Verify before relying on this. Some figures or dates here are pending confirmation against the official gazette or circular. Check the sources below, or ask us.
The switch-over
The Income-tax Act 2025 replaced the Income-tax Act 1961 from 1 April 2026, together with the Income-tax Rules 2026. The "previous year / assessment year" pair is gone. Income is now taxed by Tax Year, and Tax Year 2026-27 is the financial year April 2026 to March 2027.
The 1961 Act still governs FY 2025-26 and earlier. So employers are running two systems side by side this year:
- Form 16 (old Act) for FY 2025-26, issued by 15 June 2026.
- The new forms for everything deducted from April 2026.
Union Budget 2026 (1 February 2026) made no change to slabs, rebate, standard deduction, surcharge or cess for Tax Year 2026-27. What changed is the law's numbering, its forms and several perquisite values set by the Rules.
Section and form map for payroll
| Purpose | 1961 Act / 1962 Rules | 2025 Act / 2026 Rules |
|---|---|---|
| TDS on salary (and EPF withdrawal TDS) | s.192 / s.192A | s.392 |
| New tax regime (default) | s.115BAC | s.202 |
| Rebate | s.87A | s.156 |
| Standard deduction | s.16(ia) | s.19 |
| Annual TDS certificate to employee | Form 16 | Form 130 |
| Quarterly salary TDS statement | Form 24Q | Form 138 (Rule 219) |
| Employee's evidence of claims | Form 12BB | Form 124 |
| Non-salary TDS statement (resident) | Form 26Q | Form 140 |
| Foreign remittance declaration / CA certificate | Forms 15CA / 15CB | Forms 145 / 146 |
What s.392 asks of the employer
The core duty has not changed. At the time of payment, deduct tax on the employee's estimated salary income for the tax year, at the rates in force, spread evenly over the remaining months. In practice:
- Regime. The new regime is the default. Take the employee's choice at the start of the year. An employee who opts for the old regime must give evidence of deductions and exemptions in Form 124.
- Other income and previous employers. Include salary from a previous employer, and other income or losses the employee declares (loss only under house property), where the Act allows it.
- Perquisites. Value perquisites under the new Rules. KPMG's summary of the Income-tax Rules 2026 lists these values, which should be checked against the Rules text before you configure them:
- motor car: ₹5,000 a month (up to 1.6 L engine, and EVs) or ₹7,000 a month (above 1.6 L), plus ₹3,000 for a chauffeur
- meals: ₹200 per meal exempt
- gifts: up to ₹15,000 a year exempt
- children's education allowance: ₹3,000 a month per child
- medical loans: exempt up to ₹2 lakh
- HRA. The 50%-of-salary limit now applies to eight cities: Mumbai, Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad. Everywhere else it is 40%. HRA exemption is available only in the old regime.
- Deposit. Tax is deposited by the 7th of the following month, and March deductions by 30 April.
New-regime numbers for Tax Year 2026-27 (s.202)
| Taxable income | Rate |
|---|---|
| Up to ₹4,00,000 | Nil |
| ₹4,00,001 – ₹8,00,000 | 5% |
| ₹8,00,001 – ₹12,00,000 | 10% |
| ₹12,00,001 – ₹16,00,000 | 15% |
| ₹16,00,001 – ₹20,00,000 | 20% |
| ₹20,00,001 – ₹24,00,000 | 25% |
| Above ₹24,00,000 | 30% |
- Standard deduction: ₹75,000.
- Rebate (s.156): available where taxable income does not exceed ₹12 lakh, up to ₹60,000. It is not available against special-rate income such as capital gains. Marginal relief applies just above ₹12 lakh.
- Surcharge: 10% above ₹50 lakh, 15% above ₹1 crore, and 25% above ₹2 crore, which is also the maximum under the new regime.
- Health and education cess: 4%.
- Employer NPS contribution: deductible up to 14% of salary.
- Employer retirement contributions: PF, NPS and superannuation together above ₹7.5 lakh a year are taxable perquisites.
