The Trap Nobody Is Talking About

Most of the writing around the Income-tax Act, 2025 coming into force on 1 April 2026 has focused on the glamorous changes — the renumbered sections, the consolidated TDS framework, the new forms. What has received far less attention is a small, boring compliance question that is going to quietly wreck a lot of March-April 2026 TDS returns: when an underlying transaction straddles the cutover, which Act's section number goes on the challan and on the quarterly return? The answer is not "the Act in force on the day you deposit the money." It is the Act in force at the earlier of credit or payment, which is a test that practitioners already know from the 1961 Act but will have to apply with unusual care in the next two quarters.

The "Earlier of Credit or Payment" Test, Restated for the Transition

Under the 1961 Act, the non-salary withholding provisions — Sections 194C, 194-I, 194J, 194Q, 194T and their siblings — generally trigger the deduction obligation at the earlier of credit of the sum to the account of the payee (including a suspense or "any other" account) or actual payment, in cash, cheque, draft or otherwise. Salary TDS under the old Section 192, by contrast, runs on a payment-time rule, and the 2025 Act preserves that distinction by housing salary TDS in its own section separate from the general consolidated provision. For the transition window, the better reading of the timing provisions read with the repeal-and-savings framework is that you look at which of credit or payment happened first (for non-salary withholdings) or at the date of actual payment (for salary), and the Act in force on that governing date is the Act that governs the deduction, the rate, and the section citation. This is not, as of the date of writing, backed by a standalone CBDT transition circular using exactly this language, so practitioners should read this as the principled default and watch for any clarificatory communication.

Three short worked examples make the rule concrete:

  • Professional fee credited on 28 March 2026, paid on 10 April 2026. The earlier event is the book credit on 28 March 2026, which is before the cutover. The 1961 Act applies. The deduction is made under the old Section 194J, the challan carries the old section code, and the entry flows into Form 26Q for Q4 of FY 2025-26 under the legacy sections.
  • Advance rent paid on 25 March 2026, invoice and credit dated 3 April 2026. The earlier event is the payment on 25 March 2026. The 1961 Act applies again — the old Section 194-I is cited, notwithstanding that the vendor's invoice falls in the new year.
  • Contractor running bill credited on 5 April 2026, paid on 20 April 2026. Both events are on or after 1 April 2026. The new framework under Section 393 of the Income-tax Act, 2025 applies. The section citation and challan mapping are under the 2025 Act, not the old Section 194C.

The rule is mechanical once you accept the test. The mistakes happen when people try to reason by reference to the date the money actually leaves the bank, or the date the challan is deposited, neither of which is the governing event.

What Stays Under the 1961 Act (and When)

For any TDS-triggering event where the earlier of credit or payment is on or before 31 March 2026, the 1961 Act continues to govern the deduction, even though the money may be deposited into the Government account in April 2026 or later. Three consequences follow, and they matter operationally.

First, the statutory deposit deadlines under the existing rules continue to apply to those legacy events. TDS deducted on transactions with a March 2026 credit or payment trigger is, for non-government deductors, ordinarily required to be deposited by 30 April 2026 under the existing framework — but the deductor should always re-check the exact date notified for the transition year rather than rely on memory. Second, the challan for such a deposit must carry the old section code (192, 194A, 194C, 194H, 194-I, 194J, 194Q, 194T and so on, as applicable), because that is the section under which the liability crystallised. Third, the Q4 FY 2025-26 quarterly statement — Form 26Q for resident payees, Form 27Q for non-resident payees — will still be filed using the legacy section dropdowns and will need to tie back to the old-Act challans. Corrections, revisions, and lower-deduction certificates for that quarter continue to live in the 1961 Act universe for the full limitation period.

What Moves to the 2025 Act Framework

For any TDS event where the earlier of credit or payment (or, for salary, the actual payment) is on or after 1 April 2026, the 2025 Act governs. Section 393 of the enacted Income-tax Act, 2025 is the principal non-salary TDS provision — it absorbs the substance of the old non-salary withholding sections, including the non-resident withholding sections that were earlier spread across Sections 195 to 196D — while salary TDS is housed separately in Section 392 of the new Act. Practitioners drafting filings for Q1 FY 2026-27 should pull the exact sub-clause within Section 393 that corresponds to the specific payment type and read it alongside the relevant rule and form, and should watch for CBDT circulars on edge cases in the first few quarters. For run-of-the-mill contractor, professional and rent payments with a post-1 April 2026 trigger, the Section 393 framework is the right place to look.

