AMENDMENT:

The Budget replaces the multiple, scattered sections of the Income Tax Act, 1961
(eg.. Sections 192 to 206C) with a unified structure under the Income Tax Act, 2025:

Section 392: TDS on Salary and employee payments.
Section 393: TDS on Non-Salary payments (consolidated table).
Section 394: Tax Collection at Source (TCS).

Impact: This simplifies the legal framework, making it easier for taxpayers and tax professionals to navigate compliance requirements without tracking dozens of separate sections.

TAXOSMART'S ANALYSIS:

• Previously, taxpayers had to refer to Section 194C for contractors, 194J for professionals, 1941 for rent, etc..
• The new Act creates a "master provision" (Section 393) containing tables that list the nature of payment, threshold, and rate. This structural recalssification is designed to reduce litigation and automate compliance logic in ERP systems.

RATIONALIZATION OF TCS RATES

Amendment: The TCS rates for specific goods have been rationalized to a uniform 2%.

CATEGORY
REVISED TCS RATE
Alcoholic Liquor From 1% to 2% From 1% to 2%
Scrap From 1% to 2% From 1% to 2%
Minerals: Coal, lignite, iron ore From 1% to 2% From 1% to 2%
Tendu Leaves From 5% to 2% From 5% to 2%
LRS Remittances (Education/Medical > 10L) Up to 20% to 2% Up to 20% to 2%
Overseas Tour Packages Up to 20% to 2% Up to 20% to 2%

Reduction in burdensome 5% & 20% rates on certain categories eases consumer cash flow.


UNIFORM TIMING PRINCIPLES FOR TCS


• Harmonized Rule (Section 394(1)(c)) of the Income Tax Act, 2025.


TCS timing is at the earlier of:


Time of debiting the buyer/licensee/lessee's account; or

Time of receiving the amount from the buyer (cash, cheque, draft, etc.).


Earlier collection (invoice stage) creates working capital requirement for sellers.


  • Old TCS Rule ( IT Act 1961) Time of Invoive
  • New TCS Rule ( IT Act 2025) Time of Invoive/ Debit
  • New TCS Rule ( IT Act 2025) Time of Receipt

Rationalization of TCS Rates (Section 394)

Amendment: The TCS rates for specific goods have been rationalized to a uniform 2%.

Alcoholic liquor for human consumption: Increased from 1% to 2%.
Scrap: Increased from 1% to 2%.
Minerals (coal, lignite, iron ore): Increased from 1% to 2%.
Tendu Leaves: Reduced from 5% to 2%.
LRS Remittances (Education/Medical > ₹10 Lakhs): Reduced/Standardized to 2%
Overseas Tour Packages: Standardized to 2% (Threshold removed).

Impact: While the rate has marginally increased for scrap and minerals, the significant reduction for Tendu leaves (from 5% to 2%) and Overseas Tour packages(from up to 20% to 2%) will ease cash flow burdens for consumers andtraders.

Taxosmart’s Analysis: The variation in rates (ranging from 1% to 20% under the 1961 Act) createdclassification disputes and compliance complexities. By standardizing most goods to2%, the government aims to simplify collection and reduce the incentivefor misclassification. The reduction in the Overseas Tour Package rate is a direct relief totravellers who faced high upfront costs

Uniform Timing Principles for TCS
Amendment : Under Section 394(1)(c) of the Income Tax Act, 2025, the timingfor TaxCollection at Source (TCS) has indeed been harmonized. The law nowmandates that taxmust be collected at the earlier of:

 The time of debiting of the amount payable by the buyer/licensee/lessee to their account; or
 The time of receipt of such amount from the said buyer/licensee/lessee (incash, cheque, draft, or any other mode).
 This establishes a "single logic model" replacing the multiple timing rules that existed previously.
Impact:

• Compliance Burden: The impact assessment is accurate. Because theliabilitytriggers at the "time of debiting" (raising the invoice), sellers must deposit thetaxto the government even if the buyer has not yet paid. This effectively forcessellers to fund the tax component from their own working capital until thepayment is received,
• System Alignment: This aligns tax collection with standard accounting practices(accrual basis) and integrates better with ERP systems, but it removes thecashflow cushion previously available for certain categories

Taxosmart’s Analysis:

• Old Act Context: Under the Income Tax Act, 1961, specific provisions like Section 206C(1F) (TCS on Motor Vehicles) triggered TCS only upon receipt of theamount.

