Month: August 2026

Related Party Transactions and Disclosure of Director’s Interest: Sections 184, 188 and 189 of the Companies Act, 2013

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A related party includes a director or KMP and their relatives, a firm or private company in which a director or manager or relative is a partner, member or director, and a holding, subsidiary or associate company, among others (section 2(76)).
  • A company can enter into the listed types of contracts with a related party (sale or purchase of goods, property, leases, services, agents, office or place of profit, underwriting) only with the consent of the Board at a meeting. Above the prescribed limits, members must approve by resolution, and related party members cannot vote.
  • Transactions in the ordinary course of business and at arm’s length are outside section 188(1). The Board’s report must refer to each contract with the justification.
  • An unapproved contract that is not ratified within three months is voidable. Penalty on the director or employee: Rs 25 lakh in a listed company and Rs 5 lakh in any other company.

When a company deals with people who control it or are close to those who control it, the price and terms may not be what an outsider would get. The Companies Act, 2013 handles this with three safeguards: a wide definition of “related party” (section 2(76)), an approval process for transactions with them (section 188), and a duty on every director to disclose personal interests (section 184), with a register of contracts (section 189).

Who is a related party (section 2(76))

  1. A director or his relative;
  2. a key managerial personnel or his relative;
  3. a firm in which a director, manager or his relative is a partner;
  4. a private company in which a director, manager or his relative is a member or director;
  5. a public company in which a director or manager is a director and holds, along with his relatives, more than 2% of the paid-up share capital;
  6. a body corporate whose Board, managing director or manager is accustomed to act on the advice, directions or instructions of a director or manager;
  7. a person on whose advice, directions or instructions a director or manager is accustomed to act (clauses 6 and 7 do not apply to advice given in a professional capacity);
  8. a body corporate that is a holding, subsidiary or associate company, a subsidiary of the holding company to which it is also a subsidiary, or an investing company or venturer of the company; and
  9. such other person as may be prescribed.

A relative means a member of the same Hindu Undivided Family, husband and wife, or a person related in the prescribed manner (section 2(77)).

Transactions covered by section 188(1)

A contract or arrangement with a related party relating to:

  • sale, purchase or supply of any goods or materials;
  • selling or otherwise disposing of, or buying, property of any kind;
  • leasing of property of any kind;
  • availing or rendering of any services;
  • appointment of any agent for purchase or sale of goods, materials, services or property;
  • the related party’s appointment to any office or place of profit in the company, its subsidiary or associate company; and
  • underwriting the subscription of any securities or derivatives of the company.

What approval is needed

  • Board consent: no such contract may be entered into except with the consent of the Board given by a resolution at a meeting, subject to prescribed conditions.
  • Shareholders: where the company’s paid-up share capital is at or above the prescribed amount, or the transactions exceed the prescribed sums, the contract needs the prior approval of the company by resolution. No member who is a related party can vote on that resolution (this does not apply to a company in which 90% or more of the members, in number, are relatives of promoters or related parties).
  • Exceptions: section 188(1) does not apply to transactions in the ordinary course of business that are on an arm’s length basis, nor does the shareholders’ resolution requirement apply to transactions between a holding company and its wholly owned subsidiary whose accounts are consolidated with the holding company and placed before the shareholders at the general meeting.
  • Arm’s length transaction means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.
  • Office or place of profit: for a director, anything received above the remuneration due to him as a director; for anyone else, any remuneration, salary, fee, commission, perquisites or rent-free accommodation received from the company.

Reporting and consequences

  • Board’s report: every contract or arrangement under section 188(1) is referred to in the Board’s report to the shareholders, with the justification for entering into it (section 188(2)).
  • Voidable contracts: if a director or employee enters into a contract without Board consent or shareholders’ approval and it is not ratified within three months, it is voidable at the option of the Board or the shareholders. If it is with a related party of a director, or authorised by another director, the directors concerned must indemnify the company against any loss (section 188(3)).
  • Recovery: the company can proceed against the director or employee to recover any loss (section 188(4)).
  • Penalty (section 188(5)): a director or employee who entered into or authorised the contract in violation is liable to a penalty of Rs 25 lakh in a listed company and Rs 5 lakh in any other company.

Section 184: disclosure of interest by a director

  • General disclosure (section 184(1)): every director discloses his concern or interest in any company, body corporate, firm or association of individuals, including shareholding, at the first Board meeting in which he participates, at the first Board meeting of each financial year, and at the first meeting after any change in what he has disclosed.
  • Specific disclosure (section 184(2)): a director who is concerned or interested in a contract or arrangement with a body corporate in which he (with others) holds more than 2%, or is a promoter, manager or CEO, or with a firm or entity in which he is a partner, owner or member, discloses the nature of his interest at the Board meeting where it is discussed and does not participate. If he becomes interested after the contract is made, he discloses forthwith or at the first Board meeting after.
  • Consequences (section 184(3) and (4)): a contract made without disclosure, or with participation by an interested director, is voidable at the company’s option, and the director is liable to a penalty of Rs 1 lakh.
  • Small shareholdings (section 184(5)(b)): the section does not apply to contracts between companies where a director holds not more than 2% in the other company.

