TDS Compliance During the Transition to the Income‑tax Act 2025

The enactment of the Income‑tax Act 2025, effective from 1 April 2026, does not introduce new taxes but reorganises and consolidates existing provisions. For businesses and employees, the shift affects tax deducted at source (TDS) obligations. This guide summarises the transitional rules from both deductor (payer) and deductee (payee) perspectives, drawing on the Central Board of Direct Taxes (CBDT) FAQs and the text of the new law.

Which Act Governs TDS During the Transition?

Timing of credit or payment determines the applicable Act

• Trigger date – TDS liability is tied to the earlier of credit or payment. If that event falls on or before 31 March 2026, the Income‑tax Act 1961 governs; if it occurs on or after 1 April 2026, the Income‑tax Act 2025 applies.
• Example 1 – Professional fees credited in March 2026 but paid in April 2026: the credit date triggers TDS under the 1961 Act.
• Example 2 – Advance payment made in March 2026 but credited in books in April 2026: the advance payment triggers TDS under the 1961 Act.

Ongoing contracts

A contract continuing across 31 March 2026 does not need to be renegotiated. The deductor applies the 1961 Act for payments or credits up to 31 March 2026 and the 2025 Act thereafter. For instance, a monthly housekeeping contract: TDS for March 2026 is governed by section 194C of the old Income Tax Act 1961 , while April 2026 payments fall under Section 393(1) of the new Income Tax Act 2025. The rates and thresholds remain identical.

Continuity of rates and section references

The new Act does not change TDS rates or monetary thresholds. However, section numbers have been consolidated into a simplified table under section 393. Deductors must update their ERP/payroll systems to reflect the new numbering and reporting requirements. Quoting an obsolete section (e.g., 194C instead of 393) may cause processing errors and necessitate a correction statement.

Deposit of TDS – Timelines and Compliance

Due dates for non‑government deductors

For FY 2026‑27, due dates mirror the existing schedule under Rule 30 (old Act) and Rule 218 of Income Tax Act 2025 (New Income Tax Act 2025). Key timelines are:

Period of deduction	Due date for deposit	Governing law
January–February 2026	7th of the following month	Income‑tax Act 1961 (Rule 30)
March 2026	30 April 2026	Income‑tax Act 1961 (Rule 30)
April 2026 onwards	7th of the following month	Income‑tax Act 2025 (Rule 218 of Income‑tax Rules 2026)

Late deposit attracts interest at 1.5 % per month from the date of deduction until payment. For example, if tax deducted in March 2026 is deposited in May 2026, the deductor is liable for interest from 31 March 2026 until the payment date.

Due dates for government deductors

Government offices follow similar timelines but must deposit TDS without challan on the same day of deduction; where a challan is required, the deposit is due by the 7th of the next month. The rules apply identically under both Acts.

Challan‑cum‑TDS statements

Certain transactions require a combined payment‑cum‑statement instead of a quarterly return. Under the 1961 Act this applied to Forms 26QB (purchase of immovable property), 26QC (rent by individual/HUF), 26QD (payments by individuals/HUFs to contractors/professionals) and 26QE (transfer of virtual digital assets). For events occurring on or before 31 March 2026 these forms remain valid. For events on or after 1 April 2026, the Income‑tax Rules 2026 prescribe a common Form 141 applicable to all four types.

Filing TDS Returns and Statements

Quarterly returns during FY 2026‑27

Deductors may need to file returns under both Acts in FY 2026‑27. The relevant forms and deadlines are summarised below:

Quarter & period	Governing Act	Form(s)	Due date
Q4 of FY 2025‑26 (Jan–Mar 2026)	Income‑tax Act 1961	Forms 24Q/26Q/27Q/27EQ	31 May 2026
Q1 of TY 2026‑27 (Apr–Jun 2026)	Income‑tax Act 2025	Form 138 (salary TDS), Form 140 (non‑salary TDS), Form 144 (non‑resident TDS) and Form 143 (TCS)	31 July 2026
Q2 of TY 2026‑27 (Jul–Sep 2026)	Income‑tax Act 2025	Same forms (138/140/144/143)	31 October 2026

Correction statements for periods up to March 2026 must continue under the old Act (using the old forms) even after the new Act comes into force.

