From 1 April 2026, the Income Tax Act, 1961 is no longer the governing law for new transactions. Every salary credited, every contractor payment made, and every professional fee processed from that date falls under the Income Tax Act, 2025. For businesses, this is not a cosmetic update. The entire TDS and TCS framework has been restructured with new section numbers, new form names, new payment codes, and tighter compliance requirements. If your payroll team is still referencing Section 194C or Section 194J for April 2026 transactions, those returns will generate system validation errors on the income tax portal.
This guide explains every major TDS change from April 2026, what it means for your business, and what your accounts and payroll teams must update before filing the first quarterly return for Tax Year 2026-27.
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Why the TDS Framework Changed So Completely
The Income Tax Act, 1961 contained over 60 individual TDS sections. Sections 192 through 194T each carried their own threshold, their own rate, and their own set of provisos. Over six decades of amendments had made the Act genuinely difficult to navigate. Finding the correct rate for a payment required reading multiple sub-sections and memorising which sections overlapped.
The Income Tax Act, 2025 solves this by consolidating everything into three parent sections. Section 392 covers salary TDS. Section 393 covers all other TDS payments to residents and non-residents, organised in a tabular format across three clear categories. Section 394 covers all TCS provisions. The rates and thresholds are largely unchanged. What changed is the structure, the referencing system, and the form numbers.
Change 1: All TDS Sections Are Renumbered Under Three Parent Sections
Under the new Act, the entire 194-series is retired. From 1 April 2026, all TDS transactions reference the new section numbers. Section 392 handles salary TDS and replaces the old Section 192 and 192A. Section 393 handles all non-salary TDS for residents, non-residents, and any-person categories, and replaces sections 194C, 194J, 194I, 194H, 194A, 194D, 194DA, 194N, 194R, 194S and all others. Section 394 replaces all TCS provisions that previously appeared across scattered sections.
Additionally, the Income Tax Department has introduced a numeric payment code system. Instead of citing section numbers like 194C or 194J in returns and challans, deductors now use numeric codes ranging from 1001 to 1092. For example, payments to resident contractors that previously cited Section 194C now use Code 1005 or 1006 depending on whether the payee is an individual or company. Professional fees that previously cited Section 194J at 10% now use Code 1027. Technical services that previously attracted 2% under Section 194J now use Code 1026. Using the wrong code is effectively an under-deduction on record, which triggers a demand notice from the system automatically.
The Transition Rule: Which Law Applies to Which Payment
The fundamental principle for deciding which law applies is straightforward. The Income Tax Department has confirmed that applicability depends on the event of credit or payment, whichever is earlier. If that earlier event falls on or before 31 March 2026, the Income Tax Act, 1961 governs the transaction. If that earlier event falls on or after 1 April 2026, the Income Tax Act, 2025 applies. This means Q4 of FY 2025-26, covering payments up to 31 March 2026, must use old section numbers in Form 24Q and Form 26Q even if those returns are filed after April 2026.
Change 2: Assessment Year Is Replaced by Tax Year
From 1 April 2026, the Income Tax Act, 2025 replaces the previous system of Financial Year and Assessment Year with a single concept called Tax Year. Under the old system, income earned in FY 2025-26 was assessed in Assessment Year 2026-27. This created confusion, particularly in litigation and documentation. Under the new system, income earned in Tax Year 2026-27 is filed and assessed in Tax Year 2027-28. The Tax Year equals the Financial Year. This is a terminology change, not a structural change to how tax is calculated. However, all ERP systems, payroll software, TDS returns, and documentation must now reference Tax Year rather than Assessment Year for transactions after 1 April 2026.
Change 3: New TDS Return Forms Replace the Old Form Numbers
Every TDS and TCS return form has been renumbered under the Income Tax Rules, 2026. The old Form 24Q, which was the quarterly return for salary TDS, is now Form 138 and covers TDS under Section 392. The old Form 26Q, which covered all non-salary payments to residents, is now Form 140 and covers Section 393(1). The old Form 27Q, which covered payments to non-residents, is now Form 144 and covers Section 393(2). The old Form 27EQ, which was the TCS return, is now Form 143 and covers Section 394.
