Contents
- Introduction: TDS/TCS Non-Compliance Landscape for FY2025-26
- Overview of Major Changes & Reforms
- Who is Affected by TDS/TCS Non-Compliance?
- Detailed Analysis of Non-Compliance Consequences
- Decriminalization Relief Under Section 276B/276BB
- CBDT Circular 04/2025: Revised Compounding Guidelines
- July 2025 Critical Compliance Dates
- Proactive Prevention & Mitigation Strategies
- You may also like
- Frequently Asked Questions (FAQs)
- Conclusion: Staying Compliant in FY2025-26
Introduction: TDS/TCS Non-Compliance Landscape for FY2025-26
The Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) compliance framework has undergone significant transformations in FY2025-26, with landmark reforms effective from April 2025 and continuing updates through July 2025. These changes represent a paradigm shift toward taxpayer-friendly policies while maintaining strict financial discipline for non-compliance.
The removal of higher TDS/TCS rates for non-filers and enhanced prosecution relief mechanisms mark the most significant compliance reforms in recent years.
This comprehensive guide addresses all aspects of TDS/TCS non-compliance for FY2025-26, incorporating the latest developments including the elimination of Sections 206AB and 206CCA, enhanced threshold limits, and crucial updates to prosecution relief under Sections 276B and 276BB.
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With the removal of Section 206C(1H) from April 1, 2025, sellers of goods no longer need to collect TCS, but buyers must still comply with TDS requirements under Section 194Q if their turnover exceeds Rs. 10 crore.
Overview of Major Changes & Reforms for FY2025-26
FY2025-26 introduces comprehensive reforms to the TDS/TCS framework, balancing simplification with continued enforcement of compliance obligations. These changes reflect the government's commitment to reducing procedural complexities while maintaining revenue collection efficiency.
Note: All major reforms became effective from April 1, 2025, with certain prosecution relief measures backdated to October 1, 2024.
Important: While several compliance burdens have been reduced, financial penalties for non-compliance remain stringent and have been enhanced in certain areas.
| Reform Category | Specific Change | Impact on Compliance | Effective Date |
|---|---|---|---|
| Threshold Enhancement | Multiple TDS sections with increased limits | Reduced compliance burden for smaller transactions | April 1, 2025 |
| Section Elimination | Sections 206AB & 206CCA removed | No higher rates for non-filers | April 1, 2025 |
| TCS Simplification | Section 206C(1H) permanently removed | No TCS on goods sales | April 1, 2025 |
| New TDS Introduction | Section 194T - Partner remuneration | 10% TDS on partner payments >Rs. 20,000 | April 1, 2025 |
| Prosecution Relief | Enhanced Section 276B/276BB relief | No prosecution if paid before quarterly statement due date | October 1, 2024 |
| Compounding Reform | CBDT Circular 04/2025 | Universal compounding, no time limits | March 17, 2025 |
Who is Affected by TDS/TCS Non-Compliance?
The reformed TDS/TCS landscape affects multiple stakeholders across the compliance ecosystem, with varying degrees of impact based on their role and transaction volumes.
Primary Stakeholders
- Deductors/Collectors: Face direct liability for interest, penalties, and potential prosecution. Benefits from simplified compliance but remains primarily responsible for accurate implementation.
- Deductees/Collectees: No longer face higher deduction rates due to non-filing status. Enjoy improved credit claiming process with simplified verification requirements.
- Corporate Management: Directors and principal officers continue to face personal liability for prosecution under Section 276B, making compliance a critical governance imperative.
- Tax Professionals: Must adapt to new thresholds, eliminated sections, and enhanced relief mechanisms while ensuring client compliance.
Sector-Specific Impact
- Trading Businesses: Significant relief from TCS elimination under Section 206C(1H), but continued TDS obligations under Section 194Q.
- Partnership Firms: New compliance obligations under Section 194T for partner remuneration exceeding Rs. 20,000 annually.
- Small & Medium Enterprises: Benefit from enhanced thresholds and elimination of non-filer penalties.
