Starting April 1, 2026, India is poised to implement a significant overhaul of its Tax Deducted at Source (TDS) system, impacting salaried employees and Small and Medium Enterprises (SMEs). This reform aims to address existing challenges within the TDS framework, such as incorrect deductions, frequent mismatches, and extensive reconciliation processes during tax filing, which often lead to frustration for both employees and employers.

Key Objectives and Features

The primary goal of the TDS overhaul is to create a more transparent and digitally-driven system. The key features of the new TDS form are expected to include:

• Enhanced Disclosures: Providing extra clarity to minimize ambiguity.
• Direct Data Linkage: Establishing a direct connection with the Annual Information Statement (AIS) and Form 26AS for seamless data flow.
• Simplified Structure: Adopting an easy-to-read format.
• Digital-Friendly Filing: Aligning with modern compliance requirements.
• Clear Instructions: Offering explicit guidance for both employers and employees.

Impact on Salaried Employees

For salaried individuals, the TDS changes are expected to bring about several benefits:

• Clearer Tax Breakdown: Salary slips will offer a more detailed tax breakdown.
• Reduced Mismatches: Fewer discrepancies during tax return filings.
• Consolidated Financial View: Providing a comprehensive financial overview for better planning.
• Lower Risk of Notices: Reducing the likelihood of receiving income tax notices.

Implications for SMEs

SMEs need to prepare for these changes to avoid confusion, penalties, and stress. Some of the steps SMEs can take to prepare include:

• Mandatory Software Upgrades: Upgrading payroll and accounting software to align with the new requirements.
• Training for Staff: Providing adequate training for compliance and HR teams.
• Accurate and Timely Filing: Ensuring accurate and timely filing of TDS returns.

Amendments Introduced in Finance Bill 2025

The Finance Bill 2025 has proposed several amendments to the TDS/TCS framework to simplify compliance and improve the ease of doing business. Some key changes include:

• Reduced TDS Rate for Securitization Trusts: The TDS rate under Section 194LBC for income payable by a securitization trust has been reduced from 25%/30% to 10%.
• Increased Threshold Limits: The bill raises the threshold limits for TDS applicability across various sections, including interest on securities, dividend payments, and professional fees.

Changes in Threshold Limits

Several threshold limits under various sections have been revised:

• Section 193 (Interest on Securities): Threshold increased to Nil.
• Section 194 (Dividend): Threshold increased to ₹10,000.
• Section 194A (Interest other than interest on Securities): Threshold increased to ₹50,000 for senior citizens.
• Section 194B (Winning from Lotteries, Crossword Puzzles, Gambling, Betting, etc.): Threshold increased to ₹50,000 per month or ₹6,00,000 in the financial year.
• Section 194D (Insurance Commission): Threshold increased to ₹20,000.
• Section 194G (Commission and other payments on the sale of lottery tickets): Threshold increased to ₹20,000.
• Section 194H (Commission and Brokerage): Threshold increased to ₹20,000.
• Section 194-I (Rent): Threshold increased to ₹6,00,000 annually.
• Section 194J (Royalty and Fees for Professional or Technical Services): Threshold increased to ₹50,000.
• Section 194K (Income in respect of units of mutual fund): Threshold increased to ₹10,000.

Additional Key Changes

Other significant changes to the TDS and TCS provisions include:

• Section 194T for Partner's Remuneration: Payments to partners (remuneration, interest, commission, or bonus) exceeding ₹20,000 in a financial year will be subject to TDS at 10%.
• Omission of Sections 206AB & 206CCA: These sections, which imposed higher TDS rates for non-filers of returns, have been removed to simplify compliance.
• TDS Rate Reduction for Section 194LBC: The TDS rate for income received from investment in securitization trusts for residents has been reduced to 10%.

Preparing for the Overhaul

To ensure a smooth transition, individuals and businesses should:

• Keep income and investment records up to date.
• Track deductions throughout the year.
• Stay informed about official CBDT circulars and updates.
• Upgrade systems and train staff well before April 2026.

By taking these proactive steps, salaried employees and SMEs can navigate the TDS overhaul effectively and ensure compliance with the new regulations.