Importantly, the content and structure of these returns remain largely familiar. The form logic is unchanged. What changed is the form number and the legal references within. Any return filed with old form numbers for Tax Year 2026-27 transactions will generate validation errors at the time of upload.
Change 4: Form 16 Is Replaced by Form 130
Under the Income Tax Rules, 2026, Form 16 is no longer valid for Tax Year 2026-27. The annual TDS certificate for salaried employees is now Form 130. Form 16A, which was issued for non-salary TDS deductions to vendors and service providers, is now Form 131. Form 27D, which was the TCS certificate, is now Form 133.
Form 130 follows a three-part structure. Part A contains deductor and deductee details. Part B provides quarter-wise TDS reconciliation. Part C contains either Annexure I with full salary computations showing gross salary, exemptions, deductions, taxable income and tax, or Annexure II for pension and interest for senior citizens. Employers must issue Form 130 by 15 June after the end of the Tax Year. Form 130 can only be generated through the TRACES portal after the quarterly Form 138 return is filed. Offline or self-generated versions are invalid. Any employer who issues a document labelled Form 16 for Tax Year 2026-27 salary is technically issuing a non-compliant certificate, which creates problems for employees when they file their own returns.
Change 5: Manpower Services Now Explicitly Covered Under the Contractor TDS Provision
The supply of manpower services is now explicitly included as work under the TDS provision that corresponds to the old Section 194C, now covered under Section 393 of the new Act. Earlier, there was ambiguity about whether deploying contract workers constituted a works contract or a service contract, and some businesses avoided deducting TDS on manpower supply invoices on this basis. That ambiguity is gone. From 1 April 2026, TDS applies clearly to manpower supply payments. The rate is 1% where the payment goes to a resident individual or HUF, and 2% for all other cases. Businesses that have not been deducting TDS on worker deployment contracts must review and correct this for all April 2026 payments onwards.
Change 6: Form 15G and Form 15H Are Replaced by a Single Form 121
Under Section 393(6) of the Income Tax Act, 2025, the age-based distinction between Form 15G and Form 15H is removed. Previously, individuals below 60 submitted Form 15G and senior citizens submitted Form 15H to declare that their income was below the taxable threshold and request nil TDS deduction. From 1 April 2026, both are replaced by a single unified Form 121. This form works for all age groups and follows a streamlined digital process. Furthermore, payer entities must now allot a 26-character Unique Identification Number to every Form 121 received. This ensures proper tracking and reduces instances of declarations going missing during assessments.
Change 7: MACT Interest Is Fully Exempt, No TDS Required
Interest awarded by the Motor Accident Claims Tribunal to a natural person is now fully exempt from income tax under the new Act. No TDS deduction applies on such interest payments at all. The earlier threshold of Rs. 50,000 does not apply. The entire amount is exempt regardless of size. Insurers and legal payment processors must update their payment systems accordingly. Any TDS deducted on MACT interest payments after 1 April 2026 would constitute excess deduction and create refund complications for the recipient.
Change 8: NRI Property TDS Now Uses Buyer’s PAN Instead of TAN
Under the provision corresponding to old Section 194IA, when a resident buyer purchases immovable property from a non-resident seller, TDS must be deducted and deposited using the buyer’s PAN. Under the old law, the buyer needed to separately obtain a TAN solely for this transaction, which created significant friction in property deals involving NRI sellers. That requirement is now removed. The buyer’s PAN serves as the identifier for deduction and deposit. However, a separate return form is still required for these transactions, and they are not reported in Form 140, which is the new Form 26Q equivalent for regular non-salary payments.
Change 9: CBDT Guidelines Are Now Binding on All Deductors
Section 400(2) of the Income Tax Act, 2025 restores and makes explicit the binding nature of CBDT guidelines on both tax authorities and deductors. The earlier draft of the 2025 Act had inadvertently dropped this clause from the 1961 Act. That gap is now corrected. From 1 April 2026, CBDT circulars on TDS and TCS, including those on perquisites under the old Section 194R and on virtual digital assets under the old Section 194S, carry mandatory compliance weight for all deductors. The argument that CBDT circulars are advisory and not legally binding no longer holds. Any business that has been treating CBDT guidance on vendor perquisites or cryptocurrency transactions as optional should reconsider its position immediately.