- Foreign Transaction Entities: Continued stringent compliance with 100% expenditure disallowance for non-compliance.
Detailed Analysis of Non-Compliance Consequences
Despite reforms, the financial consequences of TDS/TCS non-compliance remain severe and in some cases have been enhanced for FY2025-26.
1. Interest Liability (Section 201(1A))
Interest provisions remain unchanged and continue to impose automatic liability from the date of default.
- Non-Deduction Interest: 1% per month (or part thereof) from the date the tax should have been deducted until actual deduction.
- Non-Deposit Interest: 1.5% per month (or part thereof) from deduction date to actual government deposit.
- TCS Late Collection: From April 1, 2025, TCS late collection interest increased to 1.5% per month (previously 1% for certain categories).
2. Penalty Provisions (Sections 271C & 271CA)
Penalty frameworks remain robust with enhanced enforcement mechanisms.
- Section 271C: Penalty equal to 100% of the tax amount not deducted or deposited.
- Section 271CA: Similar 100% penalty for TCS non-collection or non-deposit.
- Enhanced Enforcement: Improved detection mechanisms through data analytics and cross-verification processes.
3. Late Filing Penalties (Sections 234E & 271H)
Filing-related penalties have been streamlined but remain financially significant.
- Section 234E: Rs. 200 per day for delayed quarterly statements, capped at total TDS/TCS amount for the quarter.
- Section 271H: Enhanced penalty range of Rs. 10,000 to Rs. 1,00,000 for non-filing beyond one year or incorrect information.
- Automated Processing: Faster penalty generation through system automation.
4. Expenditure Disallowance (Section 40(a)(ia))
Disallowance provisions remain stringent with enhanced verification processes.
- Resident Payments: 30% disallowance of expenditure where TDS was not deducted or deposited.
- Non-Resident Payments: 100% disallowance with no relief provisions.
- Cure Provision: Disallowance can be avoided if TDS is deducted and deposited before the end of the financial year or due date of filing return, whichever is earlier.
Decriminalization Relief Under Section 276B/276BB
The most significant reform in FY2025-26 is the enhanced prosecution relief mechanism under Sections 276B and 276BB.
Statutory Relief Mechanism
Effective October 1, 2024: A new proviso to Sections 276B and 276BB provides statutory relief from prosecution if delayed TDS/TCS is deposited before the due date for filing the quarterly statement.
- Relief Condition: TDS/TCS amount deposited with interest before quarterly statement due date (31st July, 31st October, 31st January, 31st May).
- Universal Application: Applies regardless of the default amount - whether Rs. 1 lakh or Rs. 50 lakhs.
- Interest Obligation: Relief from prosecution does not waive interest liability at 1.5% per month for the delay period.
Impact on Previous Guidelines
The statutory relief supersedes CBDT Circular No. 24/2019 for the specific offense of late TDS/TCS deposit:
- Previous Rs. 25 Lakh Threshold: No longer the primary determining factor for prosecution initiation.
- 60-Day Rule: Replaced by quarterly statement due date timeline.
- Administrative vs. Statutory: New statutory provision takes precedence over administrative guidelines.
Critical Warning: If TDS/TCS is not deposited even by the quarterly statement due date, original prosecution provisions remain applicable, and the Rs. 25 lakh administrative threshold may still be considered.
CBDT Circular 04/2025: Revised Compounding Guidelines
Effective March 17, 2025, CBDT Circular 04/2025 introduces revolutionary changes to the compounding of tax offenses, providing unprecedented relief for taxpayers.
Universal Compounding Framework
| Previous Framework | New Framework (Circular 04/2025) | Impact |
|---|---|---|
| Limited offenses compoundable | All Income Tax Act offenses compoundable | Complete coverage including Sections 275A, 276B |
| 12/24/36-month time limits | No time restrictions | Applications can be filed anytime |
| Single application per offense | Multiple applications allowed | Reapplication after rejection possible |
| Fixed compounding charges | Revised, often reduced charges | Lower financial burden |
| Interest on delayed payment | No interest on compounding charges | Additional cost savings |
Enhanced Features of New Guidelines
- Consolidated Applications: Multiple offenses across different years can be covered in a single application.