Register of contracts: section 189

  • Every company keeps one or more registers of all contracts or arrangements to which section 184(2) or section 188 applies, in the prescribed manner, placed before the next Board meeting and signed by all directors present.
  • A director or KMP discloses within 30 days of appointment or relinquishment the particulars of his concern or interest in other associations.
  • The register is kept at the registered office, open to inspection during business hours, and produced at the start of every AGM.

A short compliance checklist

  1. Keep a live list of related parties, updated at each Board meeting from the directors’ disclosures.
  2. Test each proposed transaction: is it with a related party, is it one of the seven types, is it in the ordinary course and at arm’s length?
  3. If not exempt, get Board consent at a meeting, and check the prescribed monetary thresholds for the shareholders’ resolution.
  4. The interested director leaves the discussion; related party members do not vote on the shareholders’ resolution.
  5. Record the justification, put it in the Board’s report, and enter the contract in the register.

Points to check

  • This post follows the Companies Act as published on India Code, including its amendments up to the footnotes in that edition. The monetary thresholds for the shareholders’ resolution, the conditions for Board consent, the register form and the extra list of related parties are in the Rules, which were not reviewed.
  • Listed companies have further requirements under the SEBI listing regulations, including audit committee approval of related party transactions.
  • The statutory auditor reports on related party compliance under clause (xiii) of the Companies (Auditor’s Report) Order, 2020.

Frequently asked questions

Who is a related party?

Under section 2(76): a director or his relative; a KMP or his relative; a firm in which a director, manager or relative is a partner; a private company in which a director, manager or relative is a member or director; a public company in which a director or manager, with relatives, holds more than 2% of paid-up capital; a body corporate whose Board or manager acts on a director’s advice; a person on whose advice a director acts (other than in a professional capacity); a holding, subsidiary or associate company, a fellow subsidiary, and an investing company or venturer; and any person prescribed.

Which transactions does section 188 cover?

Contracts or arrangements with a related party for: sale, purchase or supply of goods or materials; selling, disposing of or buying property; leasing property; availing or rendering services; appointing an agent for purchase or sale; the related party’s appointment to an office or place of profit in the company, its subsidiary or associate; and underwriting the subscription of the company’s securities.

Is Board approval enough?

The Board’s consent at a meeting is required for every such contract. Where the paid-up capital or the value of the transaction exceeds the prescribed amounts, the company’s prior approval by resolution is also needed, and no member who is a related party can vote on it.

When is section 188(1) not applicable?

To transactions in the ordinary course of business that are on an arm’s length basis, and to transactions between a holding company and its wholly owned subsidiary whose accounts are consolidated with it and placed before shareholders at the general meeting (the requirement of a shareholders’ resolution is not applicable to them).

What happens if the contract is entered into without approval?

If it is not ratified by the Board or the shareholders within three months from the date it was entered into, it is voidable at the option of the Board or the shareholders, and the concerned directors must indemnify the company against any loss where the contract is with a related party to a director or was authorised by another director.

What is the penalty?

A director or employee who entered into or authorised the contract in violation is liable to a penalty of Rs 25 lakh in a listed company and Rs 5 lakh in any other company.

What must a director disclose?

At the first Board meeting in which he participates, and at the first meeting of each financial year (and after any change), his concern or interest in other companies, bodies corporate, firms and associations. A director interested in a contract must disclose the nature of the interest at the Board meeting and not participate. A contract entered into without such disclosure or with such participation is voidable at the company’s option, and the director is liable to Rs 1 lakh.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

The Complete Guide to Free AI Resources in 2026: AI Tools, APIs, Credits, Student Benefits & Startup Programs

Posted on by CA Meet Dhrangadhariya

Best Free AI Resources in 2026: Tools, APIs, Credits, Student Offers and Startup Programs

AI is becoming cheaper surprisingly fast.

But there is a problem.

Most people only know about the obvious free versions of ChatGPT, Gemini, Claude and a handful of AI tools. They do not know about free API tiers, developer credits, student programs, startup grants, open-source benefits and cloud credits that can provide access to significantly more AI infrastructure.

In 2026, you can build, test and automate a surprising amount of work without spending much money on AI.

This guide brings together some of the most useful free and subsidised AI resources available in 2026, with a particular focus on developers, students, startups, professionals and businesses.

Important: AI pricing, limits and eligibility change frequently. The benefits below should be treated as opportunities to check, not permanent guarantees. Always verify the current terms before relying on a free allowance for production work.

1. Free AI APIs and inference platforms

If you are building an application, automation or internal tool, API access is often more useful than a consumer chatbot subscription.

Google AI Studio

Google AI Studio provides access to Gemini models and a free API tier, subject to model-specific rate limits.

The important point is that there is no single universal “Gemini free limit”. Google states that limits depend on the model, usage tier and account, and can include requests per minute, tokens per minute and requests per day.

For developers experimenting with AI applications, it remains one of the first platforms worth checking.

Best for:

  • Prototyping AI applications
  • Testing Gemini models
  • Large-context experiments
  • Building small automations

Website:  ⁠Google AI Studio

Groq

Groq is particularly interesting if speed matters.

Its developer platform provides free API access with rate limits that can be substantially higher than what many developers expect. Current documentation shows examples of limits such as 14,400 requests per day, depending on the model and account.

The platform is built around specialised inference hardware, making latency one of its major attractions.

