TDS & TCS: Transitioning to the Income-tax Act, 2025 & Rules, 2026

Effective April 1, 2026, the Income-tax Act, 2025 along with the Income-tax Rules, 2026 has replaced the existing 1961/1962 tax framework.

The transition primarily focuses on structural and drafting improvements without significantly changing the core taxation principles.

Key objectives include:

⇒  Simplification of statutory language

⇒  Improved structural clarity

⇒  Reduction in interpretational disputes

⇒  Alignment with modern legislative standards

⇒  Enhancement of voluntary compliance

Introduction of Tax Year

Concept of “Tax Year”

⇒  The term “Tax Year” replaces the earlier Previous Year (PY)

⇒  The Assessment Year (AY) is now referred to as the financial year succeeding the tax year

Example:

Income earned in Tax Year 2026–27 will be assessed and filed in FY 2027–28

Key highlights on TDS & TCS 

TDS on salaries (Section 392)

⇒  Replaces Section 192 of the Income-tax Act, 1961

⇒  Tax deduction continues at the average rate based on the estimated annual salary

Key Highlights:

⇒  Employers may pay tax on non-monetary perquisites [Sec 392(2)]

⇒  Perquisite valuation governed by Rule 15 (Income-tax Rules, 2026)

⇒  Employees must submit proof of claims via Form No. 124

⇒  Statement of perquisites: Form No. 123 (earlier Form 12BA)

⇒  Salary certificate: Form No. 130 (earlier Form 16), to be issued by June 15

Note: No major changes in tax rates or thresholds

TDS on payments to residents (Domestic Vendors) (Section 393(1))

A consolidated “Super-Table” replaces multiple sections under the 194 series.

Common categories include:

Note: No significant changes in rates or thresholds; only section references are updated

TDS on payments to non-residents (Section 393(2))

⇒  Replaces Section 195 of the 1961 Act

⇒  Applies rates in force for applicable transactions

Note: No major changes in taxation principles

TDS on payments to any person (Section 393(3))

⇒  Covers payments such as partner remuneration, commission, interest, salary, and bonus

Note: No major changes in taxation principles

Tax collection at source (Section 394)

⇒ Standardises TCS rate at 2% for most categories under the Finance Act, 2026

⇒  No significant change in core provisions

Modernised forms (Income-tax Rules, 2026)

Key updates include:

Quarterly Returns:

Certificates:

Payment mechanism & challans

⇒  New TDS/TCS challan: ITNS 281N replaces the old challan number ITNS 281

⇒  Advance/Self-assessment tax: ITNS 280N replaces the old challan number ITNS 280

1. Form No. 141 introduced for specific cases (property, rent, VDA, etc.): This is a critical new form for specific categories where a TAN is not required. It is used for: (TDS on sale of property and rent- old form 26QB/QC)Rent paid by Individual/HUF under Sec 393(1) [Sl. No. 2(i)].

   1. Immovable Property transfer under Sec 393(1) [Sl. No. 3(i)].

   2. Specified Contractor/Professional fees under Sec 393(1) [Sl. No. 6(ii)].

   3. Transfer of Virtual Digital Assets (VDA) under Sec 393(1) [Sl. No. 8(vi)].

Additional points:

1. Lower Deduction [Sec 395(6)]: Applications for lower or nil TDS/TCS can now be filed electronically in Form No. 128 (old form 13).

2. Nil TDS Declarations [Sec 393(6)]: Self-declarations (Form 15G/H equivalent) are made in Form No. 121. These are NOT permitted for Contract or Professional Fees.

3. Non-Resident Reporting [Sec 397(3)(d)]: Payers must furnish information for all payments to non-residents, even if not taxable, in Form No. 145 (Part D) [Earlier form 15CA-Part D].

4. PAN Failure [Sec 397(2)]: If the payee fails to furnish a PAN, tax is deducted at the higher of: specified rate, rates in force, or 20% (Capped at 5% for goods/e-commerce).

5. Daily Interest [Sec 398(3)]: Failure to deduct/collect triggers 1% per month interest; failure to pay after deduction triggers 1.5% per month.

6. Late Filing Fee [Sec 427(1)]: Automatic fee of Rs 200 per day for late returns, not to exceed the tax amount.

Conclusion

While the Income-tax Act, 2025 does not introduce significant changes in tax rates or thresholds, it brings a comprehensive structural overhaul.

All teams are advised to:

⇒  Update accounting and compliance systems

⇒  Align processes with new section references and forms