- Automatic Coverage: Pending applications before October 17, 2024, automatically considered under new guidelines.
- Withdrawal Rights: Previous applications can be withdrawn and resubmitted under new framework.
- Extended Payment Window: More time provided for compounding charge payment.
- Reduced Administrative Burden: Streamlined process with fewer documentation requirements.
July 2025 Critical Compliance Dates
July 2025 represents a crucial compliance month with quarterly deadlines and important filing obligations for the first quarter of FY2025-26.
| Due Date | Compliance Requirement | Applicable Period | Consequences of Default |
|---|---|---|---|
| July 7, 2025 | TDS/TCS Deposit | June 2025 | Interest @1.5% per month |
| July 15, 2025 | TCS Statement (Form 27EQ) | April-June 2025 | Late fee @Rs. 200/day + penalties |
| July 15, 2025 | TDS Certificates (Form 16B/C/D) | May 2025 | Penalty for non-issuance |
| July 30, 2025 | Challan-cum-Statement (Form 26QE) | June 2025 | Late fee and penalty provisions |
| July 31, 2025 | Quarterly TDS Returns (Forms 24Q, 26Q, 27Q) | April-June 2025 | Late fee @Rs. 200/day + Section 271H penalty |
Special Considerations for July 2025
- First Quarter Reconciliation: Crucial opportunity to identify and rectify Q1 defaults before prosecution relief deadline.
- System Upgrades: Enhanced GST integration with hard-locked GSTR-3B from July 2025 may impact TDS/TCS coordination.
- Extended ITR Deadline: Individual ITR deadline extended to September 15, 2025, but TDS/TCS obligations remain unchanged.
- Quarterly Statement Benefits: Meeting July 31 deadline provides prosecution relief for any April-June defaults under new statutory provisions.
Proactive Prevention & Mitigation Strategies
A comprehensive compliance strategy leveraging the new reforms can significantly reduce non-compliance risks and associated costs.
- Step 1: Implement Enhanced Compliance Calendar
- Mark all monthly deposit dates (7th of following month)
- Highlight quarterly statement deadlines (31st July, October, January, May)
- Set up automated reminders 5 days before each deadline
- Include new Section 194T partner payment thresholds
- Step 2: Leverage Technology Solutions
- Implement automated TDS/TCS calculation systems
- Use real-time reconciliation tools
- Set up exception reporting for threshold breaches
- Integrate with updated government portals for faster processing
- Step 3: Utilize Prosecution Relief Windows
- Monitor monthly deposit defaults immediately
- Ensure correction before quarterly statement due dates
- Calculate and pay applicable interest promptly
- Document all corrective actions for audit trails
- Step 4: Strategic Compounding Approach
- Evaluate all historical defaults for compounding eligibility
- Prepare consolidated applications under new Circular 04/2025
- Calculate cost-benefit analysis of compounding vs. penalties
- Engage with competent authorities proactively
- Step 5: Continuous Monitoring & Updates
- Subscribe to official CBDT notifications and circulars
- Regularly review threshold changes and new provisions
- Maintain updated vendor/deductee databases with current PANs
- Conduct quarterly compliance audits and reconciliations
Frequently Asked Questions (FAQs) on TDS/TCS Non-Compliance FY2025-26
Q1: Are the higher TDS/TCS rates for non-filers applicable in FY2025-26?
A1: No. Sections 206AB and 206CCA have been completely removed from April 1, 2025. Deductors no longer need to verify the return filing status of deductees, and all transactions are subject to standard TDS/TCS rates regardless of filing status.
Q2: Is TCS on sale of goods still applicable in FY2025-26?
A2: No. Section 206C(1H) requiring TCS on sale of goods has been permanently removed from April 1, 2025. However, TDS under Section 194Q for purchase of goods by buyers with turnover exceeding Rs. 10 crore remains applicable.