Best for:

  • Fast AI applications
  • Chatbots
  • Classification
  • Structured extraction
  • Developer experiments

Website:  ⁠Groq

Cerebras

Cerebras is another platform worth knowing if inference speed is important.

Its wafer-scale architecture is designed specifically for high-performance AI workloads.

For developers, the attraction is simple: extremely fast inference without having to operate your own specialised hardware.

Check the current developer limits before designing an application around a particular quota.

Website:  ⁠Cerebras

Mistral

Mistral provides developers with access to its models through its API platform, including experimentation options subject to current usage limits and terms.

It is particularly useful if you want to compare different model families instead of depending on a single provider.

Website:  ⁠Mistral AI

Cloudflare Workers AI

Cloudflare Workers AI is particularly interesting for developers already using Cloudflare.

The current free allocation is 10,000 Neurons per day. Cloudflare notes that some resource-intensive models now require the paid Workers plan, while many models remain available under the free allocation.

This makes Workers AI particularly useful for small AI-powered web applications and edge-based experiments.

Website:  ⁠Cloudflare Workers AI

OpenRouter

OpenRouter is useful for a completely different reason.

Instead of committing your application to one model provider, it gives developers a common interface to models from multiple providers.

It also has free models.

However, the current free-model limit is important to understand. OpenRouter states that users without at least $10 in purchased credits are limited to 50 free-model requests per day. Users who have purchased at least $10 in credits can receive a higher free-model limit of up to 1,000 requests per day.

So it is better described as a multi-model experimentation platform than an unlimited free API.

Website:  ⁠OpenRouter

2. Do not ignore GitHub

One of the most overlooked sources of free AI resources is GitHub Education.

Verified students can receive free access to GitHub Copilot Student, alongside other benefits available through the GitHub Student Developer Pack.

Even better, GitHub now also has a general Copilot Free tier.

The current free plan includes:

  • 2,000 code completions per month
  • Access to selected AI models
  • Copilot CLI
  • No credit card required

For students, the Student plan provides additional access beyond the standard free tier.

Website:  ⁠GitHub Education

3. Student benefits can be worth hundreds of dollars

If you are a student, do not treat your student email as just an academic login.

It can unlock an entire developer ecosystem.

GitHub Student Developer Pack

The pack provides access to numerous developer tools and partner offers for verified students.

One of the most important benefits is GitHub Copilot Student.

Cursor

Cursor also maintains a dedicated student program. Current student offers and eligibility should be checked directly on its student page because these offers can change.

Other student AI offers

AI companies periodically run student promotions for products such as:

  • AI coding assistants
  • Research assistants
  • Cloud platforms
  • Productivity tools
  • Developer environments

The important lesson is not to assume that a student benefit you saw on social media six months ago is still active.

Check the provider’s current student page before publishing or relying on a specific offer.

4. Startups have access to much larger AI budgets

This is where the numbers become interesting.

A startup should not immediately assume that every AI expense has to come out of its own bank account.

Several major technology companies run startup programs that provide credits, infrastructure and technical support.

Google for Startups Cloud Program

Google currently advertises up to $350,000 in Google Cloud credits for qualifying AI startups.

The program structure is eligibility-dependent, with different tiers for different startup stages. Google states that qualifying early-stage startups can receive up to $200,000, while AI startups can receive up to $350,000.

These are cloud credits, not unrestricted cash.

That distinction matters.

They can help cover eligible Google Cloud usage, but they should not be treated as a ₹3 crore cash grant sitting in the company’s bank account.

Website:  ⁠Google for Startups Cloud Program

OpenAI startup programs

OpenAI also provides startup-focused programs and benefits.

Eligibility and credit amounts depend on the specific program and participating startup. Therefore, founders should check the current OpenAI startup page rather than assuming a fixed credit amount.

Website:  ⁠OpenAI for Startups

NVIDIA Inception

NVIDIA Inception is another program worth exploring for eligible startups building AI-related products.

The program can provide access to technology resources, technical support and ecosystem opportunities.

It is particularly relevant for startups whose products depend heavily on AI infrastructure.

5. Open-source developers have their own opportunities

Open-source maintainers are another group that often gets overlooked.

For example, OpenAI currently has a Codex for Open Source program.

Selected maintainers can receive:

  • Six months of ChatGPT Pro
  • API credits for qualifying open-source work
  • Potential access to Codex Security
  • Support for coding, reviews, issue triage and maintenance workflows

This is not an automatic benefit for anyone with a GitHub repository.

Applications are reviewed, and OpenAI looks for projects with meaningful usage, broad adoption or clear ecosystem importance.

6. India has a particularly interesting AI advantage

For Indian users, one offer deserves special attention.

OpenAI launched ChatGPT Go in India before expanding it globally. OpenAI’s India promotion offered eligible users 12 months of ChatGPT Go at no cost, subject to the promotion’s eligibility and redemption conditions.

However, this should not be confused with permanent free ChatGPT access.

Promotional offers have eligibility requirements, expiration dates and redemption conditions.

The broader lesson is more important:

Always check whether your country has a local AI promotion before paying for an international plan.

7. The most useful strategy is not finding one free AI tool

This is where most people approach AI incorrectly.

They search for:

“What is the best free AI?”

A better question is:

“Which free resource is best for this particular job?”

