Q1. Can we select both salary and non-salary payment codes simultaneously in a single TDS challan?
Answer:
Yes, it is possible. Under the new system, a single challan allows you to include both salary and non-salary TDS payments.
- Section Limit: You can select a maximum of 20 different sections/payment codes within one challan.
- Exceeding the Limit: If your transaction involves more than 20 sections, you will need to generate a new, separate challan.
- Flexibility: When creating these new challans, you can continue to combine both salary and non-salary codes as needed.
Q2. In Form 124 for employee deductions, providing a rent agreement is mandatory, and a 200% penalty applies for false declarations. What is the onus on the employer, how do they verify its validity, and what checks and balances are required?
Answer:
To understand this, it helps to look at the broader framework of the TDS scheme. The Income Tax Department essentially delegates the responsibility of tax collection to employers. Employers calculate an employee's taxable salary income based on the declarations submitted by that employee.
- Onus of the Penalty: The 200% penalty for misreported information is strictly on the employee if they provide a fraudulent or incorrect declaration. The employer is not an investigative body and cannot be held liable for an employee's deliberate misrepresentation.
- Employer's Responsibility: The employer's responsibility is limited to executing basic due diligence (checking that a signed rent agreement exists and matches the declared amount).
- Where Employer Liability Applies: If the employee provides a perfectly valid declaration but the employer calculates or deducts the TDS incorrectly due to an internal payroll error, the liability and ownership of that error rest solely with the employer.
Q3. Under the Income Tax Act 1961, we used specific sections to pay TDS challans. Why has the government transitioned to "payment codes" under the Income Tax Act 2025?
Answer:
This change was introduced for simplicity. In the Income Tax Act, 2025, the primary TDS framework is consolidated under fewer sections—specifically Section 392 and Section 393.
Section 393 contains four distinct tables:
- Table 1: Payments to residents
- Table 2: Payments to non-residents
- Table 3: Payments applicable to both residents and non-residents
- Table 4: Instances where TDS deduction is not required
As an example, Table 1 alone contains an extensive list of serial numbers for various types of resident payments, memorizing these subsection/serial strings became highly impractical. To solve this, the government introduced simplified Payment Codes.
Examples of Payment Codes:
- Codes 1001 & 1002: Salary payments for government and non-government employees, respectively.
- Codes 1023 & 1024: Payments to contractors (where Code 1023 applies a 1% TDS rate and Code 1024 applies a 2% TDS rate).
Ultimately, payment codes act as user-friendly shortcuts to help you accurately select the right tax category without needing to look up complex legal subsections.
Q4. Why has filing Form 41 been made mandatory under ITA 2025 to submit a Tax Residency Certificate (TRC), whereas it wasn't required under ITA 1961?
Answer:
The primary reason is data accessibility for tax enforcement. Income tax return (ITR) forms do not allow taxpayers to upload external PDF attachments.
- The Old Process (ITA 1961): When an assessee claimed relief under a Double Taxation Avoidance Agreement (DTAA), the government had no way of verifying their Tax Residency Certificate (TRC) upfront. The Tax Department could only demand the TRC by initiating formal scrutiny/audit proceedings, which applied to only a small fraction of taxpayers.
- The New Process (ITA 2025): By mandating Form 41, the government ensures that the TRC is submitted electronically by default. This provides the department with immediate access to the necessary data, allowing them to verify later whether the assessee was genuinely eligible for DTAA treaty benefits without needing to trigger a full tax audit first.
Q5. Since all TDS data is now automatically reflected in the Annual Information Statement (AIS), is it still legally mandatory for employers to issue TDS certificates?
Answer:
Yes, it remains legally mandatory. Even though the data is captured in the AIS, tax laws strictly dictate that valid TDS certificates must be issued to deductees.
- Non-Salary Payments: For non-salary TDS, certificates must generally be issued within 15 days from the end of the month in which the TDS return was filed. (For instance, if a quarterly/monthly return deadline is July 31st, the certificate must be issued by August 15th).