• New Act Change: The new Section 394 removes this exception. It aligns itemslike Motor Vehicles (Table 1, Sl. No. 6(a) of Section 394) with the general "earlier of debit or receipt" rule that applies to other goods like scrap or timber.

• Revenue Protection: This change ensures "revenue protection" for thegovernment by securing tax at the earliest point of the transaction (invoicing), preventing delays in tax collection that previously occurred when paymentswere deferred.

1 Supply of Manpower - Clarified as "Work"
• Section 402(47) & 393(1)
• Definition of "work" amended to explicitly include supply of manpower
• TDS applicable at contract rates:
• 1% (Individual/HUF) 2% (Others)

2 TDS on Purchase of Immovable Property from Non-Residents
• Section 397
• Resident buyer (Individual / HUF) allowed to deduct and report TDS
• using PAN
• TAN not required for such transactions

3 Exemption of TDS on MACT Interest
• Relevant TDS provisions under Chapter XVII
• Interest awarded by Motor Accident Claims Tribunal (MACT) fully exempt.
• No TDS required on such interest payments to individuals

4 Centralized Filing of Form 15G/15H
• Section 393(6)
• Single Form 15G/15H can be submitted to the Depository (NSDL/CDSL)
• Declaration applicable to all securities held in demat form
• Eliminates multiple filings with individual companies

5 Automated Lower / Nil Deduction Certificate (LDC)
• Section 395
• Introduction of electronic, rule-based issuance of lower or nil TDS certificate.
• Reduced manual intervention by the Assessing Officer

6 Decriminalization of Certain TDS Defaults
• Sections 476 & 477
• "Rigorous imprisonment" replaced with "Simple imprisonment"
• Maximum imprisonment term capped at 2 years
• Failure to deduct/pay TDS on benefits in kind

TDS Exenption for Co-operative Banks
• Section 393(4) – Table SL No-7(C)
• No TDS on Interest income paid or credited to.
• Co-operative banks
• Co-operative land mortgage banks

Clarification on "Supply of Manpower" (Section 402 &393)

Amendment: The definition of "work" under Section 402(47) has been amendedtoexplicitly include "supply of manpower". Consequently, these payments will attract TDSat contract rates: 1% (for Individuals/HUF) or 2% (for others) under Section 393(1),

Impact: This eliminates the ambiguity where tax officers often classified manpower supply as "technical/professional services" (attracting 10% TDS), leadingtolitigation and blocked working capital for manpower agencies

Taxosmart’s Analysis: Manpower supply agencies operate on thin margins. A 10% TDS rate createdimmense refund backlogs. By codifying this as a "contract" (work), the Act ensuresthat the lower TDS rate is applied as a matter of right, reducing the need for litigationto prove the nature of services.
TDS on Immovable Property Purchase fromNon-Residents (Sec- 397)
Amendment: Resident buyers (Individuals/HUFs) purchasing immovable property from Non-Residents are now permitted to report the deduction using their PAN rather thanobtaining a Tax Deduction and Collection Account Number (TAN).

Impact: This significantly eases the compliance burden for residents buying propertyfrom NRIs, removing the procedural hurdle of applying for a TANfor a one-off transaction.

Taxosmart’s Analysis: Under the 1961 Act (Section 195), buying property from a non-resident requiredthebuyer to obtain a TAN to deduct TDS. The relaxation (using PAN only) was previously available only for purchases from residents (under Sec 194-IA). The 2025 Act extendsthis simplified compliance mechanism to purchases from non-residents,.