Support for return preparation utilities

The CBDT has clarified that the e‑TDS/TCS return preparation utility (RPU) and the TRACES portal will support both old and new formats during the transition.

Issuance of TDS Certificates

Deductors must issue certificates to deductees within specified timelines. During the transition there are different formats depending on the period:

Description	Period covered	Governing Act & form	Due date
TDS on salary	FY 2025‑26	Form 16 (old Act)	15 June 2026
TDS on payments other than salary	Jan–Mar 2026	Form 16A (old Act)	15 June 2026 (15 days from due date of return)
TDS on salary	TY 2026‑27	Form 130 (new Act)	15 June 2027
TDS on payments other than salary	Apr–Jun 2026	Form 131 (new Act)	15 August 2026

Failure to issue the certificate on time attracts a penalty of Rs 500 per day under section 272A(2)(g) of the 1961 Act.

Consequences of Non‑compliance – Deductor

Assessee‑in‑default

If a deductor fails to deduct TDS on payments or credits made before 31 March 2026, they are treated as an assessee in default under section 201(1) of the 1961 Act. Consequences include recovery of the tax, interest at 1 % per month for failure to deduct and 1.5 % per month for failure to deposit, and a penalty equal to the tax not deducted. These proceedings can be initiated even after 1 April 2026 by virtue of section 536(2)(c)–(d) of the 2025 Act.

Time limit for passing orders

Under the 2025 Act, orders deeming the deductor as assessee‑in‑default must be made within six years from the end of the tax year in which tax was deductible or two years from the end of the tax year in which a correction statement is delivered, whichever is later. This is similar to the old Act.

When the deductee has paid tax directly

If the deductee has included the income in their return, paid tax on it and furnished the prescribed certificate (Form 26A), the deductor is not deemed to be an assessee in default, but remains liable for interest for the period of delay.

Penalties and disallowances

Non‑deduction or non‑deposit of TDS can result in multiple consequences under the new Act: (1) recovery of tax and interest; (2) penalty and possible prosecution for wilful failure; and (3) disallowance of 30 % of the expenditure when computing business income under section 35(b) of the 2025 Act (equivalent to section 40(a)(ia) of the old Act). For example, failure to deduct TDS on a professional fee of Rs 5 lakh in TY 2026‑27 results in disallowance of Rs 1.5 lakh.

TCS provisions

Tax collected at source (TCS) is consolidated under section 394 of the 2025 Act. The same transition rules—credit/payment trigger and continuity of rates—apply.

TDS on Salary – Specific Transition Issues

Salary TDS is governed by the date of payment, not credit. Thus:

• Salary for March 2026 paid on 31 March 2026 is governed by the 1961 Act.
• Salary for April 2026 paid on 30 April 2026 is governed by the 2025 Act.

Employers should:

1. Apply section 192 of the old Act for salary relating to FY 2025‑26 paid up to March 2026.
2. From 1 April 2026, reset TDS computations under section 392 of the new Act for Tax Year 2026‑27, considering projected income, deductions and the chosen tax regime.
3. Update payroll software to reflect new section references (e.g., Schedule XV read with section 123 for deduction equivalents to section 80C).

Claiming TDS Credit – Deductee Perspective

Deductees should be proactive during the transition to ensure correct credit:

• Claiming credit for FY 2025‑26 – TDS on income pertaining to FY 2025‑26 will appear in the Annual Information Statement (AIS) for AY 2026‑27 and should be claimed under the old Act.
• Deposit made after 1 April 2026 – If tax deducted in March 2026 is deposited after 1 April 2026, credit still belongs to AY 2026‑27 provided the deductor files the Q4 return correctly.
• Credits from both Acts – Where tax is deducted in both March 2026 and April 2026, the credit will be segregated between AY 2026‑27 (old Act) and Tax Year 2026‑27 (new Act) in the AIS and Form 168.
• Separate AIS statements – There will be distinct AIS statements: one for AY 2026‑27 (old Act) and another Form 168 for TY 2026‑27 (new Act).
• Mismatches – If there is a mismatch between TDS credit claimed and the AIS, the deductee should promptly contact the deductor to file a revised return.