- Salary Payments: For employees, instead of the traditional Form 16 used under the old Act, employers are now required to issue Form 130 so that employees can verify their taxes before filing their income tax returns.
Q6. Can unconsumed TDS challans from the old Income Tax Act (1961) be utilized and transitioned into the new ITA framework?
Answer:
Yes. According to the official FAQs and transitional guidelines provided by the government, taxpayers are legally permitted to consume unutilized challans from the 1961 Act in the new tax filing forms. This protects the taxpayer's rights, as the money has already been paid into the government exchequer.
Q7. Can we allow a monthly vehicle reimbursement for mixed (official and personal) use up to Rs.5,000 per month now, which was previously capped at Rs.1,800?
Answer:
Yes. If an employee owns/holds the motor vehicle, this perquisite/exemption structure is permissible. The updated monetary limits are accommodated under the modern rules for mixed-use vehicle reimbursements, provided the necessary logbooks or declarations are maintained.
Q8. Will the Income Tax Act 2025 framework increase the level of due diligence expected from employers across compliance, validating declarations, payroll governance, and documentation?
Answer:
In practice, the core philosophical expectations have not radically shifted, but the structural compliance has tightened.
The Income Tax Department does not expect an employer to function as a criminal investigation agency. Your role remains one of basic due diligence, not forensic investigation. However, the newer employee declaration forms require more specific inputs. If an employer completely ignores obvious red flags in employee declarations, they may face administrative queries. While it doesn't change the fundamental legal liability of the employer compared to the 1961 Act, the strictness of automated reporting means payroll compliance governance must be sharper than ever.
Q9. Can a new TDS challan be cross-adjusted between different categories? For example, can a challan meant for Section 194J (Professional Fees under old law) be used for Section 192 (Salaries), or vice-versa?
Answer:
This requires looking at two different types of cross-adjustment:
|
Adjustment Scenario |
Is it permissible/advisable? |
Reason |
|---|---|---|
|
Adjusting Non-Salary against Non-Salary (e.g., Contracts vs. Professional Fees) |
Allowed |
Both fall under the same non-salary reporting structure and are declared in the same TDS return form. |
|
Adjusting Salary against Non-Salary (or vice-versa) |
Not Recommended / Restrictive |
While the portal might physically let you bundle items into one challan creation step, you should not offset or adjust a paid salary TDS amount against a non-salary liability. Salary and non-salary taxes are processed through entirely different tax return streams. Doing this will cause processing mismatches and reporting errors. |
Q10. Since Form 3CA, Form 3CB and Form 3CD have been clubbed into a unified Form 26, has the content been simplified or remains the same?
Answer:
The core data requirements remain largely identical to the older forms, but it is not necessarily simplified—in fact, it asks for more granular corporate governance details.
In the consolidated Form 26, you are required to provide additional compliance disclosures that were not present before. These include:
- The specific accounting software being used by the assessee.
- Audit qualifications or statutory notes.
- The physical log details, such as the IP address from which the data/filing is being transmitted.
Q11. If a company's data backup is legally hosted at a headquarters located outside of India, how must this situation be handled under the new rules?
Answer:
Under the updated mandates, maintaining a localized backup in India is strictly mandatory. While the company is entirely free to keep an external backup at its overseas headquarters for global continuity and safety, an identical, real-time live backup or data mirror must be maintained on servers located within the jurisdictions of India to satisfy statutory compliance.
Q12. What is the overall status of penalties and prosecutions under the Income Tax Act 2025 compared to the old regime?
Answer:
While standard monetary penalty percentages remain relatively comparable across several clauses, the legal teeth of the Act have been sharpened significantly regarding severe non-compliance. Specifically, criminal prosecution has seen a major structural shift: imprisonment has been made completely mandatory in roughly 25 specific default use-cases. Delayed or non-payment of collected TDS is treated with high severity under this framework.
Disclaimer: This is an effort by Lexcomply.com, to contribute towards improving compliance management regime. User is advised not to construe this service as legal opinion and is advisable to take a view of subject experts.