EXEMPTION OF TDS ON MACT INTEREST

Amendment: Interest awarded on compensation by the Motor Accident Claims Tribunal (MACT) to an individual is now fully exempt from tax. Consequently, no TDS is tobededucted on such interest payments.

Impact: Accident victims or their heirs will receive the full compensation amount without tax cuts, eliminating the need to file returns solely to claimrefunds onthis interest.

Taxosmart’s Analysis: Previously, interest on compensation exceeding ₹50,000 was subject to TDS, causinghardship to victims who often belonged to lower-income groups and found it difficult to claim refunds. This amendment aligns the tax policy with the humanitarianintent of the compensation.

Centralized Form 15G/15H Filing (Section 393(6))

Amendment: Investors can now submit a single declaration (Form15G/15H) tothedepository for securities held in demat form. The depository will facilitate thenon-deduction of tax across multiple companies.

Impact: Reduces the paperwork for senior citizens and small investors who previouslyhad to send separate forms to every company they held shares in

Taxosmart’s Analysis: This leverages the digital infrastructure of depositories (NSDL/CDSL). Oncethedeclaration is filed with the depository, it serves as a master declaration for all issuersof securities held by that investor, streamlining the "no-TDS" process for dividend and interest income.

Automated Lower Deduction Certificate (LDC) (Section 395)
Amendment: A new mechanism allows for the issuance of lower or nil deductioncertificates through an electronic verification process, minimizing human interventionbythe Assessing Officer

Impact: Accelerates the issuance of LDCs, improving cash flow for businesses that sufferfrom excessive TDS despite having low tax liability.

Taxosmart’s Analysis: The traditional LDC process (Section 197 of the old Act) was often slow and discretionary. The new Section 395(6) empowers a rule-based engine to validate applications and issue certificates instantly if conditions are met, promoting "Easeof Doing Business".
Decriminalization of TDS Defaults (Section 476/477)
Amendment: The prosecution provisions for failure to pay TDS/TCS havebeenrationalized:
• Punishment: "Rigorous imprisonment" is replaced with "Simple imprisonment".
• Term: Capped at a maximum of 2 years (previously up to 7 years).
• Payment in Kind: Failure to ensure TDS payment for benefits provided inkind(likeSection 194R) is completely decriminalized.

Impact: Reduces the fear of harassment and severe criminal consequencesforprocedural delays or technical defaults.

Taxosmart’s Analysis: The government is shifting from a punitive approach to a compliance-focusedone. Byremoving "rigorous" imprisonment and decriminalizing complex provisions (likeTDSon perks where no cash changes hands), the Act distinguishes between maliciousevasion and compliance failures.

Relief for Co-operative Banking Sector (TDS Exemption)

Amendment: Under the new Section 393(4) [specifically Table Sl. No. 7.C], theAct introduces a specific exemption from Tax Deducted at Source (TDS) on interest incomepaid or credited to any co-operative society engaged in carrying on the businessofbanking. This includes co-operative land mortgage banks
Impact:

Improved Liquidity: Co-operative banks will no longer have tax withheldontheir interest earnings from investments. This immediately improves theircash flow and working capital.
Reduced Compliance Burden: These banks are relieved fromtheadministrative task of claiming refunds for excess TDS deductedandreconciling these amounts in their tax returns.
Taxosmart’s Analysis:

• Previously, under the 1961 Act, while scheduled banks enjoyed exemptions oninterest received, co-operative banks often faced TDS deductions on interest earned from their investments (e.g., deposits with other institutions).
• The amendment harmonizes the provisions by treating co-operative banks at par with commercial banks regarding the receipt of interest. By removing theTDSrequirement on interest paid to them, the government acknowledges that theseentities are regulated financial institutions where tax evasion is unlikely, andwithholding tax primarily served to block their funds until assessment
Statement Of Financial Transactions (SFT) & Penalty Risks

