TDS & TCS Changes from 1st April 2026: New Sections, Revised Rates, and Enterprise Impact

TDS and TCS changes from 1st April 2026 are introduced by the new Income Tax Act, 2025, further amended by the Finance Act, 2026. It transforms India's withholding tax framework with new section numbers, new form names, and tighter compliance rules. Continue reading this article for action items on your tax team before the TDS/TCS changes kick in.

Key Takeaways

• Sections 392, 393, and 394 of the Income Tax Act, 2025 replace 194C, 194J, 194I, all TDS sections.
• The annual TDS certificate for salaried employees is now Form 130 under the new Income Tax Rules, 2026, instead of Form 16.
• Calculate TDS using the buyer's PAN instead of TAN for an NRI selling immovable property. 
• TCS rate changes from 1st April 2026 bring several categories to a flat 2%.

TDS & TCS Changes from 1st April 2026

1. All TDS Sections Renumbered

The new Income Tax Act, 2025, restructures TDS provisions under three broad provisions:

• Section 392: TDS on salary (Form 138 is the quarterly return replacing Form 24Q)
• Section 393: TDS on all non-salary payments to residents and non-residents
• Section 394: TCS provisions

Every FVU code has been reassigned. Update your ERP and TDS software before filing the first quarterly return for Tax Year 2026-27. Old section codes filed for the new year will trigger validation errors.

2. 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.

3. Form 16 Replaced by Form 130

Form 16 was the annual TDS certificate for salaried employees. It has now been changed to Form 130 under the new TDS rules. Form 16A becomes Form 131. Form 27D becomes Form 133. Content and structure are largely unchanged. However, your HR and payroll teams must issue the correct form number for the upcoming year. Any certificate issued as Form 16 for TY 2026-27 will be technically non-compliant.

4. Manpower Services Covered Under Section 194C

Supply of manpower services is now explicitly included as "work" under the new TDS rules aligned to Section 194C. TDS rates: 1% where payment is made to a resident individual or HUF, 2% for all others. If you were not deducting TDS on manpower supply invoices, correct that from 1st April 2026. This is a clarification with teeth.

5. 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 legal payors must update their payment systems accordingly.

6. Non-TDS Deduction Certificate: Process Goes 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.

7. 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 2025 Act 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.

8. 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.

9. 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 26Q).

10. TCS Rate Changes from 1st April 2026

Several TCS categories now carry a flat 2% rate.

The flat 2% on overseas tour packages removes the earlier slab structure entirely. The 20% rate above Rs. 10 lakh was a real operational pain point for travel agents and corporate booking group tours. That is gone.

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.

The binding nature of CBDT guidelines creates direct legal exposure if your teams have been treating circulars on 194R (perquisites to vendors) or 194S (VDA transactions) as optional.

For payroll: 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.

TDS & TCS Penalties for Non-Compliance

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

Conclusion

Manually managing TDS compliance across multiple entities, sections, and return cycles is where errors compound. ClearTax's Direct Tax Platform offers:

• TDS Workbench powered by GL-Stream
• Advanced 26AS reconciliation 
• 200+ filing validations 
• FVU generation 
• TDS challan tracking
• Support for the new sections under the Income Tax Act, 2025