TRACES, Challan Mapping and Lower-Deduction Certificates

From a system design standpoint, the TDS portal and TRACES will need to keep both worlds live for at least a full financial year. Challans with old-Act section codes will continue to be generated for legacy credit-or-payment events deposited after the cutover. Practitioners should expect the old section dropdowns to remain on the portal for that reason — not as a leftover, but as the correct option for legacy events. Existing lower-deduction or nil-deduction certificates issued under Section 197 of the 1961 Act for FY 2025-26 remain valid for events governed by the 1961 Act and should not be ignored just because the deposit falls in the new year. For events that move into the 2025 Act window, a fresh certificate under the equivalent provision of the new Act will usually be the right answer; the bridging of certificates across the cutover is one of the areas where the department is expected to issue procedural guidance, and deductors should watch the notifications carefully rather than assume continuity.

Year-End Provision and Accrual Traps

The single biggest reconciliation trap in this transition sits in year-end provisions booked as at 31 March 2026. A provision for unbilled expenses, an accrual for professional fees where the invoice is expected in April, a year-end rent true-up, an interest accrual on an inter-corporate deposit — each of these typically involves a book credit on 31 March 2026, even though no invoice has been received and no payment has been made. Where the 31 March 2026 entry is effectively a credit to an identified payee, or to a deemed-payee / suspense-style account tied to a specific vendor, the "earlier of credit or payment" test treats that book credit as the earlier event and the 1961 Act governs the deduction on the provision. The TDS has to be deducted in March 2026, deposited under the old section code, and reported in Q4 FY 2025-26 regardless of when the vendor's invoice actually lands. Blind provisions with genuinely unidentifiable payees have attracted case-law nuance over the years on when Section 201 liability attaches, and practitioners working on such items should take a position on the specific facts and the current judicial guidance rather than assume the TDS obligation crystallises automatically.

The tempting and dangerous workaround is to "re-date" the credit to April so that the whole transaction falls under the 2025 Act and the entries look neater. That is a reconciliation trap, not an optimisation. The deductor's own trial balance, audit working papers and statutory audit memoranda will carry the 31 March 2026 provision, the internal ledgers and any later TDS reporting reconciliation will tie back to the original accrual date, and any subsequent scrutiny will treat the re-dating as a tell that the deductor knew what the right answer was and chose a different one. The cost of reconciliation failures here — interest under Section 201(1A), disallowance under the 1961 Act's disallowance provisions for non-deduction, and penalty exposure — is almost always worse than simply citing the old section correctly and moving on.

Composite Contracts That Straddle the Cutover

The other category to watch is long-running contracts where payments are made monthly or milestone-wise across the cutover. A typical example is a one-year professional retainer running from July 2025 to June 2026, with monthly invoices. For each month's fee, the test is applied independently — the earlier of credit or payment for that month's invoice is what matters. Invoices with a credit or payment on or before 31 March 2026 stay under the 1961 Act; those on or after 1 April 2026 move to the 2025 Act. The same retainer, paid under the same contract, can legitimately carry 1961 Act section codes for some months and 2025 Act codes for others, and the Q4 FY 2025-26 and Q1 FY 2026-27 returns will reflect that split cleanly if the deductor keeps the invoice-level audit trail. Rent contracts, AMC arrangements, retainer agreements with lawyers and auditors, and running account balances with sub-contractors are all in this bucket.

Practitioner Checklist for the March-April 2026 Cutover

  1. Freeze a cutoff date for book credits. Close the March 2026 TDS ledger by a defined internal date (say, 5 April 2026) and run the earlier-of-credit-or-payment test on every open entry before posting any April transactions.
  2. Tag every challan with the governing Act. Build a simple column in the working paper: "1961 Act" or "2025 Act." That tag drives the section code, the challan mapping and the quarterly return line.
  3. List all year-end provisions and accruals. For each, confirm that TDS was deducted in March 2026 under the old-Act section, even where the vendor invoice is still awaited.
  4. Walk through every composite contract. Identify running retainers, rent agreements and AMCs that straddle the cutover, and split the months cleanly between the two Acts.
  5. Reconcile to Form 26AS and AIS as they refresh. Counterparty books and the department's data feeds should agree with your section tagging. Any mismatch is cheaper to resolve before the return is filed than after.
  6. Review lower-deduction certificates. Confirm which Section 197 certificates are still valid for legacy events and which payees will need a fresh certificate under the 2025 Act.
  7. Watch for CBDT transition circulars. Expect procedural clarifications in the March-to-June 2026 window on challan formats, section mapping and certificate bridging. Read them before filing Q1 FY 2026-27.
  8. Document your mapping logic in writing. A short internal note explaining how each category of payment was classified is cheap insurance if the file is picked up for verification two years later.

Closing Note

The transition to the Income-tax Act, 2025 is a once-in-a-generation event, and the TDS cutover is the part of it that will touch almost every deductor in the country. The rule itself is simple — the earlier of credit or payment decides the Act — but the discipline required to apply it mechanically, across thousands of vendor entries, is not. Treat March and April 2026 as a separate closing exercise rather than a routine month-end, keep the audit trail tight, and hedge on the section numbering of the 2025 Act until the notifications and clarifications are on the table. The restraint will cost you a few evenings; the lack of it will cost considerably more.