Clause 34(c) of Tax Audit Report: TDS/TCS Interest Reporting for AY 2026-27

Clause 34(c) of tax audit report is the Form 3CD disclosure for interest payable under Section 201(1A) on TDS defaults and Section 206C(7) on TCS defaults. For AY 2026-27, the tax auditor must identify whether such interest liability arose during FY 2025-26, quantify the amount TAN-wise, and report the amount paid together with the payment date. This is separate from reporting TDS/TCS deduction or collection particulars under Clause 34(a) and statement-filing compliance under Clause 34(b).

AY 2026–27 update (28 September 2026): CBDT changed the ordinary tax-audit report date from 30 September to 21 October 2026 and the related audited return date from 31 October to 21 November 2026. Separate transfer-pricing dates are unchanged. Official CBDT announcement

Clause 34(c) of Tax Audit Report: What Exactly Must Be Reported?

The Income Tax Department’s 2026 guidance on items reportable in the tax audit report expressly states that Clause 34(c) requires the auditor to state whether the assessee is liable to pay interest under Section 201(1A) or Section 206C(7). If the answer is yes, the relevant details have to be furnished against Clause 34(c). In practical terms, the working paper should not stop at a simple yes/no conclusion: it should reconcile the TAN, the interest payable, the interest actually paid and the date of payment.

This makes Clause 34(c) a consequence-oriented disclosure. Clause 34(a) asks whether tax was required to be deducted or collected and reports the underlying TDS/TCS position. Clause 34(b) tests whether the prescribed statements were furnished and whether they contained the required details. Clause 34(c) then asks whether interest became payable because deduction, collection or remittance was delayed.

Section 201(1A) Interest: TDS Defaults Covered by Clause 34(c)

For FY 2025-26, TDS obligations triggered on or before 31 March 2026 continue to be governed by the Income-tax Act, 1961. The Income Tax Department’s current transition guidance confirms that the commencement of the Income Tax Act, 2025 does not disturb liabilities that arose under the 1961 Act for periods beginning before 1 April 2026.

Section 201(1A) broadly creates two interest legs for TDS defaults. Where tax was deductible but was not deducted on time, interest applies at 1% for every month or part of a month from the date on which tax was deductible to the date it is actually deducted. Where tax was deducted but not deposited on time, interest applies at 1.5% for every month or part of a month from the date of deduction to the date of actual payment to the Government.

The Department’s current TDS compliance FAQ uses the same framework and specifically confirms that a March 2026 deduction deposited after the statutory due date attracts 1.5% monthly interest from the date of deduction to the date of actual payment. For tax-audit purposes, the interest working should therefore be built transaction-wise or challan-wise before it is aggregated TAN-wise for Clause 34(c).

Common TDS situations that can create Clause 34(c) reporting

• Tax was deducted one or more months after the date on which it became deductible.

• Tax was deducted correctly but the challan was deposited after the statutory due date.

• A lower TDS amount was deducted and the shortfall was corrected later.

• A year-end provision triggered TDS but deduction or deposit was completed only in the next month or later.

• A correction statement revealed an earlier short deduction or short payment requiring interest.

• Different branches or payroll/vendor systems used the same TAN and delayed items were missed in the central reconciliation.

Section 206C(7) Interest: TCS Defaults Covered by Clause 34(c)

Clause 34(c) also covers interest under Section 206C(7). The provision applies where the person responsible for collecting tax fails to collect it or, after collection, fails to pay it as required. From 1 April 2025, the provision distinguishes the two stages in a manner aligned more closely with TDS: interest is 1% per month or part of a month from the date tax was collectible to the date it is collected, and 1.5% per month or part of a month from the date of collection to the date it is actually paid.

Accordingly, a seller or other person with TCS obligations should not test Clause 34(c) merely by checking whether the quarterly TCS return was filed. The audit file should separately test the date tax became collectible, the date it was actually collected, the date the amount was deposited and whether the resulting interest was paid.

Worked Example: Late TDS Deposit and Clause 34(c)

Assume a company deducts TDS of ₹2,00,000 on a professional-services payment on 18 February 2026 but deposits the amount on 20 April 2026 after the applicable due date. The interest under Section 201(1A) for the late-deposit period must be computed at 1.5% for every month or part of a month from the date of deduction until actual payment. Because the statutory formula counts part of a month as a full month, the period must be tested carefully instead of using a simple daily-interest calculation.

The Clause 34(c) working paper should identify the TAN, underlying TDS amount, due date, actual payment date, number of months or parts thereof under the statutory method, interest payable, challan details for the interest payment and the date on which the interest was actually discharged. If the interest remains unpaid as of the tax-audit reporting date, that position should be reflected accurately rather than treating the liability as resolved merely because the TDS principal has been deposited.

Clause 34(a), 34(b) and 34(c): Do Not Mix the Three Tests

• Clause 34(a): tests the obligation to deduct or collect tax and reports the underlying TDS/TCS particulars.

• Clause 34(b): tests whether TDS/TCS statements were required, filed on time and complete.

• Clause 34(c): tests whether interest is payable under Section 201(1A) or Section 206C(7) and reports the interest position.

The same transaction can affect all three sub-clauses. For example, a vendor payment may involve a short deduction under Clause 34(a), a correction statement under Clause 34(b), and interest under Section 201(1A) that must be reported under Clause 34(c). Treating the three sub-clauses as separate reconciliation layers is therefore more reliable than trying to prepare each one independently.