For example:

Requirement

Resource worth checking

General AI experimentation

Google AI Studio

Very fast API inference

Groq

Multi-model API experimentation

OpenRouter

Edge AI applications

Cloudflare Workers AI

AI coding

GitHub Copilot

Student developer benefits

GitHub Education

Startup cloud infrastructure

Google for Startups

Open-source AI development

Codex for Open Source

AI application prototyping

Gemini API / other free API tiers

The goal is not to collect 50 free accounts.

The goal is to combine the right resources intelligently.

8. What a student can potentially build for almost nothing

Consider a student who has:

  • A verified student account
  • GitHub
  • Access to student developer benefits
  • A laptop
  • Basic programming knowledge

That student can potentially combine:

GitHub + Copilot + free AI APIs + cloud credits + open-source models

to build:

  • SaaS prototypes
  • AI agents
  • Research tools
  • Websites
  • Automation systems
  • Data-analysis applications
  • Portfolio projects

The infrastructure cost can be extremely low during the experimentation stage.

The real limitation is often not money.

It is knowing where to look.

9. What a startup founder should do before paying for AI

If you are running an AI startup, create a simple checklist before putting an AI API on your company credit card.

Step 1: Check the provider’s free tier

Find out:

  • Requests per minute
  • Requests per day
  • Token limits
  • Model availability
  • Data retention terms
  • Commercial-use restrictions

Step 2: Check startup programs

Look at:

  • Cloud credits
  • API credits
  • Accelerator benefits
  • Partner programs
  • VC ecosystem benefits

Step 3: Check cloud credits

Google, Microsoft, AWS, NVIDIA and other infrastructure providers periodically offer startup programs.

Step 4: Calculate the actual cost

Do not compare AI products only by subscription price.

Calculate:

Cost per million tokens + infrastructure + storage + API calls + support

Step 5: Keep a paid fallback

Free tiers are excellent for development.

They are not necessarily suitable as the only infrastructure for a production application.

10. One important warning about “free AI”

Free does not always mean unlimited.

And free does not always mean suitable for confidential data.

Before uploading client information, financial records, customer databases, tax documents or other sensitive information to an AI platform, check:

  • Whether the data is retained
  • Whether it can be used for model training
  • Whether your organisation has approved the service
  • Where the data is processed
  • Whether the provider offers appropriate privacy controls
  • Whether your professional obligations permit the use

This is particularly important for professionals handling confidential client information.

For a CA firm, “free” should never be the only criterion.

The real AI advantage in 2026

The biggest AI advantage is no longer simply knowing how to use ChatGPT.

It is knowing how to navigate the AI ecosystem.

There are:

  • Free model tiers
  • Free API quotas
  • Cloud credits
  • Student programs
  • Startup programs
  • Open-source benefits
  • Developer programs
  • Regional promotions
  • Free coding assistants
  • Free experimentation environments

Many of these opportunities have eligibility requirements and change frequently.

But if you know where to look, you can significantly reduce the cost of learning, experimenting and building with AI.

The tools are already there.

The question is whether you know how to find them.

Last updated: August 2026

Because AI pricing, model availability, quotas and promotional programs change rapidly, verify the provider’s official terms before relying on any specific offer.

For CA, finance and business professionals: the bigger opportunity is not simply using free AI tools. It is learning how to use AI safely for research, Excel automation, MIS reporting, reconciliation, documentation, workflow automation and decision support without compromising client confidentiality.

Disclaimer:

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Gratuity: Rules, Formula and Income Tax Exemption (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 02 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Gratuity is payable on five years of continuous service (one year for fixed-term employees) at 15 days’ wages for each completed year, worked out as last monthly wages ÷ 26 × 15 × years.
  • The Code on Social Security, 2020 has been in force since 21/11/2025 and now governs gratuity; the ₹20 lakh ceiling is a notified amount, so check it before you rely on it.
  • Under the Income-tax Act, 2025 the exemption is in section 19(1): government employees get it in full, others get the least of the gratuity received, the notified limit (₹20 lakh) and the statutory formula.
  • The gratuity exemption is also available in the new tax regime.

Gratuity is a lump sum an employer pays for long service. Two questions come up every time: how much is payable, and how much of it escapes tax. This post answers both under the Code on Social Security, 2020 and the Income-tax Act, 2025.

Which law governs gratuity now

The Code on Social Security, 2020 repealed the Payment of Gratuity Act, 1972 (section 164(1)). The four labour codes were made effective from 21 November 2025 (PIB press release), and the Ministry of Labour has said gratuity under the Code applies from that date. Notifications made under the old Act, such as the ceiling, are deemed to continue under the corresponding provisions of the Code (section 164(2)(a)). Gratuity is now in sections 53 to 56 of the Code. Older articles that quote the 1972 Act describe the same scheme, but the section numbers have changed.

