employee should first request the employer to file a correction statement for the relevant quarters to reflect the full Rs 2,40,000; if the employer delays, the employee should raise a TRACES/e-filing grievance attaching Form 16, salary slips, and bank statements as corroborating evidence, and if a demand notice is issued regardless, file a rectification application under Section 154 citing Section 205 along with the same evidence.

Common mistakes and red flags

• Paying the demand raised for the mismatched TDS out of pocket without first checking whether the tax was actually deducted, in which case Section 205 may fully protect you
• Not retaining Form 16, salary slips, or contract notes, and bank statements showing the net (post-TDS) amount received — this is the core corroborating evidence
• Waiting passively for the employer or deductor to fix the mismatch, without formally following up or escalating
• Not distinguishing between tax that was deducted but not deposited or reported (Section 205 protects you) and tax that was never actually deducted (Section 205 does not apply, and you remain liable)
• Skipping the TRACES/grievance route and going straight to litigation, when a rectification application often resolves the matter faster

What should you do: the practical remedy path

• Step 1: Ask the deductor (employer or payer) to correct and file/revise the relevant TDS return — 24Q for salary, 26Q for other payments. This directly corrects Form 26AS and is usually the fastest fix
• Step 2: If the deductor is unresponsive, itself in default, or insolvent, raise a grievance on the TRACES portal and separately through the income-tax e-filing grievance mechanism, attaching Form 16/salary slips/contract notes and bank statements showing the net amount received
• Step 3: If a demand is raised despite this, file a rectification application under Section 154 citing Section 205 and attaching the same evidence — a well-established ground in most documented cases
• Step 4: If the Assessing Officer does not act on the rectification, escalate through appeal to the CIT(A), since a stubborn officer may need that route to enforce an otherwise settled legal position
• Throughout, keep a dated file of every communication with the deductor and every grievance filed — this becomes your evidence trail if escalation is needed

Frequently asked questions

This article is general information for educational purposes, not an opinion on any specific case; verify the current status of your TDS credit and consult a qualified professional before acting.