How to Reconcile Clause 34(c) for AY 2026-27

• Obtain the complete TAN-wise TDS and TCS ledger for FY 2025-26, including year-end entries and subsequent corrections.

• Reconcile books with challans, quarterly statements, TRACES defaults or justification reports, and correction statements.

• Identify each late deduction, late collection, short deduction, short collection and delayed remittance.

• Recompute interest independently under Section 201(1A) and Section 206C(7) rather than relying only on software output.

• Check that part-month rules have been applied correctly and that the period begins from the statutory trigger date.

• Match interest actually paid with challan evidence and bank records.

• Separate liabilities that were paid before the tax-audit report from amounts still unpaid on the reporting date.

• Cross-check Clause 34(c) against Clauses 34(a) and 34(b) so that defaults, corrections and interest consequences tell one consistent story.

Common Mistakes in Clause 34(c) of Form 3CD

• Reporting only interest demanded by the portal and ignoring independently identifiable interest liability.

• Using a daily interest calculation instead of the statutory month-or-part-of-month method.

• Calculating late-deduction interest and late-payment interest as one blended rate.

• Ignoring TCS interest under Section 206C(7) because the audit team focuses only on TDS.

• Failing to update the working after a correction statement or late challan is filed close to the tax-audit date.

• Not reconciling TAN-wise interest with the amounts disclosed in Clause 34(a) and the statements reported in Clause 34(b).

• Assuming that payment of the principal TDS/TCS automatically closes the interest exposure.

AY 2026-27 Transition: Which Act Applies?

A practical complication for AY 2026-27 is the transition to the Income Tax Act, 2025 from 1 April 2026. The Income Tax Department has clarified that TDS obligations whose triggering event occurred on or before 31 March 2026 continue under the 1961 Act even if the later deposit or interest payment happens after 1 April 2026. Accordingly, Clause 34(c) reporting for FY 2025-26 should preserve the 1961 Act analysis for those defaults rather than mechanically applying new-law section numbering to an old-law liability.

Finance-Team Checklist Before Signing Form 3CD

• Confirm all TANs and all branches/business units are included.

• Reconcile payroll TDS, vendor TDS and TCS separately before consolidation.

• Review March 2026 deductions and collections with special care because deposits may fall after year-end.

• Obtain the latest TRACES/default reports and verify whether any identified liability has since been corrected.

• Document the statutory interest computation for each material default.

• Retain challans and payment dates for interest actually paid.

• Tie Clause 34(c) to Clauses 34(a) and 34(b) and to any material tax provision or expense recorded in the books.

• Ensure the final position reflects developments up to the tax-audit report date.

Frequently Asked Questions

Is Clause 34(c) applicable only when the Income Tax Department raises a demand?

No. The audit question is whether the assessee is liable to pay interest under Section 201(1A) or Section 206C(7). A liability may exist based on the statutory facts even before a formal demand is raised.

What is the difference between Clause 34(b) and Clause 34(c)?

Clause 34(b) deals with furnishing TDS/TCS statements and their completeness. Clause 34(c) deals with interest consequences arising from TDS/TCS defaults. A correction statement can therefore affect both sub-clauses.

Does late deposit of TDS after deduction attract 1.5% per month?

For FY 2025-26 liabilities governed by Section 201(1A), the Income Tax Department confirms 1.5% per month or part of a month for delay from the date of deduction to actual payment.

Does Clause 34(c) cover TCS interest?

Yes. The clause expressly covers interest under both Section 201(1A) for TDS and Section 206C(7) for TCS.

Related PGT & Associates Reading

Form 3CD Clause 34 for AY 2026-27: TDS/TCS Reporting, Defaults & Reconciliation — https://www.pgtandassociates.com/post/form-3cd-clause-34-ay-2026-27-tds-tcs-reporting

Clause 34(b) of Tax Audit Report: TDS/TCS Statement Filing for AY 2026-27 — https://www.pgtandassociates.com/post/clause-34b-tax-audit-report

Tax Audit AY 2026–27: Forms 3CA/3CB/3CD, now due 21 October — https://www.pgtandassociates.com/post/tax-audit-ay-2026-27-forms-deadline

Primary Sources

Income Tax Department — Items reportable in the Tax Audit Report (2026): https://www.incometaxindia.gov.in/documents/20117/42998/Items-reportable-in-the-Tax-Audit-Report_2026-05-22_04-53-07_bec8b2_en.pdf

Income Tax Department — TDS Compliance FAQs: https://www.incometax.gov.in/iec/foportal/help/all-topics/e-filing-services/tds-compliance

Income Tax Department — Section 206C: https://www.incometaxindia.gov.in/w/section-206c-35

Practical Takeaway

Clause 34(c) should be treated as the final consequence check in the TDS/TCS audit chain. A clean tax-audit file should establish what tax was required to be deducted or collected, whether statements were correctly furnished, whether any timing or quantum default occurred, how statutory interest was computed, and whether that interest was actually paid. For businesses with high transaction volumes, the most effective control is a monthly TAN-wise default tracker rather than a year-end reconstruction exercise.

PGT & Associates assists businesses with tax-audit readiness, TDS/TCS reconciliations and Form 3CD reporting. Professional advice should be obtained for fact-specific positions; this article is general information and does not constitute legal or tax advice.