New TDS Rules from April 2026: Form 141, Schedule C, and Filing Process

The Income Tax Act, 2025, replaces the six-decade-old Income Tax Act, 1961, with effect from 1 April 2026. Among its most operationally significant changes are the reorganised TDS provisions under Sections 391 to 428, a unified quarterly return in Form 141 with Schedule C for non-salary resident deductions, and rationalised thresholds across payment categories. Every business that deducts tax at source - whether on contractor bills under Section 397, rent under Section 404, or professional fees under Section 408 - must transition to the new section numbers, forms, and filing process before the first quarterly return is due on 31 July 2026. This guide covers every change that deductors, deductees, and tax professionals need to implement before April 2026.

What Changed in TDS Rules from April 2026

Tax Deducted at Source has been a cornerstone of India's tax collection mechanism since 1961. Under the old regime, TDS provisions were scattered across Sections 192 to 206AA of the Income Tax Act, 1961, with 45 distinct sections covering different payment types, each added incrementally over six decades. The Income Tax Act, 2025, consolidates and reorganises these provisions into a structured framework under Sections 391 to 428 in Chapter XIX, Part B.

The reorganisation is not merely cosmetic. Three structural changes affect every deductor in India. First, the scattered section numbering (192, 194A, 194C, 194-I, 194-IA, 194-IB) has been replaced with sequential sections (391, 394, 397, 404, 405, 406) that follow a logical order. Second, the multiple TDS return forms - 24Q for salary, 26Q for non-salary residents, 27Q for non-residents - are consolidated into a single Form 141 with three schedules. Third, certain threshold limits have been rationalised to reduce compliance burden on small businesses and freelancers.

For businesses running annual compliance, the transition requires updating every system that references TDS sections - from accounting software and payroll modules to vendor master data and purchase order templates. The CBDT has indicated that the new Income Tax Rules, including form templates and the File Validation Utility (FVU), will be released by January 2026 to give deductors a three-month implementation window.

How TDS Sections Map from the Old Act to the New Act

The most immediate operational impact for deductors is the section number change. Every TDS challan, certificate, and return entry references a section number. From 1 April 2026, these references must shift to the new Act's numbering. The table below maps the 15 most commonly used TDS sections from the Income Tax Act, 1961, to their equivalents under the Income Tax Act, 2025.

Every private limited company, LLP, partnership firm, and proprietorship that deducts TDS must update internal reference tables to the new section numbers. Accounting software vendors such as Tally, Zoho Books, and Busy are expected to release patches incorporating the new mapping. Businesses using custom ERP systems need to plan manual updates before 1 April 2026.

What Is Form 141 Under the New TDS Framework

Form 141 is the unified quarterly TDS return prescribed under Section 426 of the Income Tax Act, 2025. It replaces the three separate quarterly forms that deductors currently file under the 1961 Act - Form 24Q for salary deductions, Form 26Q for non-salary resident deductions, and Form 27Q for non-resident deductions.

The consolidation into a single form addresses a long-standing pain point. Under the old regime, a company deducting TDS on salaries, contractor bills, rent, and professional fees had to file three separate returns every quarter, each with its own validation rules and correction procedures. Form 141 merges these into one return with three distinct schedules:

• Schedule A (Salary Deductions): Employee-wise TDS details for deductions under Section 391. Captures gross salary, exemptions, deductions under Chapter VIII, taxable income, and tax deducted per employee per month. Replaces the Annexure II of Form 24Q.
• Schedule B (Non-Resident Deductions): Deductee-wise details for all payments to non-residents under Sections 400, 411, and 417 to 422. Includes remittance details, DTAA article references, and Tax Residency Certificate information. Replaces Form 27Q.
• Schedule C (Resident Non-Salary Deductions): Deductee-wise details for all non-salary payments to residents - contractor payments (Section 397), rent (Section 404), professional fees (Section 408), commission (Section 403), interest (Section 394), and all other resident TDS categories. Replaces Form 26Q.

This unified structure reduces the total number of TDS filings from 12 per year (3 forms multiplied by 4 quarters) to 4 per year (1 form multiplied by 4 quarters) for deductors who handle all three payment categories.

