Authored by VipinRead this first: the law changed on 1 April 2026. The Income-tax Act, 2025 replaced the Income-tax Act, 1961 with effect from 1 April 2026. FY 2026-27 is therefore the first tax year under the new Act; the separate concepts of "previous year" and "assessment year" have been replaced by a single "tax year", so what practitioners would have called AY 2027-28 is now simply the tax year 2026-27, with returns filed in 2027. The new Act largely carries forward the substance of the old provisions but renumbers and regroups them. In this guide, section numbers of the 1961 Act are used as familiar reference labels (for example "Section 44AD") because most forms, case law, software and professionals still use them; the corresponding provision in the 2025 Act should be confirmed using the official section mapping published on incometax.gov.in. Returns for FY 2025-26 filed during 2026 remain governed by the 1961 Act.
1. Statutory Overview and Legislative Intent
Tax deduction at source (TDS) and tax collection at source (TCS) make the payer or seller an agent of the Government. Tax is collected at the point where income arises, which brings payees into the tax net, spreads collections across the year and creates a data trail that now feeds the Annual Information Statement. Chapter XVII-B (deduction) and Chapter XVII-BB (collection) of the 1961 Act contained over thirty separate sections. The Income-tax Act, 2025 consolidates them into tabular provisions (Section 393 for deduction and Section 394 for collection, with related provisions for certificates, statements and consequences), but the payment categories, thresholds and rates largely continue from the position after the Finance Act, 2025.
The Finance Act, 2025 rationalised many thresholds with effect from 1 April 2025, removed the higher-rate provisions for non-filers (Sections 206AB and 206CCA), and omitted TCS on sale of goods under Section 206C(1H). These changes are reflected below.
2. Applicability and Threshold Matrix
A. TDS matrix (resident payees unless stated)
| Section (1961 reference) | Nature of payment | Threshold | Rate |
|---|---|---|---|
| 192 | Salary | Income above the basic exemption under the regime applicable | Average rate at slab rates |
| 192A | Premature withdrawal from EPF | Above Rs. 50,000 | 10% |
| 193 | Interest on securities | Specified thresholds for certain securities (for example Rs. 10,000 for debentures to resident individuals and HUFs) | 10% |
| 194 | Dividend | Above Rs. 10,000 in a financial year (for individual shareholders) | 10% |
| 194A | Interest other than on securities | Banks, co-operative banks and post office: Rs. 50,000 (Rs. 1,00,000 for senior citizens). Others: Rs. 10,000 | 10% |
| 194B and 194BB | Lottery, crossword puzzle, card game, horse race winnings | Above Rs. 10,000 in a single transaction | 30% |
| 194C | Payments to contractors and sub-contractors | Single payment above Rs. 30,000, or aggregate above Rs. 1,00,000 in a year | 1% (individual or HUF payee); 2% (others). Nil for transporters owning up to 10 goods carriages who furnish PAN and declaration |
| 194D | Insurance commission | Above Rs. 20,000 | 2% (non-company); 10% (company) |
| 194DA | Payment under life insurance policy (income component) | Rs. 1,00,000 or more | 2% |
| 194G | Commission on sale of lottery tickets | Above Rs. 20,000 | 2% |
| 194H | Commission or brokerage | Above Rs. 20,000 in a year | 2% |
| 194-I | Rent | Above Rs. 50,000 for a month or part of a month | 2% (plant, machinery, equipment); 10% (land, building, furniture) |
| 194-IA | Transfer of immovable property (other than agricultural land) | Consideration or stamp duty value of Rs. 50 lakh or more | 1% of the higher of consideration and stamp duty value |
| 194-IB | Rent paid by individuals or HUFs not liable to audit | Above Rs. 50,000 per month | 2% |
| 194-IC | Monetary consideration under joint development agreement | No threshold | 10% |
