Introduction
India’s tax system changed on April 1, 2026. After being in force for more than six decades, the Income Tax Act, 1961, has now been replaced by the Income Tax Act, 2025, bringing major changes to the country’s TDS and TCS framework.
From Tax Year 2026-27, all TDS tasks, including deductions, payments, challans, return filings, and certificates, must comply with the new framework under the Income Tax Act, 2025, as amended by the Finance Act, 2026. Using outdated TDS software or ERP systems may lead to filing errors, reconciliation issues, notices, and compliance penalties.
As companies and tax professionals prepare for this transition, you should clearly understand the latest TDS and TCS changes to ensure smooth, accurate tax compliance. In this blog, we discuss the major TDS and TCS changes introduced under the Income Tax Act, 2026.
TDS and TCS Changes Under the New Income Tax Act
The latest Income Tax Act brings several important changes to TDS and TCS submission. Some of the changes include new section numbers, revised forms, and updates to filing and reporting requirements. Both tax professionals and businesses should understand how these changes affect the processes. Updating your systems and using the latest TDS software can help ensure smooth compliance and reduce the risk of errors during FY 2026-27
All TDS Sections Renumbered
The new Act reorganises TDS and TCS provisions into three major sections:
- Section 392 – TDS on salary payments
- Section 393 – TDS on non-salary payments to residents and non-residents.
- Section 394 – TCS provisions
Every FVU code is now reassigned.
The quarterly salary TDS return previously filed in Form 24Q will now be filed using Form 138. Businesses must update ERP systems and TDS software before filing returns for TY 2026-27, as old section codes may result in validation failures.
Assessment Year Replaced by Tax Year
The concept of the Assessment Year (AY) has been replaced by the Tax Year (TY). The Tax Year will now correspond directly with the Financial Year.
For example:
- Income earned in Tax Year 2026-27 will be reported in the ITR filed in TY 2027-28.
All accounting systems, return formats, and tax documentation should be updated to reflect the new terminology.
Form 16 Replaced by Form 130
The annual salary TDS certificate, Form 16, is now renamed Form 130 under the new Act.
Like this, the other forms are changed to:
- Form 16A to Form 131
- Form 27D to Form 133
Although the structure and content remain largely unchanged, payroll and HR departments must issue certificates using the updated form numbers to remain compliant.
Manpower Services is explicitly covered under TDS.
Supply of manpower services is now particularly categorised as “work” under provisions aligned with Section 194C.
Applicable TDS rates:
- 1% for payments to resident individuals or HUFs
- 2% for all other entities
Businesses employing manpower suppliers must ensure proper TDS deduction in the new financial year.
No TDS on MACT Interest Payments
Interest awarded by the Motor Accident Claims Tribunal (MACT) to natural persons is now fully exempt from income tax.
Key changes are:
- No TDS deduction is required on MACT interest payments.
- The previous exemption limits of 50000 no longer apply.
Insurance companies and payors should update their systems accordingly.
Automated Lower/Nil TDS Certificate Process
The process for obtaining lower or nil deduction certificates is being automated under the new compliance framework.
The system will evaluate:
- Past tax filings
- Projected tax liability
- Eligibility parameters
Eligible applicants may receive certificates without manual intervention, reducing delays and administrative burden.
CBDT Guidelines Become Binding Again
Section 400(2) restores the binding nature of CBDT guidelines on both tax authorities and deductors.
This means CBDT circulars related to:
- Perquisites under Section 194R
- Virtual Digital Assets under Section 194S
- Other TDS/TCS clarifications
will carry mandatory compliance value from 1st April 2026.
New Mandatory Disclosures in Tax Audit Report
Form 3CD has now been replaced by Form 26 under the new Income Tax Act.
The earlier Clause 34 disclosures relating to TDS/TCS have now been split into Clauses 49, 50, and 51.
The updated reporting requires:
- Total number of TDS/TCS transactions reported
- Exact count of unreported transactions
- Monetary value of unreported transactions
This shift introduces stricter quantitative reporting requirements, making automated tracking systems essential for businesses.
