26AS Reconciliation: Step-by-Step Guide for Accurate Tax Filing

26AS reconciliation is one of the most time-consuming yet crucial tasks that tax teams must undertake. One has to match the tax deducted at source (TDS) credit received between books and Form 26AS to ensure accuracy and avoid missing credits. Many businesses automate the process using 26AS reconciliation software. But does the standalone tool really automate without human intervention? Continue reading the article to understand the nitty-gritties of the 26AS reconciliation process, objectives and automation.

Key Takeaways

• Match Form 26AS TDS details with your ERP TDS receivable ledger quarterly to claim accurate credits for optimised advance tax computations.
• Resolve mismatches by following up with deductors for corrections on PAN/TAN errors, non-deposits, or wrong provision/amount.
• Regular reconciliation prevents penalties and scrutiny by ensuring TDS claims align precisely with 26AS data.

What is 26AS Reconciliation?

26AS reconciliation means matching the TDS received as per Form 26AS (Tax credit statement) and the TDS receivable ledger maintained on your ERP system. 

Form 26AS on the income tax portal is a consolidated statement of TDS deducted on a PAN of the taxpayer by various vendor entities for a given assessment year. It also contains other details such as TCS, advance tax paid, self-assessment tax paid, tax refunds received, TDS defaults and specified financial transactions.

Tax credit reconciliation is crucial. If a company claims any TDS credit over and above what appears in their 26AS, they are at risk of receiving a notice from the department. The taxpayer must ideally claim the TDS credit as it appears in 26AS. Form 26AS reconciliation ensures all eligible credits are claimed, preventing teams from overpaying advance tax. It helps finance teams chase non-compliant deductors and reclaim trapped refunds.

Hence, the 26AS reconciliation process is essential as it helps ensure the completeness and accuracy of TDS data. A regular 26AS reconciliation, not a one-time reconciliation at the end of the financial year, helps the taxpayer's business identify and correct any discrepancies with vendors. Ultimately, businesses can avoid high penalties for any short payment of taxes or incorrect disclosures.

Components of Form 26AS Relevant for Reconciliation

The only and crucial section of Form 26AS relevant for reconciliation is ‘Details of Tax Deducted at Source’. It contains information on all deductions made against your PAN, including-

• TDS on interest income from banks and other financial institutions
• TDS deducted on rent received
• TDS on payment to contractors/sub-contractors
• TDS on commission/brokerage
• TDS on professional/technical fees
• TDS on dividends from other companies

Why Mismatches Occur in 26AS

Some of the common reasons why mismatches occur in 26AS reconciliation are given below-

• Deductor-led reasons: The primary reason lies with deductor-led actions. Suppose they report wrong TAN/PAN, report incorrect taxable value/TDS amounts, report under the wrong TDS provision- 194J instead of 194C, choose the wrong assessment year or even fail to file TDS returns.
• Taxpayer-led reasons: The deductee can go wrong, leading to mismatches between 26AS and the books. Suppose the taxpayer has not accounted for an income/receipt in the books, or has incorrectly accounted for it under the wrong TDS head/wrong amounts, a mismatch can occur. 
• Other reasons: System and technical errors, such as portal glitches or server issues, can cause delays on the deductor’s end. Consider timing mismatch as well, wherein the expense is accounted for in one quarter, whereas the TDS was deducted and reflected in the 26AS in the next quarter.

Step-by-Step Process for 26AS Reconciliation

Companies do TDS 26AS reconciliation quarterly, half-yearly or annually, depending on the volume of their data and the availability of the team’s bandwidth.

Step 1: Fetch 26AS data from the Income Tax/TRACES portal.

Step 2: Pull out the TDS receivable ledger for the reconciliation period, in a spreadsheet.

Step 3: Conduct a TAN<>PAN mapping. Classify the 26AS data based on TAN and see if these are mapped against PAN. Ensure TDS receivable ledgers are present for all the given PANs.

Step 4: Match details in 26AS with entries in TDS Receivable Ledgers (TRL), vendor-wise. Ensure to take into consideration the LDC limit set for the PAN of the vendor, especially for high-value vendors.