Practical Steps for Businesses to Ensure Correct TDS Compliance

The transition requires both payers and payees to coordinate their systems and processes. Key action points include:

1. Identify the trigger date: Determine whether the payment/credit event occurs before or after 1 April 2026 to ascertain which Act applies.
2. Update contracts and internal documentation: While existing contracts need not be amended solely due to the new Act, ensure that accounting and payroll systems can capture the relevant date and apply the correct section number.
3. Revamp ERP/payroll systems: Incorporate the consolidated section 393 and other new sections; map old section numbers to the new ones; update forms and labels for returns and certificates.
4. Adhere to deposit deadlines: Mark calendar reminders for due dates; apply the correct rule (Rule 30 or Rule 218) depending on the period.
5. File timely quarterly returns: Recognise that FY 2026‑27 will involve filing returns under both Acts; ensure use of the correct forms and due dates.
6. Issue TDS certificates promptly: Track due dates for Form 16/16A (old Act) and Forms 130/131 (new Act) to avoid penalties.
7. Monitor non‑compliance risks: Understand the consequences of being deemed assessee‑in‑default, including recovery of tax, interest, penalty and disallowance of expenditure.
8. Educate employees: Provide clarity to staff on the new section references (e.g., investment declarations referencing Schedule XV instead of section 80C).
9. Reconcile AIS/Form 168 data: Deductees should match TDS credits with AIS statements and report discrepancies promptly.

Frequently Asked Questions (FAQs)

1. What rule determines whether the old or new Act applies to a payment?

The applicable Act depends on the earlier of credit or payment. Events up to 31 March 2026 fall under the Income‑tax Act 1961, while events on or after 1 April 2026 are governed by the Income‑tax Act 2025.

2. Do TDS rates change under the new Act?

No. The 2025 Act consolidates TDS provisions under section 393 but retains existing rates and monetary thresholds.

3. Are contracts required to be amended because of the new Act?

No. Contracts can continue; the deductor simply applies the old Act up to 31 March 2026 and the new Act thereafter.

4. What are the due dates for depositing TDS during FY 2026‑27?

For non‑government deductors, TDS deducted up to February 2026 must be deposited by the 7th of the next month, March 2026 TDS by 30 April 2026, and TDS from April 2026 onwards by the 7th of the next month. Government deductors deposit TDS on the same day without challan or by the 7th of the next month when a challan is used.

5. Which TDS returns must be filed during the transition year?

The Q4 return for FY 2025‑26 (Jan–Mar 2026) is filed under the old Act using Forms 24Q/26Q/27Q/27EQ. Returns for quarters falling in Tax Year 2026‑27 are filed under the new Act using Forms 138 (salary), 140 (non‑salary), 144 (non‑resident) and 143 (TCS).

6. Is a common form available for property purchase, rent, contractor payments and virtual digital asset transfers?

Yes. For events on or after 1 April 2026, the Income‑tax Rules 2026 prescribe Form 141 as a common challan‑cum‑TDS statement for these transactions.

7. When must TDS certificates be issued and under which forms?

Certificates for salary and other payments relating to FY 2025‑26 are issued in Form 16 and Form 16A respectively by 15 June 2026. For payments under the new Act, salary certificates (Form 130) are due by 15 June 2027 and non‑salary certificates (Form 131) for Apr–Jun 2026 are due by 15 August 2026.

8. What happens if a deductor does not deduct TDS or deposits it late?

They may be treated as an assessee in default, leading to recovery of tax, interest (1 % for non‑deduction; 1.5 % for late deposit) and penalties. Non‑compliance can also result in disallowance of 30 % of the expenditure under section 35(b) of the new Act.

9. How can a deductee claim TDS credit during the transition?

Credits deducted up to March 2026 appear in the AIS for AY 2026‑27 and should be claimed in the return filed under the old Act. Credits deducted from April 2026 onwards appear in Form 168 for TY 2026‑27. Deductees should reconcile these statements and inform the deductor of any mismatch.

10. Are there separate AIS statements for AY 2026‑27 and TY 2026‑27?

Yes. The AIS for AY 2026‑27 covers income and TDS/TCS under the old Act, while Form 168 serves as the Annual Information Statement for Tax Year 2026‑27 under the new Act.

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