Union Budget 2026: Major Amendments In TDS and TCS Provisions
The Union Budget 2026 has brought significant changes to the TDS and TCS system under the Income-tax Act, 2025, to make it simpler and more taxpayer-friendly. These reforms focus on reducing and rationalising tax rates, making compliance easier, clearing confusion in rules, giving relief to taxpayers, and reducing criminal penalties in some cases. Most of these changes will come into effect from 1 April 2026. The following are the changes:
Rationalisation of TCS Rates
Section 394(1) provides different and inconsistent TCS rates for various transactions. The Union Budget 2026 proposes to simplify this by standardising TCS rates wherever possible. It also offers reduced rates in some cases to give relief to taxpayers.
The proposed changes revise the tax rates on certain types of receipts. The tax on the sale of alcoholic liquor for human consumption is proposed to increase from 1% to 2%. The tax on the sale of tendu leaves is proposed to be reduced from 5% to 2%. Similarly, the tax on the sale of scrap and the sale of minerals such as coal, lignite, and iron ore is proposed to increase from 1% to 2%. For foreign remittances under the Liberalised Remittance Scheme (LRS), the tax on amounts spent on education or medical treatment exceeding Rs. 10 lakh is proposed to be reduced from 5% to 2%, while the tax on remittances for other purposes will remain unchanged at 20%. In the case of overseas tour programme packages including expenses for travel or hotel stay or boarding or lodging, or any such similar or related expenditure, the current system applies 5% tax on amounts up to Rs. 10 lakh and 20% on amounts above Rs. 10 lakh. Under the proposed changes, this will be replaced with a flat rate of 2% on the entire amount, without any threshold.
Overseas Tour Programme Package
Currently, when people in India book overseas tour packages, the government collects Tax Collected at Source (TCS) on the amount paid. If the tour package cost is up to Rs. 10 lakh, TCS is 5%. If it is more than Rs. 10 lakh, TCS is very high at 20%.
In Budget 2026, the following rules were proposed. Now, there is a uniform TCS rate of 2% on all overseas tour packages. The Rs. 10 lakh limit has been removed, so the same 2% rate applies no matter how cheap or expensive the package is. This change reduces the financial burden on travellers and makes compliance simpler.
Liberalised Remittance Scheme (LRS)
Currently, if someone sends more than Rs. 10 lakh abroad for education or medical treatment, the government collects 5% extra tax (TCS) on that amount. However, in Budget 2026, it is proposed to reduce TCS to 2%, so people will have to pay less extra tax. However, for other purposes, the 20% tax stays the same. This change aims to provide relief to students and patients who send funds abroad.
Electronic Application for Lower/Nil TDS Certificates
Currently, a person who wants lower or nil TDS has to apply manually to the Assessing Officer. Which is a slow process and requires a lot of time.
However, after the Budget 2026 amendment, the process has been made simpler and faster. Now, the payee can apply online (electronically). The application will be submitted to a prescribed income-tax authority. After checking the application, a certificate may be issued online, or the application may be rejected if details are incomplete or conditions are not met. It will provide major relief to small taxpayers.
TDS on Supply of Manpower
There was confusion related to whether the supply of manpower should be taxed as contract work under section 393(1): 1% or 2%, or as technical or professional services under section 393(1) up to 10%.
In Budget 2026, it is proposed that the supply of manpower be explicitly included under “work” in section 402(47), and the applicable TDS for individuals and HUFs is 1% and for other cases, it is 2%. This change will reduce litigation risk and will provide equal treatment across taxpayers.
Deduction Allowed to Non-Life Insurance Business for Late TDS Payment
Currently, if an expense is disallowed due to non-deduction or non-payment of TDS, there is no clear provision for allowing that expense in a later year when the TDS is paid.
In Budget 2026, this issue has been addressed by amending Schedule XIV. A new provision has been introduced for non-life insurance businesses, allowing such expenses to be claimed as a deduction in the year in which TDS is actually deducted and paid. This change will apply from Assessment Year 2026-27 onwards.
Decriminalisation and Rationalisation of TDS/TCS Offences
At present, if a person fails to deposit TDS deducted on lottery or crossword puzzle winnings, or on benefits and perquisites arising from business or profession, there is no provision for imprisonment.
However, in the budget 2026, it is proposed that if a person does not properly deduct or pay TDS on online gaming winnings or virtual digital asset (VDA) transactions, the punishment depends on the amount involved. If the default amount is more than Rs. 50 lakh, the person may face up to 2 years of simple imprisonment, a fine, or both. If the amount is between Rs. 10 lakh and Rs. 50 lakh, the punishment can be up to 6 months of simple imprisonment, a fine, or both. In other smaller cases, only a fine will be imposed.
TDS on Sale of Immovable Property by Non-Resident
Currently, when a buyer purchases property from an NRI, they are required to obtain a Tax Deduction and Collection Account Number (TAN) to comply with TDS regulations. This requirement makes the process more complex and time-consuming.
Now, the buyer can deduct and deposit TDS using a PAN-based challan linked to their PAN, and there is no need to apply for a TAN. This change makes the process much simpler, reduces paperwork, and lowers compliance difficulties for buyers, especially in property transactions involving NRIs.
These amendments will come into force from April 1, 2026 and will be applicable from tax year 2026-27 onwards.