Change 10: Tax Audit Report Changes, New Disclosure Requirements for TDS Transactions
Form 3CD, the tax audit report under the old Act, is replaced by Form 26 under the Income Tax Act, 2025. The TDS and TCS disclosure that was Clause 34 in the old form is now spread across Clauses 49, 50, and 51 with a dedicated schedule.
The most significant change in this area is in the new equivalent of old Clause 34(b). Previously, auditors ticked a Yes or No box to confirm whether all TDS transactions were reported. Under the new Form 26, the disclosure requires three specific data points. First, the total number of TDS and TCS transactions reported in returns. Second, the total number of transactions not reported, expressed as an exact count rather than a yes-no answer. Third, the monetary amount attributable to unreported transactions. For large businesses filing TDS returns with thousands of transactions across multiple vendor categories, producing an exact count of unreported transactions requires system-level tracking built into the TDS workbench throughout the year. This cannot be reconstructed manually at year-end audit time. Businesses that wait until March 2027 to address this will face a genuinely difficult audit process.
TCS Rate Changes from 1 April 2026
Several TCS categories that previously carried different rates now move to a flat rate of 2% under the Finance Act, 2026. Alcoholic liquor for human consumption moves from 1% to 2%. Scrap moves from 1% to 2%. Coal, lignite, and iron ore move from 1% to 2%. Tendu leaves move from 5% to 2%. LRS remittances for education and medical treatment, which previously attracted 5% above Rs. 10 lakh, now attract a flat 2% without any threshold distinction.
The biggest practical change for businesses comes in overseas tour packages. Under the old law, tour packages attracted TCS at 5% up to Rs. 10 lakh and at 20% beyond that. The 20% rate created operational problems for travel agents and corporate travel booking teams handling group itineraries above that threshold. That slab structure is gone entirely. From 1 April 2026, overseas tour packages attract a flat 2% regardless of the booking value. This simplifies invoicing and reduces the compliance burden for travel companies significantly.
| TCS Category | Old Rate | New Rate from 1 April 2026 |
|---|---|---|
| Alcoholic liquor for human consumption | 1% | 2% |
| Scrap | 1% | 2% |
| Coal, lignite, iron ore | 1% | 2% |
| Tendu leaves | 5% | 2% |
| LRS for education and medical treatment | 5% above Rs. 10 lakh | Flat 2% |
| Overseas tour packages | 5% up to Rs. 10L, 20% above | Flat 2% |
Penalties for TDS Non-Compliance Remain in Force
The penalty and interest framework for TDS and TCS defaults is unchanged under the Income Tax Act, 2025. Failure to deduct TDS attracts interest at 1% per month from the date on which deduction was due to the date of actual deduction. Failure to deposit TDS after deduction attracts interest at 1.5% per month from the date of deduction to the date of actual payment. Late filing of TDS returns attracts a mandatory fee of Rs. 200 per day under the provision corresponding to old Section 234E.
Additionally, failure to deduct TDS when applicable leads to disallowance of the corresponding expense in the deductor’s tax computation. This is a direct P&L consequence, not merely a compliance issue. A business that misses TDS on Rs. 50 lakh of contractor payments does not just face interest and late fees. It also risks losing the deduction for that Rs. 50 lakh expense entirely, which increases its taxable income by that amount.
⚠️ TDS Penalty Summary for Tax Year 2026-27
Failure to deduct TDS: Interest at 1% per month from date it was deductible
TDS deducted but not deposited: Interest at 1.5% per month
Late TDS return filing: Rs. 200 per day from due date
Non-deduction of applicable TDS: Expense disallowed in tax computation
Using old section numbers for April 2026 transactions: Return validation errors at portal
Ignoring binding CBDT guidelines: Reassessment risk and penalty proceedings
One quarter of non-compliance under the new Act can create compounding consequences across interest, penalties, expense disallowance and audit disclosure requirements simultaneously.