Eligibility and formula under section 53

  • Five years of continuous service is needed on superannuation, retirement, resignation, death or disablement. The five years are not needed on death or disablement.
  • Fixed-term employees are paid gratuity pro rata and do not need five years. The Ministry of Labour has clarified (FAQs of 16/03/2026) that a fixed-term employee is eligible after rendering one year of service under the contract. This covers employees engaged directly by the employer, not contract labour supplied by a contractor.
  • Rate: 15 days’ wages for every completed year of service or part of a year in excess of six months, on the wages last drawn.
  • Monthly-rated employees: the 15 days’ wages are the monthly wages last drawn ÷ 26 × 15.
  • Ceiling: the Central Government notifies the maximum (section 53(3)). The Ministry of Labour’s FAQs say it is currently ₹20 lakh.
  • Time to pay: within 30 days from the date gratuity becomes payable, with simple interest for delay (section 56(3) and (4)). The employer must work out the amount and give written notice even if you have not applied.
  • Nomination: if the employee dies, gratuity goes to the nominee or heirs.
  • Forfeiture: wholly or partly, only for wilful damage to property, riotous or violent conduct, or an offence involving moral turpitude committed during employment.

Gratuity = Last drawn monthly wages ÷ 26 × 15 × completed years

Example: monthly wages ₹40,000, service 8 years: 40,000 ÷ 26 × 15 × 8 = ₹1,84,615.

Under section 2(88) of the Code, “wages” are basic pay, dearness allowance and retaining allowance, and if the excluded allowances (house rent allowance, conveyance and others) are more than half of total remuneration, the excess is added back to wages. The Ministry of Labour’s FAQs say performance incentives, ESOPs and reimbursements are not wages, and that gratuity and retrenchment compensation are left out of the 50% test. If your pay structure keeps basic pay low, the gratuity base may now be higher than under the old 1972 Act, from 21/11/2025. Ask your employer how the base is worked out.

Is gratuity taxable?

Gratuity is part of salary (section 16(c) of the Income-tax Act, 2025). Section 19(1) then allows these deductions from it, in the order of the Table:

Who receives it Exempt amount
Death-cum-retirement gratuity under the Central Government pension rules or a similar government scheme (serial 3) The entire amount
Retiring gratuity under the defence services pension code (serial 4) The entire amount
Gratuity under the Payment of Gratuity Act, 1972, now the Code (serial 5) The amount received, limited to the amount worked out under section 4(2) and (3) of that Act, which gives the 15/26 formula and the ₹20 lakh ceiling
Any other gratuity on retirement, incapacity before retirement or termination (serial 6) The least of the actual gratuity, the notified amount (₹20 lakh) and half a month’s salary for each completed year

“Salary” for these purposes is basic pay plus dearness allowance, if the terms of employment provide for it. All other allowances and perquisites are left out (section 19(2)(b)).

Employees covered by the gratuity law (serial 5)

The exempt amount is the least of three figures:

  1. the gratuity actually received,
  2. the formula amount: last drawn salary ÷ 26 × 15 × completed years (a part year of more than six months counts as a year), and
  3. ₹20 lakh.

Example: last drawn basic plus DA is ₹1,00,000 a month, service is 19 years and 7 months, so 20 years are counted. Gratuity paid is ₹15,00,000.

  • Formula amount: 1,00,000 ÷ 26 × 15 × 20 = ₹11,53,846
  • Ceiling: ₹20,00,000
  • Received: ₹15,00,000
  • Exempt: ₹11,53,846. Taxable: ₹3,46,154, added to salary income.

Employees not covered (serial 6)

The exempt amount is the least of the gratuity received, ₹20 lakh and half a month’s salary for each completed year of service, where the salary is the average of the ten months before the month of the event (retirement, incapacity or termination). Only completed years count.

Example: average salary of the last ten months is ₹90,000, service is 25 years and 2 months, gratuity received is ₹14,00,000.

  • Half month’s salary: 90,000 × 1/2 × 25 = ₹11,25,000
  • Exempt: ₹11,25,000. Taxable: ₹2,75,000.

Gratuity from more than one employer

For serial 6, if you receive gratuity from more than one employer in a tax year, or received exempt gratuity in earlier years, the total exemption cannot exceed the notified limit reduced by what was already exempted (section 19(2)(a)). Keep a record of gratuity exempted in earlier jobs.

New tax regime

Of the section 19(1) Table, section 202(2) bars only serial number 1 (professional tax) in the new regime. The gratuity entries are not barred, so the gratuity exemption is available in both regimes.

Employer side

  • Contributions to an approved gratuity fund created under an irrevocable trust are deductible (section 29(1)(c)).
  • A provision for gratuity that has become payable during the tax year is deductible (section 29(1)(d)).
  • Gratuity paid during the employee’s lifetime is treated as salary (Schedule XI, Part B, paragraph 5). The income of an approved gratuity fund is itself exempt (Schedule VII).
  • TDS on the taxable part is deducted with other salary under section 392.

Gratuity and pension compared

Point Gratuity Pension
Payment One time, on leaving Monthly, for life
Paid by Employer Employer, a pension fund or the government
Condition Five years of continuous service (one for fixed-term) As per the scheme
Tax Exempt up to the limits above Taxable as salary when received (commuted lump sum has separate rules)

Things to check before you rely on this

  • The Income-tax Act, 2025 still names the Payment of Gratuity Act, 1972 in serial 5 and its section 4(2) and (3). Those sub-sections (15 days’ wages and the ceiling) are now section 53(2) and (3) of the Code, and section 164(2)(a) of the Code carries the old notifications forward, so the exemption works as described. A future amendment of the Income-tax Act may update the wording.
  • The ₹20 lakh ceiling is a notified amount, not a number in the Act. The labour ceiling dates from 29/03/2018 and the income-tax limit from S.O. 1213(E) of 08/03/2019. The Ministry of Labour still calls ₹20 lakh the current ceiling, and we found no newer notification. Check before you advise on a very large gratuity.