New Statutory Fees & Penalties for SFT Non-Compliance

A. SFT Delay Fee (Section 427(3)

• 200 per day delay fee | Max. ₹1,00,000
• Automatic Daily Fee for Late Filing
• Strict Timeline Adherence Required

B. SFT Penalty for Non-Compliance (Section 454)

• 1,000 per day penalty | Max: 1,00,000
• After Notice Ignored by Entity
• Higher Penalty for Non-Response

C. Penalty for Inaccurate SFT (Section 455)

• 50,000 Penalty for Inaccurate Reporting
• Recoverable from Account Holder
• Accuracy is Crucial

Statement of Financial Transactions (SFT) & Penalty Risks
The Budget 2026 converts the penalty for SFT defaults into a statutory fee to ensureclearercompliance and reduce litigation.

A. SFT Delay Fee (Section 427(3))
Amendment: Section 427(3) of the Income Tax Act, 2025 mandates a "fee" for thefailureto furnish the Statement of Financial Transactions (SFT) or reportable account withintheprescribed time (under Section 508(1))

Impact: Automatic Liability: Unlike penalties which can sometimes be waivedbasedon "reasonable cause," a fee is generally statutory and automatic. Reportingentities (Banks, NBFCs, Mutual Funds) must ensure strict adherencetotimelines.

Financial Cost: The cost of non-compliance is now fixed and accumulatesdaily.

Taxosmart’s Analysis:
• Rate: The fee is set at ₹200 per day for every day the failure continues.
• Cap: The maximum fee leviable under this section is capped at ₹1,00,000.
• Purpose: This provision targets high-value financial reporting (used for the AIS/TISof taxpayers). By converting the previous "penalty" (Section 271FA of the old Act) into a "fee" (Section 427 of the new Act), the department streamlines thecollection of these amounts without needing to pass separate penalty orders.

B. SFT Penalty for Non-Compliance with Notice (Section 454)
Amendment: If an entity fails to file the SFT even after receiving a notice fromthetaxauthority (issued under Section 508(7)), a stricter penalty applies under Section 454.

Impact: Higher Cost: The cost of non-compliance increases significantly if the taxpayerignores a department notice to file the missing SFT


Taxosmart’s Analysis:
• Rate: The penalty is ₹1,000 per day for continuing default starting fromthedayafter the notice period expires.
• Cap: This penalty is also subject to a maximum of ₹1,00,000.
• Differentiation: The Act distinguishes between a "delay" (handled via automaticfee u/s 427) and "defiance" (handled via penalty u/s 454 after a notice is issued).
C. Penalty for Inaccurate SFT Information (Section 455)
Amendment: If a reporting financial institution provides inaccurate informationintheSFTand the inaccuracy is due to false information provided by the account holder, theinstitution can recover the penalty from the account holder.

Impact: Accountability: This shifts the burden of accuracy onto the account holder(taxpayer) as well as the reporting entity..
Taxosmart’s Analysis:

Penalty: ₹50,000 for providing inaccurate information if the inaccuracy is not rectified within specified timelines.
Recovery: Section 455(3) explicitly entitles the reporting financial institutiontorecover this amount from the account holder if the error was caused by them.

DISCLAIMER

The information contained in this document is prepared by R.J. Soni & Associates and TaxOSmart LLP (hereinafter referred to as RJSA) for information purpose only. It does not constitute any legal advice or tax advice. In no way, this document should be treated as a marketing material or efforts to solicit a client. While we have made every attempt to ensure that the information contained in this document is true, RJSA, its partners and/or any of its employees make no claims / guarantee about its accuracy, completeness, or up-to-date character, or warranty, express or implied, including the warranty of opinions expressed for a particular purpose, or assume any liability or responsibility for the accuracy, completeness, or usefulness of any information available from this document