| 194J | Fees for technical services, royalty for sale, distribution or exhibition of films, call centre operations | Above Rs. 50,000 in a year (per category) | 2% |
| 194J | Fees for professional services, other royalty, non-compete fees | Above Rs. 50,000 in a year (per category) | 10% |
| 194J | Remuneration, fees or commission to a director (not salary) | No threshold | 10% |
| 194K | Income from units of mutual funds | Above Rs. 10,000 | 10% |
| 194LA | Compensation on compulsory acquisition of immovable property | Above Rs. 5 lakh | 10% |
| 194M | Contract work, commission or professional fees paid by individuals or HUFs not required to deduct under 194C, 194H or 194J | Above Rs. 50 lakh in a year | 2% |
| 194N | Cash withdrawals from banks | Above Rs. 1 crore (Rs. 3 crore for co-operative societies); lower limits for persons who have not filed returns | 2% (higher rates for non-filers above the specified limits) |
| 194-O | Payments by e-commerce operators to participants | Gross sales; Rs. 5 lakh threshold for resident individual or HUF participants furnishing PAN | 0.1% |
| 194Q | Purchase of goods by a buyer whose turnover exceeded Rs. 10 crore in the preceding year | On the amount exceeding Rs. 50 lakh paid or credited to a seller in a year | 0.1% |
| 194R | Benefit or perquisite arising from business or profession | Above Rs. 20,000 in a year | 10% |
| 194S | Transfer of virtual digital assets | Rs. 50,000 for specified persons; Rs. 10,000 for others | 1% |
| 194T | Salary, remuneration, commission, bonus or interest paid by a firm to its partners | Above Rs. 20,000 in a year | 10% |
| 195 | Any sum chargeable to tax paid to a non-resident (other than salary covered by Section 192) | No threshold | Rates in force (Finance Act), or the beneficial treaty rate on furnishing a Tax Residency Certificate, Form 10F and no permanent establishment declaration; plus surcharge and cess where the Act rate applies |
Where the payee does not furnish PAN, Section 206AA requires deduction at the higher of the specified rate or 20% (5% for Sections 194-O and 194Q).
B. TCS matrix (Section 206C)
| Nature of receipt | Threshold | Rate |
|---|---|---|
| Alcoholic liquor for human consumption | No threshold | 1% |
| Tendu leaves | No threshold | 5% |
| Timber and other forest produce (not tendu leaves) | No threshold | 2.5% |
| Scrap | No threshold | 1% |
| Minerals (coal, lignite, iron ore) | No threshold | 1% |
| Parking lot, toll plaza, mining and quarrying licences | No threshold | 2% |
| Motor vehicle and notified luxury goods | Value exceeding Rs. 10 lakh | 1% |
| Foreign remittance under the Liberalised Remittance Scheme and overseas tour programme packages (Section 206C(1G)) | Rs. 10 lakh for LRS remittances (lower or nil rates for education financed by loan and for medical treatment) | Rates as specified in the Finance Act for the year (confirm the current schedule before collecting) |
3. Step-by-Step Compliance and Filing Workflow
- Obtain a TAN by applying in Form 49B through the Protean (formerly NSDL) or UTIITSL portal. Every deductor and collector must quote TAN in challans, returns and certificates.
- Register the TAN on the e-filing portal (incometax.gov.in) and on TRACES (tdscpc.gov.in).
- Configure vendor and payee masters with PAN, status (individual, company, firm), residential status, section mapping and lower deduction certificate details (Section 197 certificates are verified on TRACES).
- Deduct at the earlier of credit or payment for most sections (Sections 194A, 194C, 194H, 194-I, 194J); at the time of payment for Sections 192, 194-IA, 194-IB and 194M; and on credit or payment of amounts exceeding the threshold for Section 194Q. Credit to a suspense or provision account counts as credit.
- Deposit through the e-Pay Tax service on the e-filing portal using Challan ITNS 281 (minor head 200 for TDS payable by taxpayer, 400 for TDS on regular assessment). Use Form 26QB, 26QC, 26QD or 26QE challan-cum-statements for Sections 194-IA, 194-IB, 194M and 194S respectively.