Frequently asked questions

Who is eligible for gratuity?

An employee who has completed continuous service of five years, on superannuation, retirement, resignation, death or disablement. Death and disablement do not need five years. A fixed-term employee is eligible after one year of service under the contract, with pro-rata gratuity.

What is the gratuity formula?

Last drawn monthly wages ÷ 26 × 15 × completed years of service. A part year of more than six months counts as a full year.

How much gratuity is tax free?

For a government employee, the whole amount. For an employee covered by the gratuity law, the least of the gratuity received, the amount worked out by the statutory formula and the notified ceiling (₹20 lakh). For others, the least of the gratuity received, the notified ceiling and half a month’s average salary for each completed year.

Is gratuity exempt in the new tax regime?

Yes. Section 202(2) bars section 19(1) serial number 1 (professional tax) in the new regime, but not the gratuity entries at serial numbers 3 to 6.

Is gratuity taxable at all?

Yes, to the extent it exceeds the exempt amount. It is part of salary (section 16), so the excess is taxed at your slab rate and TDS applies.

Can the employer forfeit gratuity?

Only in the cases the law allows: wilful damage to the employer’s property, riotous or violent conduct, or an offence involving moral turpitude committed during employment. Forfeiture can be whole or partial.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Loans, Guarantees and Investments by a Company: Sections 185 and 186 of the Companies Act, 2013

Posted on by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 185 bars a company from lending to its directors, their relatives, partners and firms, or giving guarantee or security for their loans. A loan to a company in which a director is interested is allowed only with a special resolution and if the money is used for the borrower’s principal business.
  • Section 186 limits loans, guarantees, security and investments in other bodies corporate to 60% of paid-up capital, free reserves and securities premium, or 100% of free reserves and securities premium, whichever is more. Beyond that, a special resolution is needed.
  • Every such loan, investment, guarantee or security must be approved at a Board meeting by all directors present, and the loan interest rate cannot be below the prevailing government security yield for the tenor.
  • Penalties are heavy: Rs 5 lakh to Rs 25 lakh under section 185, and up to Rs 5 lakh for the company with up to two years for officers in default under section 186.

When a company lends money, gives a guarantee, or buys shares in another business, it is using funds that belong to its members and creditors. The Companies Act, 2013 therefore regulates two situations strictly: loans to directors and people close to them (section 185), and loans, guarantees, security and investments in other bodies corporate in general (section 186).

Section 185: loans to directors

The rule (section 185(1)). No company shall, directly or indirectly, advance any loan, including a loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by:

  • any director of the company, or of a company that is its holding company, or any partner or relative of such a director; or
  • any firm in which such a director or relative is a partner.

Entities in which a director is interested (section 185(2)). A company may advance a loan, or give a guarantee or security, for any person in whom a director is interested, only if:

  1. a special resolution is passed in general meeting, with the explanatory statement disclosing the full particulars of the loan, guarantee or security, the purpose for which the recipient will use it, and any other relevant fact; and
  2. the loans are used by the borrowing company for its principal business activities.

A person “in whom a director is interested” means: a private company of which the director is a director or member; a body corporate in whose general meeting a director, or two or more directors together, can exercise or control at least 25% of the total voting power; or a body corporate whose Board, managing director or manager is accustomed to act on the directions of the lending company’s Board or of any of its directors.

Exceptions (section 185(3)). The prohibition and the special resolution requirement do not apply to:

  • a loan to a managing or whole-time director as part of the conditions of service extended to all employees, or under a scheme approved by members by special resolution;
  • a company that in the ordinary course of its business provides loans or gives guarantees or securities, and charges interest at a rate not less than the prevailing yield of the one year, three year, five year or ten year Government security closest to the tenor of the loan;
  • a loan by a holding company to its wholly owned subsidiary, or a guarantee or security by a holding company for a loan made to its wholly owned subsidiary; and
  • a guarantee or security by a holding company for a loan made by a bank or financial institution to its subsidiary.

The wholly owned subsidiary and subsidiary exceptions apply only if the subsidiary uses the money for its principal business activities.

Penalty (section 185(4)).

Who Penalty
The company Fine of Rs 5 lakh to Rs 25 lakh
Every officer in default Imprisonment up to six months, or fine of Rs 5 lakh to Rs 25 lakh
The director or other person who received the loan, guarantee or security Imprisonment up to six months, or fine of Rs 5 lakh to Rs 25 lakh, or both

Section 186: loans and investments in other bodies corporate

Layers of investment companies (section 186(1)). Unless otherwise prescribed, a company makes investments through not more than two layers of investment companies (with exceptions for acquiring a foreign company that has more layers under its own law, and for a subsidiary that must have an investment subsidiary under a legal requirement).

The ceiling (section 186(2)). No company shall directly or indirectly (a) give any loan to any person or other body corporate, (b) give any guarantee or provide security for a loan to any other body corporate or person, or (c) acquire securities of any other body corporate by subscription, purchase or otherwise, exceeding the higher of:

  • 60% of its paid-up share capital, free reserves and securities premium account; or
  • 100% of its free reserves and securities premium account.

