New income tax rules: Key TDS changes salaried employees must note

As the new financial year 2026-27 begins, salaried employees need to note that changes in Tax Deducted at Source (TDS) rules have come into effect from April 1. The Income-tax Act, 2025 has introduced updated section numbers, revised forms, and new compliance requirements, affecting how employers calculate and deduct tax from salaries.

New TDS computation under the Income Tax Act, 2025

For FY 2026-27, TDS on salary will by default be calculated under the new tax regime. Employees who wish to continue with the old tax regime must explicitly inform their employer.

Employers will “reset” TDS calculations for the new financial year based on projected income, applicable deductions, and the tax regime chosen by the employee.

Zeel Jambuwala, Co-founder & Partner at Aurtus, said, “The new TDS provisions under the Income Tax Act, 2025, will apply to salaries paid on and from April 1. While TDS rates themselves do not change significantly, employers face an additional transitional compliance burden of remapping deductions and realigning payroll systems to the new framework.”

Salary payment date determines applicable law

The Income Tax Department clarified in its FAQs that the timing of salary payments—not just the salary period—determines which law applies:

• March 2026 salary (paid on or before 31 March 2026) will continue to follow the Income Tax Act, 1961.
• April 2026 salary (paid on or after 1 April 2026) will be governed by the Income Tax Act, 2025.

This creates a brief overlap where salaries paid in March and April fall under different laws.

As per the department, “Under TDS provisions relating to salary, tax is required to be deducted at the time of payment. Thus, TDS on salary shall be governed by different Acts, based on the date of payment.”

Investment declarations to follow new law

Employees’ investment declarations for FY 2026-27 must also align with the new Act. Earlier provisions, such as Section 80C, will now reference the updated schedules and section numbers—for example, Schedule XV read with Section 123 of the Income Tax Act, 2025. Employers’ payroll systems will need to be updated to reflect these changes to avoid errors in TDS calculations.

Impact on employees

For most employees, the transition will not affect TDS rates, and both old and new tax regimes remain available. However, monthly deductions may differ slightly as employers recalculate TDS based on projected income and investments under the new law.