TDS & TCS Changes from 1st April 2026

The Income-tax Act, 2025 marks a fundamental shift in India’s withholding tax framework, effective from 1st April 2026. While the rates of TDS and TCS remain largely unchanged, the structural, procedural, and compliance architecture has undergone a significant transformation.

This article provides a comprehensive analysis of the new TDS/TCS sections or rules, focusing on:

• Structural changes in law
• Section mapping from the 1961 Act to the 2025 Act
• Changes in forms, returns, and compliance systems
• Practical implications for taxpayers, professionals, and enterprises

The objective of this article is to enable the readers to understand not only what has changed, but also how it impacts real-world compliance and advisory.

1. Structural Overhaul of TDS/TCS Sections or Rules

The Income-tax Act, 2025 introduces a complete structural reorganisation of the withholding tax framework. Unlike the Income-tax Act, 1961, where TDS provisions were scattered across Sections 192 to 196D and the entire 194 series, the new law consolidates these provisions into a compact, table-driven architecture under Sections 392 to 402.

Core Structural Changes

• All TDS provisions are now housed under:
  • Section 392 → Salary
  • Section 393 → Entire TDS universe (Residents + Non-Residents + Special cases)
  • Section 394 → TCS
• Earlier section-wise fragmentation has been replaced with tabular classification
• Each nature of payment is mapped through structured serial-number-based entries.
• Every FVU code has been reassigned.

2. Section Mapping: Transition from 1961 to 2025

Under the Income-tax Act, 1961, TDS provisions were distributed across multiple sections, leading to interpretational and compliance challenges.

The 2025 Act addresses this by introducing a consolidated and table-driven structure, where each category of payment is mapped through structured entries rather than standalone sections.

3. Foundational System Changes

a. Assessment Year Replaced by Tax Year

Tax Year (TY) will be used going forward as the system of Assessment Year has been removed from 1st April 2026. Tax Year equals Financial Year. For example, income received in TY 2026-27 is filed in the ITR in TY 2027-28. Update ERP, returns and documentation to reflect the new referencing.

b. Changes in Forms (Certificate & Returns) – Rule 215 of Income Tax Rules, 2026

c. TDS Quarterly Return Forms (Rule 219 of Income Tax Rules, 2026)

d. Other TDS-Related Forms (Income Tax Rules, 2026)

4. MACT Interest: No TDS Deduction

Interest awarded by the Motor Accident Claims Tribunal (MACT) to a natural person is now fully exempt from income tax. No TDS is to be deducted on such interest payments. The earlier Rs. 50,000 ceiling does not apply. The entire amount is exempt. Insurers and other payors must update their payment systems accordingly.

This change reflects a policy intent to provide complete tax relief to accident victims and their families. It also removes litigation arising from partial exemptions and threshold disputes under the earlier Act.

5. TDS Changes from 1st April 2026

a. Salary & Employee Payments

c. Commission & Brokerage

c. Rent

d. Payment on transfer of certain immovable property other than agricultural land

Note – In case of consideration on which provisions of both serial numbers 3(i) and 3(ii) are applicable, tax shall be deducted under 3(ii) only.

e. Income from Capital Market

f. Interest Income

Note – The person responsible for making the payment referred to in serial number 5(ii) and (iii) of this Table, may at the time of making any deduction, increase or reduce the amount to be deducted for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the tax year.

The threshold for interest income for senior citizens has been rationalised, reflecting alignment with existing relief measures under other provisions.

g. Payments to contractors, fees for professional and technical services, avoid or expand

h. Dividend

Note – The tax shall be deducted at source before making any distribution or payment of dividend.

i. Other Cases

j. Non-Resident Payments

Note – The consolidation of non-resident withholding provisions under a structured table does not dilute the principles established under Section 195 jurisprudence. Determination of chargeability, applicability of DTAA, and grossing-up provisions continue to play a critical role.

Practitioners must therefore evaluate not just the rate prescribed in the table, but also – nature of income, applicable DTAA provisions and availability of lower/nil deduction certificates

K. Special Category Payments

6. TCS Changes from 1st April 2026

7. Non-TDS Deduction Certificate: Process Becomes Automated

The process for obtaining a lower or nil deduction certificate is being automated under the new TDS compliance framework. The system applies predefined eligibility rules based on past tax filings and projected liability. Certificates can be granted without manual officer intervention where the criteria are met. For enterprises that process high volumes of vendor LDC applications each year, this significantly reduces the backlog.

8. CBDT Guidelines Now Binding on Deductors

Section 400(2) of the Income Tax Act, 2025, is amended to restore the binding nature of CBDT guidelines on both tax authorities and deductors. The earlier draft of the Income Tax Act, 2025 had inadvertently dropped this clause from the 1961 Act. From 1st April 2026, CBDT circulars on TDS and TCS, including those on perquisites (194R) and virtual digital assets (194S), carry mandatory compliance weight. The argument that CBDT circulars are only advisory no longer holds.

9. Tax Audit TDS/TCS Schedule: New Mandatory Disclosures

Form 3CD (the tax audit report) has now been replaced by Form 26 under the new Act. The TDS/TCS disclosure, which was Clause 34 in the old form, is now spread across Clauses 49, 50, and 51 with a dedicated Schedule.