“Person” does not include an individual in the employment of the company. The limit is measured on the aggregate of loans and investments made, and guarantees and security given, along with those now proposed (section 186(3)).

Going above the ceiling (section 186(3)). A further investment, loan, guarantee or security that takes the total over the limit needs prior authorisation by a special resolution in general meeting. The requirement does not apply to a loan, guarantee or security given by a company to its wholly owned subsidiary or a joint venture company, or to an acquisition by a holding company of securities of its wholly owned subsidiary; the details must still be disclosed in the financial statements.

Process and conditions.

  • Disclosure: full particulars of the loans, investments, guarantees and security, and the purpose for which the recipient will use them, must be disclosed in the financial statements (section 186(4)).
  • Board approval: the resolution must be passed at a meeting of the Board with the consent of all the directors present, and with the prior approval of the public financial institution concerned where any term loan is subsisting. That approval is not needed if the limit in section 186(2) is not exceeded and there is no default in repaying that institution (section 186(5)).
  • Interest rate floor: no loan can be given at a rate of interest lower than the prevailing yield of the one year, three year, five year or ten year Government Security closest to the tenor of the loan (section 186(7)).
  • Defaulting companies: a company in default in repaying deposits or interest on them cannot give any loan or guarantee, provide security or make an acquisition while the default continues (section 186(8)).
  • Register: a register of loans, guarantees, security and acquisitions is kept at the registered office, open to inspection, and members may take extracts (section 186(9) and (10)).
  • Entities registered with SEBI: a company registered under section 12 of the SEBI Act, 1992 and covered by the prescribed classes cannot take inter-corporate loans or deposits above the prescribed limit, and must give the details in its financial statements (section 186(6)).

Who is outside most of section 186 (section 186(11)). Except for the layer limit, the section does not apply to loans, guarantees, security or investments made by a banking company, an insurance company or a housing finance company in the ordinary course of business, or by a company set up to finance industrial enterprises or provide infrastructure facilities; nor to investments by an investment company, investments in shares allotted under section 62(1)(a) or in rights issues of a body corporate, nor to investment or lending by an NBFC registered with the RBI whose principal business is the acquisition of securities.

Penalty (section 186(13)). The company is punishable with a fine of Rs 25,000 to Rs 5 lakh, and every officer in default with imprisonment up to two years and a fine of Rs 25,000 to Rs 1 lakh.

Investments in own name (section 187). A company’s investments are made and held in its own name, with limited exceptions such as shares held in a nominee’s name to keep a subsidiary above its minimum number of members, securities held through a depository, and securities deposited with bankers for collection or by way of security.

A checklist before the company lends or invests

  1. Is the borrower a director, relative, partner or a firm of a director? If yes, section 185 prohibits the loan unless an exception applies.
  2. Is the borrower a company in which a director is interested? Pass a special resolution with the full explanatory statement, and confirm the money goes to the borrower’s principal business.
  3. Compute the 60% and 100% limits on the latest audited figures, including all existing loans, investments, guarantees and security, and the new amount.
  4. Pass the Board resolution with the consent of all directors present; get the lender’s approval if a term loan is outstanding.
  5. Charge interest not below the Government Security yield for the tenor.
  6. Update the register and disclose in the financial statements.

Points to check

  • This post follows the Companies Act as published on India Code, including its amendments up to the footnotes in that edition. Rules prescribing the register, the inter-corporate loan limit and layer exceptions were not reviewed.
  • Exemptions for private companies and start-ups have been notified from time to time; check the current notifications before relying on one.
  • The statutory auditor reports on compliance with sections 185 and 186 under clause (iv) of the Companies (Auditor’s Report) Order, 2020.

Frequently asked questions

Can a company give a loan to its director?

Not under section 185(1). No company can directly or indirectly advance a loan, including a loan represented by a book debt, or give a guarantee or security for a loan, to any director of the company or of its holding company, any partner or relative of such a director, or any firm in which a director or relative is a partner. Section 185(3) lists exceptions.

What are the exceptions?

A loan to a managing or whole-time director as part of the conditions of service extended to all employees or under a scheme approved by members by special resolution; a company that lends in the ordinary course of its business at not less than the prevailing government security yield; a loan, guarantee or security by a holding company to or for its wholly owned subsidiary; and a guarantee or security by a holding company for a bank or financial institution loan to its subsidiary, where the money is used for the subsidiary’s principal business.

Can a company lend to a company in which a director is interested?

Yes, under section 185(2), if a special resolution is passed in general meeting (with full particulars in the explanatory statement) and the borrower uses the loan for its principal business activities.

What is the investment limit under section 186?

A company cannot give loans, guarantees or security to, or acquire securities of, other bodies corporate beyond 60% of its paid-up share capital, free reserves and securities premium account, or 100% of free reserves and securities premium, whichever is more, unless previously authorised by a special resolution passed in general meeting.

What approval is needed for each loan or investment?

A resolution at a Board meeting with the consent of all directors present, and the prior approval of the public financial institution concerned where a term loan is subsisting, unless the limits are not exceeded and there is no default to that institution.

What is the minimum interest rate on a loan?

Not lower than the prevailing yield of the one year, three year, five year or ten year Government Security closest to the tenor of the loan.