Q3: How does the new prosecution relief under Section 276B work?
A3: If you deposit delayed TDS/TCS along with applicable interest before the due date for filing the quarterly TDS/TCS statement (31st July, October, January, or May), prosecution under Section 276B/276BB will not be initiated, regardless of the default amount. However, you still remain liable for interest charges.
Q4: What is the new TDS requirement for partner remuneration?
A4: From April 1, 2025, Section 194T requires 10% TDS on payments to partners (remuneration, interest, commission, or bonus) if the annual aggregate exceeds Rs. 20,000. This applies to all partnership firms and LLPs.
Q5: Can all tax offenses now be compounded under the new guidelines?
A5: Yes. CBDT Circular 04/2025 effective March 17, 2025, makes all offenses under the Income Tax Act compoundable, including previously non-compoundable offenses under Sections 275A and 276B. There are no time restrictions for filing compounding applications.
Q6: What happens if I miss the July 31, 2025 quarterly statement deadline?
A6: Missing the July 31 deadline results in: (1) Late fee of Rs. 200 per day under Section 234E, (2) Potential penalty of Rs. 10,000 to Rs. 1,00,000 under Section 271H, and (3) Loss of prosecution relief for any Q1 TDS/TCS defaults under the new statutory provisions.
Q7: Are there any enhanced threshold limits for TDS in FY2025-26?
A7: Yes. Multiple TDS sections now have increased threshold limits from April 1, 2025. For example, many payment categories that previously attracted TDS at lower amounts now have higher thresholds, reducing compliance burden for smaller transactions.
Q8: How has the interest rate structure changed for TCS defaults?
A8: From April 1, 2025, the interest rate for late collection of TCS has been increased to 1.5% per month (or part thereof) for most categories, aligning with TDS late deposit interest rates. Previously, some TCS categories had lower interest rates of 1% per month.
Q9: Can I withdraw and resubmit a compounding application under the new guidelines?
A9: Yes. The new Circular 04/2025 allows withdrawal of previous compounding applications and submission of fresh applications under the revised framework. However, this may result in higher compounding charges depending on the circumstances.
Q10: What documentation is required to claim prosecution relief under Section 276B?
A10: You need to maintain: (1) Payment challans showing TDS/TCS deposit with interest, (2) Bank statements confirming government credit, (3) Quarterly statement filing acknowledgment, and (4) Interest calculation worksheets. Ensure deposits are made before the quarterly statement due date.
Q11: Does expenditure disallowance under Section 40(a)(ia) still apply in FY2025-26?
A11: Yes. Section 40(a)(ia) remains fully applicable. 30% of expenses are disallowed for resident payments and 100% for non-resident payments where TDS was not deducted or deposited. The cure provision allows avoidance if TDS is corrected before year-end or return filing due date.
Q12: Are there any changes to TDS certificate issuance requirements?
A12: The basic issuance requirements remain unchanged, but the elimination of higher rate provisions (Sections 206AB/206CCA) simplifies certificate generation. Deductors no longer need to mention special rates or filing status considerations in TDS certificates.
Conclusion: Staying Compliant in FY2025-26
FY2025-26 represents a watershed moment in TDS/TCS compliance, marked by significant taxpayer-friendly reforms balanced with continued enforcement of core obligations. The elimination of discriminatory higher rates, enhanced prosecution relief mechanisms, and universal compounding framework provide unprecedented opportunities for businesses to achieve and maintain compliance while managing historical defaults effectively.
However, the fundamental financial consequences of non-compliance—interest charges, penalties, and expenditure disallowances—remain robust and serve as strong deterrents against default. The key to successful navigation lies in leveraging the new relief mechanisms proactively while establishing systematic compliance processes that prevent defaults in the first instance.
As the regulatory landscape continues to evolve, businesses must stay informed about ongoing changes and adapt their compliance strategies accordingly. The reforms of FY2025-26 demonstrate the government's commitment to balancing revenue collection with ease of doing business, creating opportunities for compliant taxpayers to thrive in a more predictable and fair tax environment.