The Income Tax Act, 2025 came into effect on April 1, 2026. It replaces the Income Tax Act, 1961 and introduces a new framework for tax compliance in India.
For employers, this change affects payroll processing, tax deduction at source (TDS), employee declarations, tax certificates, and reporting requirements.
The new Act reorganises many existing provisions. Employers must update their payroll systems and compliance documents to reflect the new rules.
In this guide, we explain the key TDS changes and the steps every employer should take during Tax Year 2026-27.
What Has Changed Under the Income Tax Act 2025?
The new Act simplifies and reorganises several income tax provisions. It does not introduce a completely new TDS system.
The main changes relate to section numbers, forms, terminology, and reporting procedures.
Employers should focus on these areas:
Updated TDS section references
New tax certificate and return forms
Revised payroll documentation
Updated employee deduction declarations
Changes to tax-year terminology
Accurate reporting of salary and non-salary payments
These updates can affect payroll software, accounting systems, and internal compliance procedures.
1. Section 192 Is Now Section 392 for Salary TDS
Under the Income Tax Act, 1961, Section 192 covered TDS on salary payments.
Under the Income Tax Act, 2025, Section 392 covers TDS on salary.
Section 393 covers TDS on various other payments, including contractor payments, professional fees, rent, and other specified transactions.
The new Act presents these provisions in a more consolidated format.
Employers must update their payroll and accounting systems to use the correct section references for transactions from April 1, 2026.
What employers should do
Update payroll software and ERP configurations.
Review TDS settings for salary payments.
Update internal payroll procedures and compliance checklists.
Verify section references before submitting TDS returns.
Train payroll staff on the revised provisions.
Using an old section reference for a new transaction may cause reporting or processing errors.
2. Form 16 Has Been Replaced by Form 130
The Income Tax Rules, 2026 introduce new form numbers for several TDS certificates and returns.
Employers should review their existing templates and confirm that they use the correct forms for the relevant tax year.
Here are some important changes:
| Earlier form | New form | Purpose |
|---|---|---|
| Form 16 | Form 130 | Annual salary TDS certificate |
| Form 16A | Form 131 | TDS certificate for non-salary payments |
| Form 27D | Form 133 | Tax collected at source certificate |
| Form 24Q | Form 138 | Quarterly salary TDS return |
Employers should not assume that an old form remains suitable for transactions covered by the new framework.
The applicable form depends on the transaction and the relevant tax period.
What employers should do
Review the forms used by your payroll and finance teams. Update certificate templates, reporting procedures, and employee communication wherever necessary.
Also, check the applicable filing and certificate deadlines before scheduling compliance activities.
3. Employers Must Review the Applicable Tax Regime
Employers must calculate salary TDS using the tax regime and employee information applicable under the relevant rules.
The new Act does not remove the need to collect and maintain accurate employee tax information.
Payroll teams should review employee declarations and confirm that their systems apply the correct tax treatment.
Employees may provide information about eligible deductions, exemptions, and other income where applicable.
What employers should do
Collect the required employee declarations.
Review the tax regime applicable to each employee.
Update payroll settings for Tax Year 2026-27.
Calculate projected annual income correctly.
Apply eligible deductions and exemptions according to the applicable rules.
Reconcile TDS calculations during the year.
Employers should verify the current official instructions before changing employee declaration forms or tax-regime workflows.
4. Employee Deduction References Have Changed
Employees and employers are familiar with deduction references such as Section 80C under the old Act.
The Income Tax Act, 2025 reorganises these provisions. For example, deductions previously associated with Section 80C are referenced through Schedule XV read with Section 123 of the new Act.
This change matters when employees submit investment declarations and payroll teams calculate salary TDS.
Outdated references in declaration forms and employee FAQs can create confusion.
What employers should do
Review your employee declaration forms and payroll documentation.
Update references to the relevant provisions of the Income Tax Act, 2025. Also, make sure employees understand which information they need to submit.
Do not assume that every deduction or exemption applies to every employee. Eligibility depends on the applicable provisions and tax regime.
5. The Term “Assessment Year” Has Been Replaced by “Tax Year” Under the New Framework
The Income Tax Act, 1961 used the terms Financial Year and Assessment Year.
The Income Tax Act, 2025 introduces the term Tax Year as part of its revised framework.
For payroll teams, this change affects terminology in employee communications, tax documentation, and reporting systems.
However, the transition does not mean that employers can disregard the old terminology for earlier tax periods.
What employers should do
Update relevant payroll templates for the new tax year.
Review employee tax declarations and FAQs.
Check the terminology used in tax reports and certificates.
Retain the correct terminology for records governed by the old Act.
Confirm the applicable tax period before preparing returns.
Clear documentation helps employees and payroll teams avoid confusion during the transition.
