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

Last reviewed: 25 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, 1961 — re-enacted without change as Section 401 of the Income-tax Act, 2025 for tax deducted on or after 1 April 2026 — exists precisely to stop the Department from recovering that shortfall from the wrong person. That protection is backed by CBDT’s own Office Memorandum dated 1 June 2015 and by a consistent line of High Court authority. What this note also sets out plainly is that having the law on your side and getting the credit actually released are two different exercises, and the second one takes work.

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.

Section 205 or Section 401: which provision applies to your year

The Income-tax Act, 2025 came into force on 1 April 2026. It governs income earned on or after that date — tax year 2026-27 onward. Income of FY 2025-26, assessed in AY 2026-27, and every earlier year remains governed by the Income-tax Act, 1961, and Section 536(2)(c) of the 2025 Act preserves the repealed Act for proceedings relating to those years. So for TDS on your FY 2025-26 salary or invoices, cite Section 205; for tax deducted from 1 April 2026, cite Section 401 of the Income-tax Act, 2025, which reproduces Section 205 word for word: where tax is deductible at source, the assessee shall not be called upon to pay it himself to the extent it has been deducted from that income. Quote the right provision for the right year — an officer will use a wrong section reference to deflect the application.

The connected provisions have also been renumbered, and correspondence that still uses only the old numbers invites avoidable friction. Under the Income-tax Act, 2025: credit for TDS moves from Section 199 to Section 390(5)-(6); TDS on dividend moves from Section 194 to Section 393(1), Table Sl. No. 7; the deductor-in-default machinery moves from Section 201 to Section 398; TDS certificates move from Section 203 to Section 395(4), with Form 16 replaced by Form No. 130 under the Income-tax Rules, 2026; rectification moves from Section 154 to Section 287; a stay of demand moves from Section 220(6) to Section 411(12); and refund set-off moves from Section 245 to Section 438. For FY 2025-26 and earlier, the old numbers and the old forms remain correct.

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 Department’s legal hook for that denial is Section 199 read with Rule 37BA, under which credit is given on the basis of the information furnished by the deductor and to the extent the tax has been paid to the Central Government. The post never gets past this in practice unless you address it head-on: Rule 37BA is what CPC and the Assessing Officer will cite back at you, and Section 205 is the answer to it. 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 authority you should be citing

The position does not rest on stray tribunal orders. It rests on standing CBDT direction and on High Court authority:

• CBDT Office Memorandum dated 1 June 2015 (F.No. 275/29/2014-IT(B)) — a demand raised on account of TDS credit mismatch, where the deductor has failed to deposit, cannot be enforced coercively against the deductee, Section 205 being a bar on direct demand. CBDT reiterated this by a further Office Memorandum dated 11 March 2016 after field formations were found not to be following it.
• Sanjay Sudan v. ACIT (2023) 452 ITR 107 (Delhi High Court) — Section 205 bars not only direct recovery but also indirect recovery, so the amount cannot be adjusted against a future refund either.
• Satwant Singh Sanghera v. ACIT, W.P.(C) 13765/2024 (Delhi High Court, 2024) — an employee of a defaulting employer cannot be pursued for the tax withheld from his salary, nor can it be set off under Section 245 against his refunds.
• Kartik Vijaysinh Sonavane v. DCIT (Gujarat High Court, 15 November 2021) — credit must be allowed to the employee even though the employer never deposited the tax.
• Manohar Ramabtar Jhunjhunwala v. PCIT, Writ Petition No. 2063 of 2025 (Bombay High Court, 5 August 2026) — Sections 199, 205 and Rule 37BA are to be read harmoniously; once actual deduction is established, credit cannot be denied merely because the deductor did not deposit, and Form 16 is not mandatory proof where salary slips, bank statements and correspondence establish the deduction.

Note what the Bombay and Gujarat decisions add to the Delhi line: Section 205 on its own is a shield against recovery, while these judgments go further and direct that the credit itself be granted and the refund considered. Both limbs are worth pleading.

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. CPC, however, will defend the denial under Section 199 read with Rule 37BA, on the footing that the tax was never paid to the Central Government. Expect that objection and answer it.

The remedy in practice: first, press the employer for a correction statement for the affected quarters, since that alone fixes Form 26AS at source. Simultaneously — not afterwards — file an application under Section 220(6) so the Rs 90,000 is held in abeyance and is not recovered or adjusted against a refund while the matter is open. Raise a TRACES and e-filing grievance attaching Form 16, salary slips and bank statements. File a rectification application under Section 154 citing Section 205, the CBDT Office Memorandum dated 1 June 2015 and its reiteration of 11 March 2016, and Sanjay Sudan. If the rectification is rejected or ignored, appeal to the CIT(A); and if recovery or refund adjustment is pressed regardless, a writ petition is the route that has produced relief in Sanjay Sudan, Satwant Singh Sanghera, Kartik Vijaysinh Sonavane and Manohar Ramabtar Jhunjhunwala alike. Budget realistically for that possibility rather than assuming rectification will close it.

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)
• Filing a bare rectification that claims “TDS as per Form 16” without meeting Section 199 and Rule 37BA head-on — that is the ground on which CPC and the Assessing Officer will reject it
• Not citing the CBDT Office Memorandum dated 1 June 2015 (and its reiteration of 11 March 2016) in the grievance and the rectification — it is the Department’s own instruction not to enforce a credit-mismatch demand, and it carries more weight with an officer than case law does
• Omitting a Section 220(6) application, so the demand stays live and gets adjusted against a later refund while the rectification is pending — Section 205 bars that adjustment, but only if you raise it
• Assuming rectification will settle it. In every reported case that produced relief, the taxpayer had to go to the High Court by writ; plan the escalation path from the outset

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: The moment a demand exists, file an application under Section 220(6) (Section 411(12) of the Income-tax Act, 2025 for tax year 2026-27 onward) to have it held in abeyance, expressly relying on Section 205 and the CBDT Office Memorandum dated 1 June 2015 (reiterated 11 March 2016), so the amount is not recovered or adjusted against a refund while you are fixing the mismatch
• Step 4: File a rectification application under Section 154 (Section 287 of the Income-tax Act, 2025 for tax year 2026-27 onward) citing Section 205, the CBDT Office Memoranda and Sanjay Sudan v. ACIT (2023) 452 ITR 107 (Delhi), and answering Section 199 and Rule 37BA squarely. Treat this as the first attempt: CPC and Assessing Officers frequently reject these on the footing that non-deposit is not a mistake apparent from the record
• Step 5: If rectification is rejected or not acted upon, appeal to the CIT(A). Where recovery or refund adjustment is being pressed notwithstanding Section 205, a writ petition to the High Court is the remedy that has actually produced relief in the reported cases, most recently Manohar Ramabtar Jhunjhunwala v. PCIT (Bombay High Court, 5 August 2026)
• 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.