- Prepare quarterly statements using the Return Preparation Utility and validate with the File Validation Utility (FVU). Form 24Q for salary, 26Q for other resident payments, 27Q for non-residents and 27EQ for TCS. Salary details for the full year are reported in Annexure II of the fourth quarter Form 24Q.
- Upload the validated file on the e-filing portal with DSC or EVC.
- Process defaults: download the justification report from TRACES, correct short deduction, short payment, interest and PAN errors through correction statements, and pay outstanding demands.
- Issue certificates: Form 16 (salary, annual), Form 16A (non-salary, quarterly), Form 16B, 16C, 16D and 16E for the challan-cum-statement sections, and Form 27D for TCS. Certificates must be downloaded from TRACES.
- For payments to non-residents, file Form 15CA online before remittance, with Form 15CB from a Chartered Accountant where the remittance is chargeable to tax and exceeds Rs. 5 lakh (unless exempted under Rule 37BB).
Worked example: classification, year-end provision and interest
A company engages an IT vendor for software maintenance at Rs. 40,000 a month and a lawyer for a one-time opinion at Rs. 60,000 in March.
- IT maintenance: routine maintenance and support is generally treated as fees for technical services, attracting 2% under Section 194J once the annual payments in that category exceed Rs. 50,000. The first two months (Rs. 80,000 cumulative) cross the threshold in the second month, so TDS applies on the full amount credited from that point onwards, including the first month's credit, which should be covered when deduction is made on the second credit.
- Legal opinion: fees for professional services attract 10% under Section 194J as the Rs. 60,000 exceeds the Rs. 50,000 threshold. If the invoice is received in April but the expense is provided for in the March books, TDS is due on the provision credited on 31 March, and the deposit date is 30 April.
- Interest on delay: if the company deducts Rs. 6,000 on 31 March but deposits it on 15 June, interest under Section 201(1A)(ii) runs at 1.5% per month from the date of deduction to the date of payment, counting a part of a month as a full month: March (part), April, May and June (part), that is 4 months. Interest is Rs. 6,000 x 1.5% x 4 = Rs. 360, payable before the statement is filed. The Q4 statement is due on 31 May; if it is filed on 15 June, the fee under Section 234E is Rs. 200 x 15 days = Rs. 3,000.
- Disallowance: because the tax was deposited before the due date of the return, the expense is not disallowed under Section 40(a)(ia).
4. Statutory Due Dates and Frequency Table
| Compliance | Period | Due date |
|---|---|---|
| Deposit of TDS and TCS (non-Government deductors) | April to February | 7th of the following month |
| Deposit of TDS (non-Government deductors) | March | 30 April |
| Deposit of TDS (Government, through book entry) | Any month | Same day as deduction |
| Deposit under quarterly permission (Sections 192, 194A, 194D, 194H with approval) | Quarters ending June, September, December, March | 7 July, 7 October, 7 January, 30 April |
| Challan-cum-statement 26QB, 26QC, 26QD, 26QE | Per transaction | Within 30 days from the end of the month of deduction |
| Quarterly TDS and TCS statements (24Q, 26Q, 27Q, 27EQ) | Q1 (April to June) | 31 July |
| Quarterly statements | Q2 (July to September) | 31 October |
| Quarterly statements | Q3 (October to December) | 31 January |
| Quarterly statements | Q4 (January to March) | 31 May |
| Form 16 | Annual | 15 June following the financial year |
| Form 16A | Quarterly | 15 August, 15 November, 15 February and 15 June |
| Form 27D (TCS certificate) | Quarterly | Within 15 days from the due date of the quarterly TCS statement |
| Form 16B, 16C, 16D, 16E | Per transaction | Within 15 days from the due date of the challan-cum-statement |
5. Interest, Late Fees and Penal Consequences
| Default | Provision (1961 Act reference) | Consequence |
|---|---|---|
| Failure to deduct | Section 201(1A)(i) | Interest at 1% per month or part from the date tax was deductible to the date it is actually deducted |