What Your Business Must Do Before Filing the First Return for Tax Year 2026-27
Update Your ERP and Payroll Software
Section renumbering is not optional. Your ERP and payroll systems must update TDS section references to the new Section 392, 393, and 394 numbering. Additionally, TDS challans and return filings must now use numeric payment codes from 1001 to 1092 in place of old section numbers. Any system that still generates returns referencing 194C, 194J, or 194H for April 2026 transactions will face validation errors when you attempt to upload the return to the income tax portal.
Review All Vendor and Payroll TDS Configurations
Map your existing vendor categories to the new payment code system. Pay particular attention to professional services and technical services, because the old Section 194J split into two separate codes with different rates. Code 1026 covers technical services, royalty on cinematographic films and call centre fees at 2%. Codes 1027 and 1028 cover professional services and director fees at 10%. Using Code 1026 where Code 1027 should apply is effectively an under-deduction of 8%, which creates a demand notice. Review all vendor TDS configurations against the new code mapping before processing the first April 2026 payment run.
Update Payroll for Salary TDS Under Section 392
Reset TDS computation for all employees from 1 April 2026 for Tax Year 2026-27. The Income Tax Department has confirmed that employers must restart TDS calculation considering projected income, investment declarations, and tax regime choices for the new Tax Year. Investment declarations for Tax Year 2026-27 must reference provisions of the Income Tax Act, 2025, not the old Act. Furthermore, the HRA exemption now extends the 50% city classification to Delhi, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, and Ahmedabad. The standard deduction for salaried employees is Rs. 75,000 under the new regime. Incorrect HRA computation leads to short deduction of TDS, which attracts interest and expense disallowance consequences.
File Q4 FY 2025-26 Returns With Old Form Numbers
Q4 of FY 2025-26, covering payments made up to 31 March 2026, must use old form numbers. File Form 24Q for salary TDS and Form 26Q for non-salary TDS with old section numbers even if you file those returns in May or June 2026. The governing law for those transactions is still the Income Tax Act, 1961. Switching to new form numbers for Q4 FY 2025-26 returns would be incorrect.
Build TDS Transaction Tracking Into Your Audit Workflow Now
The new Form 26 tax audit report requires an exact count of unreported TDS transactions and the monetary amount involved. This cannot be produced through a year-end manual review of thousands of transactions. Build this tracking into your TDS workbench from April 2026 onwards. Every month, reconcile transactions where TDS applicability was reviewed and decided against, document the rationale, and keep a running count. This will prevent a crisis at the time of tax audit in the following year.
Frequently Asked Questions About TDS Changes from April 2026
Do TDS rates change from 1 April 2026?
TDS rates are largely unchanged under the Income Tax Act, 2025. The consolidation under Sections 392, 393, and 394 is a structural and referencing change, not a rate change. However, some TCS rates do change, particularly for overseas tour packages, tendu leaves, and LRS remittances for education and medical purposes, all of which move to a flat 2%. Additionally, the split of old Section 194J into separate codes for technical services (2%) and professional services (10%) makes rate differentiation more explicit and enforceable.
Can I still use old section numbers in TDS returns filed after April 2026?
For Q4 FY 2025-26 transactions that occurred on or before 31 March 2026, yes. Those returns use old section numbers even if filed after April 2026. For any transaction from 1 April 2026 onwards, old section numbers will cause validation errors on the income tax portal. The governing principle is the date of credit or payment, whichever is earlier.
Is Form 16 still valid for FY 2025-26?
Form 16 is valid for FY 2025-26 salary income. Employers must issue Form 16 for the year ending 31 March 2026 by 15 June 2026 as usual. However, for Tax Year 2026-27 salary income, the certificate is Form 130, which employers must issue by 15 June 2027 after filing Form 138. Issuing a document labelled Form 16 for Tax Year 2026-27 salary would be technically non-compliant.
What happens to pending assessments under the old Act?
The Income Tax Act, 2025 does not apply retrospectively. Any assessment, appeal, or proceeding that relates to a period governed by the Income Tax Act, 1961 remains under the old Act. The new Act governs income and transactions from 1 April 2026 onwards. Both laws run parallel for some time, governing their respective periods.
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