6. TDS Reporting for Contractor and Vendor Payments
The new Act consolidates many non-salary TDS provisions under Section 393.
These provisions cover various payments, including contractor payments, professional fees, rent, and other specified transactions.
The applicable TDS rate and threshold depend on the nature of the payment and the relevant provision.
The Income Tax Department states that the rates and monetary thresholds have generally been retained under the new framework.
However, employers and finance teams must use the correct section and reporting references for new transactions.
What employers should do
Review vendor and contractor payment categories.
Update TDS settings in accounting software.
Verify the applicable section and table entry.
Reconcile deductions with payment records.
Check TDS returns before submission.
Coordinate with finance teams to correct outdated references.
Businesses should pay particular attention to transactions that cross the March-April 2026 transition period.
The applicable Act generally depends on the earlier of the credit or payment event. Salary TDS follows its applicable salary-payment rules.
7. How Employers Should Handle the 2026 Transition
The transition requires employers to distinguish between transactions governed by the old Act and those governed by the new Act.
For example, salary paid on March 31, 2026 falls under the old Act. Salary paid on April 1, 2026 or later falls under the new Act.
For non-salary payments, employers must consider the applicable credit or payment date, whichever occurs first.
This distinction is important when preparing returns, correcting errors, and reconciling tax records.
Recommended transition checklist
Identify transactions covered by the old Act.
Identify transactions covered by the new Act.
Update payroll and accounting systems.
Review employee declarations and tax calculations.
Update forms and section references.
Verify return formats and filing requirements.
Reconcile TDS deductions, deposits, and certificates.
Correct any reporting errors before they create further problems.
Employers should retain records that explain how they handled the transition.
Payroll Compliance Checklist for Employers in 2026
Use this checklist to review your organisation’s readiness.
Update payroll software and ERP settings.
Review salary TDS calculations for Tax Year 2026-27.
Verify employee tax declarations.
Update relevant deduction references.
Replace outdated forms where required.
Update section references for vendor and contractor payments.
Review TDS return filing procedures.
Reconcile deductions and tax deposits.
Check applicable certificate and filing deadlines.
Train HR, payroll, and finance staff on the changes.
Verify current requirements against official tax department guidance.
Completing these steps can help reduce errors and improve payroll compliance.
Common Payroll Compliance Mistakes to Avoid
Employers should watch for several common mistakes during the transition.
Using outdated section numbers: Old references may cause reporting errors for transactions covered by the new Act.
Using the wrong forms: Payroll teams should verify the correct form for each tax period and transaction.
Ignoring employee declarations: Incomplete or outdated employee information can affect salary TDS calculations.
Mixing old and new tax periods: Employers must apply the correct framework to each transaction.
Missing filing deadlines: Late or incorrect filings can create additional compliance work and potential financial consequences.
Failing to reconcile records: Payroll teams should compare TDS calculations, deposits, returns, and certificates regularly.
A documented review process can help employers identify these issues before filing.
How SNGSPL Can Help With Payroll Compliance
Managing payroll requires more than calculating employee salaries. Employers must also maintain accurate records, deduct tax correctly, and meet applicable reporting requirements.
SNGSPL supports businesses with payroll management and statutory compliance services.
Our team can help employers review payroll processes, identify documentation gaps, and improve compliance procedures.
Explore our Payroll Management Services to learn more about our payroll support.
You can also review our Labour Law Compliance Services for broader statutory compliance requirements.
Frequently Asked Questions
1. When did the Income Tax Act, 2025 come into effect?
The Income Tax Act, 2025 came into effect on April 1, 2026.
2. What replaced Section 192 for salary TDS?
Section 392 of the Income Tax Act, 2025 covers TDS on salary.
3. What replaced Form 16?
Form 130 replaces Form 16 for the relevant salary TDS certificate requirements under the new framework.
4. Has the new Act changed all TDS rates?
No. The Income Tax Department states that TDS rates and monetary thresholds have generally been retained. Employers should check the relevant provision for the specific transaction.
5. Do employers need to update payroll software?
Yes. Employers should update their systems to reflect the new section numbers, terminology, forms, and reporting requirements.
6. What should employers do first?
Start by reviewing payroll software, employee declarations, tax calculations, forms, and TDS reporting procedures. Verify the applicable requirements against official guidance before making changes.
Conclusion
The Income Tax Act, 2025 introduces an updated framework for income tax compliance from April 1, 2026.
For employers, the main task is to ensure that payroll systems, employee records, tax certificates, and reporting procedures reflect the applicable rules.
A structured review can help businesses identify gaps and reduce the risk of incorrect filings.
Employers should also monitor official Income Tax Department updates and seek professional advice when a provision or transition requirement is unclear.
Need help reviewing your payroll compliance? Contact SNGSPL to discuss your payroll management and statutory compliance requirements.