| Failure to deposit after deduction | Section 201(1A)(ii) | Interest at 1.5% per month or part from the date of deduction to the date of payment |
| Failure to collect or deposit TCS | Section 206C(7) | Interest at 1% per month or part |
| Late filing of quarterly statement | Section 234E | Fee of Rs. 200 per day until the statement is filed, not exceeding the amount of TDS or TCS |
| Non-filing or incorrect statement | Section 271H | Penalty from Rs. 10,000 to Rs. 1,00,000; no penalty if the statement is filed within one year of the due date after paying tax, fee and interest |
| Failure to deduct or collect | Sections 271C and 271CA | Penalty equal to the amount not deducted or collected |
| Disallowance of expense (resident payee) | Section 40(a)(ia) | 30% of the expenditure disallowed in the year; allowed in the year in which TDS is deposited |
| Disallowance of expense (non-resident payee) | Section 40(a)(i) | 100% of the expenditure disallowed until tax is deducted and paid |
| Failure to pay deducted tax to the Government | Section 276B | Rigorous imprisonment from 3 months to 7 years and fine; the Finance Act, 2025 provided relief where the tax is paid within the time allowed for filing the quarterly statement |
| Deductee in default status | Section 201(1) | The deductor is treated as an assessee in default for the tax not deducted or paid. Relief is available if the payee has included the income and paid tax (first proviso, with a CA certificate in Form 26A) |
6. Practical Audit Pitfalls and Best Practices
- Distinguish technical from professional services correctly. The 2% versus 10% split under Section 194J depends on the nature of the service. Document the basis for classification in the vendor master; short deduction attracts interest and disallowance.
- Avoid double deduction under Sections 194Q and 194-O. Where 194-O applies, 194Q does not. Where the seller collects TCS on goods and the buyer is also liable under 194Q, the buyer's TDS takes precedence (relevant for earlier years when 206C(1H) existed).
- Year-end provisions: TDS applies on provisions credited to payee accounts or expense provisions where the payee is identifiable. Deduct and deposit by 30 April to avoid disallowance.
- Reconcile Form 26AS and AIS of the company as a deductee. Customers' TDS must appear in the company's Form 26AS before credit is claimed in the return.
- Match the books with TRACES every quarter. Pay small interest defaults immediately rather than letting them accumulate into demands with additional interest.
- Keep Form 10F, TRC and no-PE declarations current for treaty claims, renewed each year, and conduct a principal purpose test review under the Multilateral Instrument where relevant.
- Lower deduction certificates under Section 197 must be validated on TRACES for the period and amount. Deduct at normal rates once the certificate amount is exhausted.
- Plan the transition. From tax year 2026-27, form and section numbers in software change under the 2025 Act and its Rules. Test the updated utilities before the first quarterly statement is due on 31 July 2026.
7. Statutory References and Official Sources
- Income-tax Act, 2025: consolidated provisions on deduction of tax at source (Section 393) and collection of tax at source (Section 394), and related provisions on statements, certificates and consequences; official section mapping on incometax.gov.in.
- Income-tax Act, 1961: Sections 192 to 196D (Chapter XVII-B), 197, 200, 200A, 201, 203, 206AA, 206C, 234E, 271C, 271CA, 271H, 276B, 40(a)(i) and 40(a)(ia).
- Finance Act, 2025 (threshold rationalisation from 1 April 2025, omission of Sections 206AB, 206CCA and 206C(1H), changes to Section 276B).
- Finance (No. 2) Act, 2024 (rate reductions under Sections 194D, 194DA, 194G, 194H, 194-IB and 194-O, and introduction of Section 194T).
- Income-tax Rules, 1962: Rules 30, 31, 31A, 37BB and 37CA, and Forms 16, 16A, 24Q, 26Q, 27Q, 27EQ, 15CA, 15CB and 49B (and corresponding Rules and forms under the 2025 Act).
- Official portals: incometax.gov.in (e-pay tax, statements, Form 15CA); tdscpc.gov.in (TRACES); protean-tinpan.com (TAN and return preparation utility).