PAN Replaces TAN for NRI Property Transactions
With the new TDS rules under Section 194IA,
For transactions covered under Section 194IA involving the purchase of immovable property from non-residents, buyers can now deposit TDS using their PAN instead of obtaining a TAN.
This change simplifies the compliance process for resident buyers involved in NRI property transactions.
However, a separate TDS return must still be filed for these transactions.
Major TCS Rate Changes
Several TCS categories will now attract a uniform 2% rate from 1st April 2026.
Key revisions include:
- Alcoholic liquor – 2%
- Scrap – 2%
- Coal, lignite, iron ore – 2%
- Tendu leaves – reduced from 5% to 2%
- LRS for education and medical purposes – 2%
- Overseas tour packages – flat 2% rate
The removal of the earlier slab structure for overseas tour packages significantly simplifies compliance for travel operators.
Reduced Time Limit for TDS/TCS Correction Statements
The time limit for filing TDS/TCS correction statements is now reduced.
Corrections can only be filed within two years from the end of the financial year in which the original statement was due.
Impact of TDS & TCS Changes on Businesses
The new TDS and TCS changes are not just about new section numbers. Businesses will need to update their payroll, ERP, and TDS filing software to accommodate the revised sections, new FVU codes, and renamed forms. Taking care of these updates early can help avoid errors and last-minute compliance challenges.
Payroll teams should also update their systems to reflect the increased standard deduction of ₹75,000 and the revised HRA exemption rules applicable to employees in certain cities. Accurate calculations are important to ensure the correct amount of TDS is deducted.
Finance and procurement teams should also review their manpower supply and worker deployment contracts. Recent clarifications have confirmed that TDS applies to these arrangements, making it important to deduct and report taxes correctly from the beginning of FY 2026-27.
Overall, businesses should use this transition period to review their tax processes and make the necessary system changes to stay compliant and avoid filing issues.
Penalties for TDS & TCS Non-Compliance
Not following TDS and TCS rules can be expensive for businesses. If TDS is not deducted when required, interest will be charged at 1% per month. If tax is deducted but not deposited on time, the interest rate increases to 1.5% per month. Delays in filing TDS returns can also attract a late fee of ₹200 per day.
Apart from these charges, businesses may face a bigger issue if applicable TDS is not deducted. The related expense may not be deductible, thereby increasing overall tax liability. Ignoring CBDT guidelines can further lead to reassessment and penalty proceedings. For finance teams, CFOs, and tax heads, TDS compliance is more than a regulatory requirement—it plays an important role in managing costs and protecting profitability.
Conclusion
The new Income Tax Act has made several changes to TDS and TCS. Businesses need to review their tax processes. There are new section numbers, forms, and reporting requirements. Staying informed and keeping your systems up to date can help you avoid compliance issues and penalties.
As tax regulations continue to evolve, finance professionals need to keep their knowledge up to date. Whether you are a student, an accountant, or a working professional, learning the latest taxation and compliance practices can give you an advantage. If you’re looking to build practical accounting and tax skills, an accounting course in Kochi can help you gain the knowledge needed to handle real-world financial and tax requirements with confidence.
FAQs
1. What is the difference between Assessment Year and Tax Year?
Under the new Act, the Assessment Year is now the Tax Year. This change simplifies reporting, as Tax Year matches the financial year in which income is earned.
2. Has Form 16 been replaced under the new Income Tax Act?
Yes. Form 16 is now Form 130. Form 16A is Form 131, and Form 27D is Form 133. Their purposes remain much the same.
3. Do businesses need to update their TDS software and ERP systems?
Yes. Act immediately to review and update your TDS software, ERP, and payroll systems to align with new section numbers, FVU codes, and form names. Taking prompt action is essential to avoid filing errors and compliance issues.
4. What are the penalties for TDS non-compliance?
If TDS is not deducted when required, interest is charged at 1% per month. If the deducted tax is not deposited on time, a 1.5% per-month interest charge applies. Late filing of TDS returns can also attract a fee of ₹200 per day.
5. What changes have been made to TCS rates?
Many TCS categories now have a 2% rate. This includes liquor, scrap, coal, lignite, iron ore, overseas tours, and some LRS transactions.
