TDS Timing Rules for Cross-Year Transactions: Old Act vs New Act 2025

Why Cross-Year TDS Timing Matters

One of the trickiest aspects of TDS compliance arises when an expense is booked in one financial year but the payment is made in the next. With the Income Tax Act 2025 coming into effect from FY 2026-27, practitioners now face the added complexity of determining which Act governs TDS on such cross-year transactions.

This article breaks down the five most common cross-year scenarios and clarifies the applicable TDS rules for each.

Scenario 1: Expense Booked in FY 2025-26, Payment in FY 2026-27

This is the most common situation. A company books a professional fee or contractor payment as an expense in March 2026, but the actual payment is released in April or May 2026 (i.e., FY 2026-27).

TDS Rule: TDS must be deducted at the time of credit to the payee's account or at the time of payment, whichever is earlier. Since the expense was booked (credited) in FY 2025-26, TDS liability arose in FY 2025-26 itself.

Applicable Act: Income Tax Act, 1961 — because the TDS trigger event (credit) occurred before the new Act takes effect.

Scenario 2: Payment in FY 2025-26, Expense Booked in FY 2026-27

Sometimes an advance payment is made before the service is rendered. For example, a retainer fee paid in February 2026 for consulting work to be performed and billed in FY 2026-27.

TDS Rule: Since payment was made in FY 2025-26, TDS was required at the time of payment itself, regardless of when the expense is booked in the payer's books.

Applicable Act: Income Tax Act, 1961 — the payment trigger occurred in FY 2025-26.

Scenario 3: Expense Booked and Payment Made in FY 2025-26

Where both the expense booking and payment happen within FY 2025-26, there is no ambiguity. The entire transaction falls squarely under the old regime.

Applicable Act: Income Tax Act, 1961.

Scenario 4: Both Expense and Payment Fall in FY 2026-27

If a fresh expense is booked in FY 2026-27 and the payment is also made in FY 2026-27, the new Act governs entirely.

Applicable Act: Income Tax Act, 2025 — both trigger events fall under the new regime.

Practitioners should pay close attention to any changes in TDS rates, thresholds, or procedural requirements introduced by the new Act for such transactions.

Scenario 5: Partial Advance in FY 2025-26, Full Invoice in FY 2026-27

This is the most complex scenario. Suppose a company pays a partial advance of ₹2 lakh in March 2026 against a total contract value of ₹5 lakh. The full invoice is raised in July 2026 and the balance ₹3 lakh is paid then.

TDS Rule: This transaction straddles both Acts:

• On the advance (₹2 lakh): TDS as per Income Tax Act, 1961 — since the payment was made in FY 2025-26
• On the balance (₹3 lakh): TDS as per Income Tax Act, 2025 — since both credit and payment occur in FY 2026-27

This split treatment means the deductor must maintain clear documentation of both deductions, potentially at different rates if the new Act has revised the applicable TDS rate for that category of payment.

Key Takeaways for Practitioners

• The trigger event determines the Act: Whichever Act is in force at the time of credit or payment (whichever is earlier) governs TDS on that transaction.
• Maintain transaction-level records: For cross-year transactions, document the exact date of expense booking, payment, and TDS deduction separately.
• Watch for rate changes: The new Act may prescribe different TDS rates for certain sections. Applying the wrong rate will attract interest under Section 201(1A) / equivalent new Act provision.
• Advance payments need special attention: Partial advances straddling both years require split TDS treatment — don't apply a single rate to the entire contract value.
• Consult the transition provisions: The Income Tax Act 2025 is expected to include transition provisions for pending TDS obligations. Review these carefully before finalising your March 2026 TDS returns.

Quick Reference Table

Getting TDS timing right during this transition year is critical. An error could mean interest liability, disallowance of the expense under Section 40(a)(ia), and unnecessary notices from the CPC. Plan ahead and deduct correctly.