Worked examples: salary only, new regime
A: gross salary ₹12,75,000. Taxable income is 12,75,000 − 75,000 = ₹12,00,000. Tax on slabs is ₹60,000, and the rebate is ₹60,000. TDS is nil.
B: gross salary ₹13,00,000. Taxable income is ₹12,25,000.
- Slab tax: 20,000 (5% band) + 40,000 (10% band) + 3,750 (15% on ₹25,000) = ₹63,750.
- No rebate, because income is above ₹12 lakh. Marginal relief limits the tax to the income above ₹12 lakh, which is ₹25,000.
- Cess at 4% is ₹1,000, so total tax is ₹26,000. Monthly TDS is about ₹2,167.
- Without marginal relief the tax would be ₹66,300.
- Marginal relief runs out at taxable income of about ₹12,70,588, where 60,000 + 15% of the excess equals the excess.
C: gross salary ₹18,00,000. Taxable income is ₹17,25,000.
- Slab tax: 20,000 + 40,000 + 60,000 (15% band) + 25,000 (20% on ₹1,25,000) = ₹1,45,000.
- Cess is ₹5,800, so total tax is ₹1,50,800. Monthly TDS is ₹12,567.
Rounding. Total income is rounded to the nearest ₹10, and so is the tax payable. The 2025 Act consolidates the old ss.288A and 288B into a single rounding provision. Apply the rounding to the annual tax figure, not to each component. Monthly TDS can be rounded to whole rupees, provided the year-end total reconciles.
Old regime, briefly
The old regime is available only if the employee opts for it:
- Slabs: nil up to ₹2.5 lakh (₹3 lakh at age 60–79, ₹5 lakh at 80+), 5% to ₹5 lakh, 20% to ₹10 lakh, and 30% above.
- Standard deduction: ₹50,000.
- Rebate: up to ₹12,500 where income does not exceed ₹5 lakh, with no marginal relief.
- Deductions: the familiar "80C-type" deductions (₹1.5 lakh), 80CCD(1B) (₹50,000), 80D and home-loan interest (₹2 lakh) continue, under new section numbers. Check the mapping before you print them on Form 130.
Returns and certificates
| Obligation | Form | Due |
|---|---|---|
| Q1 (Apr–Jun 2026) salary TDS statement | Form 138 | 31 Jul 2026 |
| Q2 (Jul–Sep 2026) | Form 138 | 31 Oct 2026 |
| Q3 (Oct–Dec 2026) | Form 138 | 31 Jan 2027 |
| Q4 (Jan–Mar 2027) | Form 138 | 31 May 2027 |
| Annual certificate for TY 2026-27 | Form 130 | 15 Jun 2027 (first issue) |
What HR and payroll must change
- To do: Replace s.192, 24Q, Form 16 and 12BB references in payroll software, payslips, policies and employee FAQs with s.392, Form 138, Form 130 and Form 124.
- To do: Collect Form 124 declarations, with landlord PAN where annual rent exceeds ₹1 lakh and landlord-relationship disclosure, from old-regime employees.
- To do: Update the HRA city list to eight cities, and the perquisite valuation tables to the 2026 Rules.
- To do: Re-test the marginal-relief logic around ₹12–12.7 lakh taxable income, where engines most often go wrong.
- To do: Reconcile Q1 and Q2 challans to Form 138 before 31 Oct 2026. Correct any April–June returns filed on legacy utilities.
- To do: Keep the FY 2025-26 Form 16 and 24Q corrections on the old Act. Do not mix them with the new forms.
- To do: Brief employees that their certificate for this year will be called Form 130.
Status note (verify: true). The salary TDS statement is Form 138 according to TaxGuru, TaxUpdate, CAclubindia and other publishers, which describe Form 143 as the TCS statement (formerly 27EQ). One ClearTax page on s.392 names Form 143 for salaries. We follow the majority view, but confirm the form number on the TRACES / e-filing utility before filing. Perquisite values come from a KPMG summary of the Rules, and the new section numbers for old-regime deductions have not been independently verified.
General information, not legal advice. Last reviewed 27 Sep 2026.