Schedule C in Form 141 - Fields and Structure

Schedule C is the most widely used section of Form 141 because it covers every non-salary resident TDS deduction. If your business pays contractors, consultants, landlords, or commission agents, you will populate Schedule C every quarter. Understanding its field structure before April 2026 ensures clean first-time filing.

Mandatory Fields in Each Schedule C Row

Every deductee entry in Schedule C requires the following data points: deductee PAN (or Aadhaar in the absence of PAN), deductee name, section code under the 2025 Act (e.g., 397 for contractors, 404 for rent), nature of payment code, date of payment or credit (whichever is earlier), amount paid or credited, TDS rate applied, TDS amount deducted, challan serial number, BSR code of the bank branch, and date of TDS deposit. If TDS was deducted at a lower rate under a certificate issued under Section 423, the certificate number must be entered.

Nature-of-Payment Codes

The CBDT has introduced rationalised nature-of-payment codes for Schedule C. These replace the older codes used in Form 26Q. Key codes include: 397A for contractor payments to individuals and HUFs (1% TDS), 397B for contractor payments to companies and firms (2% TDS), 404A for rent on plant and machinery (2% TDS), 404B for rent on land, building, and furniture (10% TDS), 408A for professional fees (10% TDS), and 408B for technical services and call centres (2% TDS). Using the correct code prevents FVU validation errors and ensures accurate Form 26AS mapping.

Challan Mapping in Schedule C

Each TDS deduction row must link to a deposited challan. Schedule C supports multi-challan mapping, where a single deductee's TDS for the quarter can be split across multiple challan deposits. The FVU cross-references challan data with OLTAS (Online Tax Accounting System) records. Mismatches between the challan amount deposited and the total TDS claimed in Schedule C rows trigger validation errors that block return submission.

TDS Rate Chart Under the Income Tax Act, 2025

The table below lists the TDS rates for the most common payment categories applicable from 1 April 2026. These rates apply when the deductee has furnished a valid PAN. Where PAN is not furnished, TDS is deducted at 20% or the applicable rate, whichever is higher, under Section 424 of the new Act.

Deductors must cross-reference this rate chart with the nature-of-payment codes when filling Schedule C of Form 141. Using an incorrect rate results in short deduction, which attracts interest at 1% per month under Section 427 on the shortfall amount from the date of deductibility to the date of actual deduction.

Section 397 - TDS on Payments to Contractors

Section 397 is the provision most businesses interact with daily. It governs TDS on payments to contractors and sub-contractors for carrying out any work, including supply of labour. This section replaces the well-known Section 194C of the 1961 Act and retains its core structure while introducing clearer definitions.

Who Must Deduct TDS Under Section 397

Any person (other than an individual or HUF whose books are not subject to tax audit) who pays a resident contractor or sub-contractor must deduct TDS. This includes companies, firms, LLPs, government bodies, co-operative societies, trusts, and individuals or HUFs whose turnover exceeds ₹1 crore (business) or ₹50 lakh (profession) in the preceding financial year.

Threshold and Rate

TDS under Section 397 is triggered when a single payment exceeds ₹30,000 or the aggregate payments to the same contractor during the financial year exceed ₹1 lakh. The rate is 1% when the payee is an individual or HUF, and 2% when the payee is a company, firm, LLP, AOP, BOI, or any other entity. These thresholds and rates are unchanged from the old Section 194C, providing continuity for existing compliance processes.

What Qualifies as "Work" Under Section 397

The definition of "work" covers advertising, broadcasting, carriage of goods, carriage of passengers (excluding non-air transport operators owning 10 or fewer goods carriages), catering, manufacturing or supplying a product according to specifications, and any contract for carrying out any work including supply of labour. Pure material purchases without a work component do not attract Section 397 TDS. Businesses must evaluate each contract to determine whether it is a works contract (TDS applicable) or a sale of goods (TDS not applicable under Section 397, but potentially under Section 416 for purchase of goods above ₹50 lakh).

Step-by-Step TDS Return Filing Process Using Form 141

Filing the new Form 141 follows a structured process. While the portal interface may evolve, the underlying steps remain consistent with the current TDS return workflow, adapted for the unified form structure.

