What the Income-tax Act, 2025 changes on your contract TDS

The Income-tax Act, 2025 replaced the Income-tax Act, 1961 from 1 April 2026. For a contractor, the obligation behind TDS on contract payments has not gone away: your client still deducts tax from what it pays you, and you still claim the credit against your own tax. What has changed is the law the deduction sits in, and with it the section numbers printed on bills, certificates and templates across your office.

This post covers what to update and what to check. It does not tell you the new section number or rate for contract payments, on purpose: confirm both with your chartered accountant before you change a single template, because a wrong reference printed on 40 bills is worse than an old one.

What the old law said

Under the 1961 Act, TDS on payments to contractors was covered by section 194C. The rates under that section were 1% where the contractor was an individual or a Hindu undivided family and 2% for others, such as companies, firms and LLPs. Most RA bill templates, recovery schedules and client cover letters in India still carry the words "TDS u/s 194C" in their headings.

What changed on 1 April 2026

• The governing Act. Payments made under the new Act are deducted under the Income-tax Act, 2025, not the 1961 Act.
• Section numbers. Provisions were renumbered and regrouped. The section that covers payments to contractors has a new number, and so do the provisions for lower deduction certificates and related forms.
• References on documents. Certificates, statements and portal screens now refer to the new provisions. Your own documents should too.

Confirm the new section and the rate for contract payments with your CA, for each type of entity you bill as, before you update any template or work order. Ask the same question about any lower deduction certificate you hold.

Where the old section number hides

Section 194C is printed in more places than most offices expect. Before you update, list every place it appears.

• The recovery schedule in your RA bill template, usually as a line label.
• The cover letter or bill forwarding letter, where recoveries are listed for the client.
• Your bill register and receivables workbook, in column headings.
• Ledger names in Tally Prime or Zoho Books, such as "TDS receivable 194C".
• Subcontractor and labour contractor bills, where you are the one deducting.
• Standard clauses in your own subcontract work orders.

The last two matter most. On bills you raise, a stale reference is untidy. On payments you make to subcontractors, you are the deductor, and your own deductions and returns must follow the new law.

Bills that straddle the change

RA bills do not respect financial years. A bill for March work, measured in March, certified in April and paid in May, touches both Acts. Which law governs a deduction depends on when the credit or payment falls under the rules of each Act. Ask your CA how bills certified before 1 April 2026 and paid after it should be treated, and keep that answer on file with the work order, since the same question will come up during reconciliation.

A worked example

On RA Bill No. 7 the value of work done this bill is ₹20,84,879. The work order is configured at 2% income-tax TDS, the rate the contractor's CA confirmed for a company. The deduction is 2% of ₹20,84,879, which is ₹41,697.58, rounded to ₹41,698.

The base matters as much as the rate. Whether TDS is worked out on the value of work done alone or on an amount including GST depends on how the invoice shows the tax and on the guidance in force. Settle the base with your CA too, and print it on the recovery schedule so the client's accounts team sees the same basis you used.

Reconciliation does not change

The credit for TDS still reaches you through your annual tax statement, Form 26AS, and the Annual Information Statement (AIS). The monthly habit is the same as before: list each payment received with the TDS deducted, and match it to what the statements show. Missing credits are usually a wrong PAN on the client's return, a deduction reported in the wrong quarter, or a return not yet filed.

• Match by payment date, not bill date.
• Keep the client's TAN on every work order, so you can trace an entry in the statement to a client.
• Chase missing credits within the quarter, while the client's accounts team still has the payment in front of them.

The MSME payment rule

Under the 1961 Act, section 43B(h) allowed a buyer to deduct payments due to micro and small enterprises only when they were paid within the MSMED Act time limit. If you are a Udyam-registered contractor and your private clients have been paying faster because of it, ask your CA whether and how that rule carries into the 2025 Act. Our post on using the MSMED Act covers the payment limit itself.

A short checklist

1. Get the new section number and rate for contract payments from your CA, in writing.
2. Update recovery schedule labels, cover letters and ledger names together, on one date.
3. Update deduction settings on subcontractor and labour contractor bills.
4. Agree with your CA how bills straddling 1 April 2026 are treated.
5. Keep reconciling TDS to Form 26AS and AIS every month.

How Tatha Vastu handles income-tax TDS

In Tatha Vastu, income-tax TDS is configured per work order: the rate, the base and the label printed on the bill. Change the label once and every bill generated after that date carries the new reference, while old bills keep the reference they were issued with. Deductions are recorded against payment dates for reconciliation. Tatha Vastu computes and records; it does not file returns or give tax advice. The income-tax TDS calculator uses the rate you enter.