A major change is in the new equivalent of Clause 34(b), which now requires:

• Total number of TDS/TCS transactions reported in returns
• Total number of transactions NOT reported (previously a Yes/No tick; now an exact count)
• Monetary amount attributable to unreported transactions

For large enterprises filing TDS returns with thousands of transactions across multiple sections, providing exact counts of unreported transactions requires system-level tracking, not a human review. This cannot be produced manually at year-end. Build this tracking into your TDS workbench now, not in March 2027. This disclosure reflects a broader shift where quantitative accountability replaces qualitative declarations in tax audits.

10. TDS on Sale of Immovable Property by NRI: PAN Replaces TAN

Under the new TDS rules under Section 194IA, when a resident buys immovable property from a non-resident, TDS must now be deducted and deposited using the buyer’s PAN rather than a TAN. Earlier, buyers needed to register for a TAN solely for this transaction. That requirement is removed. This is a direct compliance relief for buyers dealing with NRI sellers in high-value residential and commercial property deals.

Note: A separate return form is still required for Section 194IA transactions. It is not reported in Form 140 (the new Form 26EQ).

11. TDS/TCS correction statement

Effective 1st April 2026, the TDS/TCS correction statement filing window is reduced to two years from the end of the financial year in which the original statement was due.

12. Impact of TDS & TCS Changes on Enterprises

System updates are non-negotiable this year. Section renumbering, new FVU codes, and new form names require changes across ERP, payroll, and TDS return preparation software. These are not minor patches.

For payroll systems:

More cities (Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, and Ahmedabad) now qualify for the 50% HRA exemption. The standard deduction for salaried employees is Rs. 75,000. Payroll systems must reflect both. Incorrect HRA computation leads to TDS short-deduction, which carries interest and expense disallowance consequences.

For procurement teams:

The manpower services clarification means TDS is now clearly applicable to worker deployment contracts. Review these before the first payment of FY 2026-27.

Practical Implication:

This clarification eliminates ambiguity that previously existed regarding classification of manpower supply arrangements. Businesses engaging contract labour, outsourcing agencies, or staffing companies must reassess their TDS applicability to avoid exposure under Section 398 (assessee in default).

13. TDS & TCS Penalties for Non-Compliance

Non-deduction leading to expense disallowance is a P&L risk, not just a compliance issue. This has direct implications for CFOs and tax heads of large enterprises.

14. Lower / Nil Deduction Certificates — Section 395

The mechanism for obtaining a lower or nil TDS certificate (previously Section 197) is preserved in Section 395. The payee applies to the Assessing Officer in Form No. 128 (old Form 13), and on satisfaction that the total income justifies lower deduction, the AO issues a certificate specifying the rate. The certificate is valid until its specified date and the deductor must deduct at that rate for the entire validity period.

For non-resident payments under Section 393(2) Sl. No. 17 (old Section 195), the payer may apply under Section 395(2) for determination of the chargeable proportion — meaning TDS applies only on the part of the sum that is actually chargeable to tax in India.

15. TAN, Higher TDS for Non-PAN, and Quarterly Returns — Section 397

The TAN application obligation (old Section 203A) continues under Section 397(1). The higher TDS rate for non-PAN (old Section 206AA) is now Section 397(2): if a deductee fails to furnish PAN, TDS is deducted at the higher of (a) the rate specified; (b) rates in force; or (c) 5% for goods purchase (Sl. No. 8(ii)) and e-commerce (Sl. No. 8(v)), or 20% in all other cases. The old 20% rate for non-PAN is retained as the general rule.

16. Quarterly TDS return due dates

17. Consequences of Failure — Section 398

If a deductor fails to deduct or pay TDS, they are deemed an assessee in default under Section 398(1) — same as old Section 201. The interest rate on the shortfall remains at 1% per month from the date tax was deductible to the date of deduction, and 1.5% per month from the date of deduction to the date of payment to the government.

The protection from default status (old Section 201(1) proviso) is retained in Section 398(2): a deductor is not deemed in default if the payee has filed their ITR, included the amount in their income, and paid the tax — subject to a CA certificate in Form No. 149 (old Form 26A/27BA).

Section 195 of the Income Tax Act 1961 is replaced by Section 393(2) Table Sl. No. 17 of the Income Tax Act 2025. The key principle — that the obligation to deduct TDS extends to all persons, resident or non-resident, regardless of whether the payee has any presence in India — is explicitly preserved.

18. Action Points

1. Update TAN certificates and related correspondence and internal documents

2. Obtain revised/new lower/nil-TDS certificates u/s 393

3. Conduct a comprehensive TDS/TCS compliance review.

4. The renumbering of forms requires immediate updates in ERP, payroll, and compliance systems. Incorrect form usage may result in defective compliance

5. Professionals must ensure correct mapping between old and new forms during the transition period

6. Banks and financial institutions must recalibrate their systems to correctly apply differentiated thresholds based on the deductee category.

 19. Key Changes at a Glance

• Shift from section-based framework to table-driven structure
• Introduction of Tax Year replacing Assessment Year
• Consolidation of TDS provisions under Section 393
• Renumbering of all TDS/TCS forms
• Automation of lower/nil deduction certificates
• Enhanced system-driven compliance and reporting
• Quantitative disclosures in tax audit
• Binding nature of CBDT guidelines restored

 20. Analytical Position

The Income-tax Act, 2025 represents a paradigm shift in the administration of TDS and TCS provisions. While the tax incidence remains largely unchanged, the transformation lies in the structural simplification, digitisation, and data-driven compliance approach.

For professionals, the focus now moves beyond interpretation of law to implementation within systems. Early preparedness, system alignment, and process re-engineering will be critical to ensuring seamless compliance under the new Act.