Step 1 - Collect Deduction Data for the Quarter

Compile all TDS deductions made during the quarter across salary, non-salary resident, and non-resident categories. For each deduction, record the deductee PAN, payment date, gross amount, applicable section under the 2025 Act, TDS rate, and TDS amount. Ensure every deduction has a corresponding challan deposit within the prescribed timeline - by the 7th of the following month for monthly deposits, or by 30 April for March deductions.

Step 2 - Prepare Form 141 Using the RPU

Download the Return Preparation Utility (RPU) for Form 141 from the TRACES portal or the income tax e-filing portal. Enter the deductor TAN, quarter, and financial year. Populate Schedule A with salary deduction details, Schedule B with non-resident deduction details, and Schedule C with all other resident deductions. Import challan data either manually or through the challan file downloaded from the OLTAS portal.

Step 3 - Validate Using the FVU

Run the prepared return file through the File Validation Utility (FVU) specific to Form 141. The FVU checks for PAN validation errors, section code mismatches, rate discrepancies, challan total mismatches, and duplicate entries. Fix all errors flagged by the FVU before proceeding. The utility generates a validated .fvu file ready for upload.

Step 4 - Upload and Submit

Log in to the income tax e-filing portal using your TAN credentials. Navigate to the TDS return filing section, select Form 141, and upload the validated .fvu file. Authenticate the submission using a digital signature certificate (DSC) - mandatory for companies and government deductors - or through EVC (electronic verification code) for other deductors. After successful upload, the portal generates a provisional receipt with a token number for tracking.

Step 5 - Download and Issue TDS Certificates

After the return is processed by CPC-TDS, download the TDS certificates from the TRACES portal. Issue Form 16 (for salary deductions under Section 391) and Form 16A (for non-salary deductions under Sections 392 to 428) to deductees within the prescribed timelines - 15 days from the due date of filing the return for Form 16A, and 15 June for Form 16 (annual salary certificate).

Key Threshold Changes That Reduce Compliance Burden

The Income Tax Act, 2025, carries forward the TDS threshold rationalisations introduced progressively through the 2023 and 2024 Union Budgets. While most thresholds remain unchanged from FY 2025-26 levels, their consolidation into the new Act provides legislative permanence that earlier relied on Finance Act amendments.

The rent threshold of ₹2,40,000 per year under Section 404 (replacing Section 194-I) was raised from ₹1,80,000 to ₹2,40,000 in the 2019 Union Budget and is now codified in the new Act. This means a landlord receiving rent of up to ₹20,000 per month from a single tenant faces no TDS deduction, benefiting thousands of small commercial property owners.

The e-commerce threshold of ₹5 lakh under Section 414 (replacing Section 194O) was introduced in the 2024 Budget. This exempts small e-commerce sellers earning below ₹5 lakh annually from the e-commerce platform from TDS deduction, eliminating the cash flow burden on micro-sellers.

The insurance commission threshold of ₹15,000 under Section 398 (replacing Section 194D) and the reduced rate of 2% (down from 5% prior to the 2024 Budget) provide significant relief to individual insurance agents earning modest commissions. An agent earning ₹15,000 or less per year from a single insurer faces zero TDS deduction.

For small businesses and startups filing through GST-registered entities, these rationalised thresholds mean fewer TDS transactions to process, fewer challans to deposit, and fewer rows in Schedule C of Form 141 every quarter.

Old TDS Forms vs New Form 141 - What Replaces What

The table below provides a clear mapping between the old TDS forms under the 1961 Act and the corresponding schedules in Form 141 under the 2025 Act.

Penalties for Late Filing or Non-Compliance Under the New Act

The penalty framework under the Income Tax Act, 2025, maintains stringent consequences for TDS defaults. Section 427 outlines the consequences of failure to deduct, short deduction, or late payment of TDS. Understanding the penalty structure helps businesses prioritise compliance timelines.

• Non-deduction of TDS: The deductor is treated as an assessee in default. Interest at 1% per month (or part of a month) is charged from the date TDS was deductible to the date of actual deduction. The deductor also loses the ability to claim the payment as a business expense until TDS is deposited.
• Late deposit after deduction: Interest at 1.5% per month (or part of a month) from the date of deduction to the date of deposit with the government. This is in addition to the principal TDS amount.
• Late filing of Form 141: Late fee of ₹200 per day for every day of delay from the due date, capped at the total TDS deducted and reported in the return.
• Failure to issue TDS certificate: Penalty of ₹100 per day per certificate for each day of delay in issuing Form 16 or Form 16A to the deductee, subject to maximum limits.
• Incorrect information in return: Penalty ranging from ₹10,000 to ₹1 lakh for furnishing incorrect information in Form 141 that results in incorrect reporting in the deductee's Form 26AS.