The following are the buckets in TDS matching-

• Matched: Values in 26AS and TRL are matched based on an exact amount with a tolerance of ± ₹1. Matches can be either line items or group-level matches.
• Suggested: Values in 26AS and TRL are matched based on a system-defined tolerance amount. Matches can be either line items or group-level matches.
• Unmatched: Entries in 26AS that have no corresponding match in TRL, or vice versa.
• Missing: PAN/TAN is missing in 26AS but present in TRL, or vice versa.
• Not Considered for Matching: Group self-knock-off cases, negative entries not knocked off, or entries where PAN/TAN is not present in TRL under this category.

Step 5: Wherever discrepancies are found, take necessary actions either on the ERP or take it up with the concerned vendors for corrections.

26AS mismatch reconciliation is not as simple as it may seem in the above steps. With rising data volumes, handling data manually, in spreadsheets, or semi-automatically with point solutions becomes complicated. 

One-to-one and one-to-many matchings is impossible manually or using a siloed solution because vendors usually merge all transactions during the week or month and report as a single line item in returns, and the same reflects in 26AS. Clear Compliance Cloud has the most advanced reconciliation algorithm to perfectly automate 26AS vs TRL, with post-reconciliation analysis, every month/quarter instead of the end of the financial year.

Common Mismatch Scenarios and How to Fix Them

Some of the common mismatch scenarios are given below with solutions-

• Wrong PAN: The deductor may enter an incorrect PAN while filing the TDS returns. So, the TDS does not reflect in the taxpayer’s 26AS. The solution is to obtain Form 16A from the deductor, identify the error and request the vendor to correct the returns.
• Non-deposit of TDS: The deductor has deducted but not deposited the TDS amount/not filed quarterly returns with the government. So, the TDS does not reflect in the taxpayer’s 26AS. The solution is to follow up with the deductor to do the needful and file returns. File a complaint on TRACES if the vendor denies your rightful request.
• TDS credit mismatch: The amount of TDS in 26AS is less than the actual deduction (accounted in ERP as per the bank statement). It results in lower TDS claims. The solution for this issue is to reach out to the vendor to correct the returns for the updated amount of TDS.
• Wrong assessment year: The deductor selected the wrong financial year/assessment year in the TDS returns. So, your TDS reflects in the wrong year’s 26AS. The solution for this issue is to reach out to the vendor to correct the returns for tagging the TDS under the correct assessment year.
• Incorrect details of TAN/challan: Challan identification number or TAN of the deductor is wrong in 26AS. Thus, the tax payment won’t link to the TDS statement. The solution for this problem is that the deductor must perform a challan correction on the TRACES portal.
• Timing differences: Suppose the tax deducted in March is deposited in April of the next financial year by the employer. So, the TDS credit appears in the next financial year. If the amount is small, you can claim it next year. Otherwise, if the amount is substantial and impacts your cash outflow this year, then ensure the deductor files the return accurately reflecting the correct period, or provide proof of deduction in the current year

Consequences of Not Reconciling 26AS

If one does not reconcile their 26AS with books before filing the income tax return, it can potentially lead to loss of money due to tax notices and penalties for any short payment of tax.

• Loss of TDS credit if the deductor has not deposited TDS, and 26AS does not reflect that amount.
• If you show a higher TDS credit in ITR than available in 26AS, then you can end up with a demand notice. Furthermore, interest under Sections 234A, 234B, and 234C may be chargeable. Alternatively, tax refunds can be put on hold.
• You could become subject to a scrutiny assessment.
• You might be charged penalties ranging from 50% to 200% of the tax payable.

Clear Compliance Cloud provides an advanced AI-powered Direct Tax compliance platform. Advantages of Clear are as follows-

• High Matching Accuracy with complex algorithms and Many-to-Many matching of records
• Automated TAN<>PAN mapping
• Large-volume data processing and fast filtering
• Intelligent categorisation of results for deeper insights and faster analysis