Businesses that handle high-volume TDS - such as construction firms, staffing agencies, and IT services companies with multiple contractors - face significant cumulative penalties if Form 141 filings are delayed. A company deducting ₹10 lakh in TDS per quarter that files 30 days late would face a late fee of ₹6,000 (₹200 multiplied by 30 days), plus interest on any late deposits. For virtual CFO clients and businesses outsourcing finance functions, calendar-driven compliance tracking is non-negotiable.

How Businesses Should Prepare Before April 2026

Transitioning to the new TDS framework requires planned action across four areas: systems, people, processes, and documentation. Businesses that begin preparation by January 2026 will have adequate time to test and validate their updated workflows.

Update Accounting and Payroll Software

Contact your accounting software provider (Tally, Zoho Books, Busy, QuickBooks, SAP, or custom ERP) to confirm the availability of patches supporting the new section numbers and Form 141 format. Test the updated software in a sandbox environment before 1 April 2026. Verify that TDS challans generated by the software reference the correct 2025 Act section numbers.

Retrain Finance and Accounts Teams

Conduct a training session for every person involved in TDS deduction, challan payment, or return filing. Cover the section mapping (old to new), the Form 141 structure (Schedules A, B, C), nature-of-payment codes, and the updated FVU validation rules. Even experienced accounts professionals need retraining because the section numbers they have memorised over decades are changing entirely.

Update Vendor and Employee Master Data

Review vendor master records in your accounting system to update TDS section references from old to new. For example, change contractor vendor records from Section 194C to Section 397, rent payments from Section 194-I to Section 404, and professional fee payments from Section 194J to Section 408. Similarly, update payroll system references from Section 192 to Section 391 for salary TDS.

Reconcile and Close Old Regime Obligations

File all pending TDS returns for FY 2025-26 and prior years under the old forms before transitioning. Clear any outstanding corrections, demand notices, or short deduction notices on TRACES. Ensure that Q4 FY 2025-26 returns (January to March 2026) are filed in old Forms 24Q/26Q/27Q by the 31 May 2026 deadline. A clean closure of the old regime prevents reconciliation issues when the new Form 26AS starts reflecting 2025 Act section numbers from Q1 FY 2026-27.

Impact on Income Tax Return Filing for Deductees

The TDS changes under the new Act also affect every taxpayer who receives income after TDS deduction. Salaried employees, freelancers, landlords, and contractors will see new section numbers reflected in their Form 26AS and Annual Information Statement (AIS) from FY 2026-27 onward.

When filing income tax returns for FY 2026-27 (assessment year 2027-28), taxpayers must match TDS credits shown in Form 26AS against the new section numbers. For example, a freelance consultant will see TDS credits under Section 408 (instead of the familiar 194J), and a contractor will see credits under Section 397 (instead of 194C). The ITR forms for AY 2027-28 will be updated to reference the new sections.

Deductees holding lower or nil TDS certificates issued under the old Section 197 should note that certificates valid beyond 31 March 2026 will be honoured under the transitional provisions. However, new applications from April 2026 onward must be filed under Section 423 of the 2025 Act. The income tax portal will update the application form to reference the new section numbers.

Summary

The Income Tax Act, 2025, restructures TDS compliance from the ground up. From 1 April 2026, every deductor must switch to new section numbers (391 to 428), file the unified Form 141 instead of separate Forms 24Q, 26Q, and 27Q, and populate Schedule C with accurate deductee-wise details for all non-salary resident deductions. TDS rates remain largely stable following the 2024 Budget rationalisations, but the operational transition - software updates, team retraining, vendor master changes, and process documentation - demands proactive planning. The first Form 141 filing deadline is 31 July 2026 for Q1 FY 2026-27. Late filing attracts ₹200 per day, and non-deduction attracts 1% monthly interest. Businesses that start preparation by January 2026 and use professional compliance support will make the transition without penalties or disruptions.