What are the penalties?

Under section 185: Rs 5 lakh to Rs 25 lakh on the company; imprisonment up to six months or Rs 5 lakh to Rs 25 lakh on every officer in default; and imprisonment up to six months or Rs 5 lakh to Rs 25 lakh or both on the borrower. Under section 186: Rs 25,000 to Rs 5 lakh on the company, and imprisonment up to two years and Rs 25,000 to Rs 1 lakh on every officer in default.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Dearness Allowance (DA): Meaning, Tax Treatment and the 60% Rate from January 2026

Posted on by CA Meet Dhrangadhariya

Last updated: 13 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Dearness allowance (DA) is paid on top of basic pay to offset inflation. It is fully taxable as salary.
  • DA counts as “salary” for HRA, gratuity and leave encashment limits only if the terms of employment provide for it.
  • For Central Government employees and pensioners the Cabinet approved a 2% rise from 58% to 60% with effect from 01/01/2026, with arrears for January to March 2026.
  • Arrears of DA taxed in a later year can qualify for relief under section 157 by filing Form 39.

Dearness allowance (DA) is the part of pay that moves with the price level. It is paid by the Central and State Governments, public sector bodies and some private employers, as a percentage of basic pay, so that the real value of pay is not eaten away by inflation. Pensioners receive the same relief as dearness relief (DR).

The current rate for Central Government employees

The Union Cabinet approved an additional 2% DA and DR with effect from 01/01/2026, taking the rate from 58% to 60% of basic pay and pension. Employees and pensioners get arrears for January, February and March 2026 (SCC Online, 20/04/2026). The Centre revises DA twice a year, with effect from 1 January and 1 July, based on the All-India Consumer Price Index for industrial workers. State governments announce their own rates and dates.

For central employees the DA is paid on basic pay: a basic pay of ₹56,100 at 60% gives DA of ₹33,660 a month.

Tax treatment of DA

  • Taxable in full as salary. Under section 16 of the Income-tax Act, 2025, “salary” includes wages, and DA is part of wages. It has no exemption of its own. DR on pension is taxed as pension, which is also salary.
  • Report it as salary. It forms part of the salary shown in your TDS certificate (Form 130) and in the return, and should match your payslip.
  • Arrears. DA revised with retrospective effect is paid as arrears, for example the January to March 2026 arrears above. Taxed in the year of receipt, it can push you into a higher slab. If so, relief under section 157 is available by furnishing Form 39 (see our post on relief for arrears of salary).

Where DA counts as “salary” for other limits

Several limits are worked out on “salary” rather than on pay as a whole. The Act and Rules say that salary includes dearness allowance if the terms of employment so provide, and excludes all other allowances and perquisites:

Use Where
HRA exemption (old regime): 50% or 40% of salary, and rent paid less 10% of salary Rule 279
Gratuity: half a month’s salary for each completed year (employees not covered by the gratuity law) Section 19(2)(b)
Leave encashment: ten months’ average salary Section 19(2)(b)

If your terms of employment do not provide for DA to count, it is left out of these calculations. For a government employee the pay rules usually do count it. Check the appointment letter or the service rules rather than assume.

Example: basic pay ₹60,000 and DA ₹36,000 (60%), HRA received ₹30,000 a month, rent paid ₹35,000 a month, Mumbai, old regime. Salary for HRA is ₹96,000 (the terms of service include DA). The exempt HRA is the least of the HRA received (₹30,000), rent paid less 10% of salary (35,000 - 9,600 = ₹25,400) and 50% of salary (₹48,000), so ₹25,400 a month.

DA and HRA are different

Point Dearness allowance House rent allowance
Purpose Offsets rising prices Helps with rent
Paid to Government and public sector employees mainly, some private employers Most employers
Tax Fully taxable Exempt in part under the old regime, limited by Rule 279
Based on Basic pay Basic pay (and DA where the terms provide)

DA for pensioners

Pensioners get DR on the pension at the same rate as the Central DA, and the DR is taxed with the pension as salary.

Before you rely on this

  • The Cabinet decision is the source for the 60% rate. Confirm the rate from the Department of Expenditure order that applies to you, and from your State government’s order if you are a State employee.
  • The revision due from 01/07/2026 is expected to be announced later in the year, so the rate shown here may change with retrospective effect and arrears.

Frequently asked questions

What is dearness allowance?

An allowance paid on top of basic pay to compensate for rising prices. It is calculated as a percentage of basic pay and revised from time to time.

Is dearness allowance taxable?

Yes. It is wages, and so part of salary under section 16 of the Income-tax Act, 2025, and is fully taxable in the year it is due or received, subject to the usual deductions.

Is DA part of salary for HRA and gratuity?

Yes, if the terms of employment so provide. Rule 279 (HRA) and section 19(2)(b) (gratuity and leave encashment) both say “salary” includes dearness allowance if the terms of employment so provide, but excludes other allowances and perquisites.

What is the DA rate for Central Government employees now?

60% of basic pay from 01/01/2026, up from 58%, as approved by the Union Cabinet in April 2026. The revision due from 01/07/2026 had not been announced when this was checked on 06/10/2026.

Do private employees get DA?

Not as a rule. Government and public sector employees receive it. Some private employers and wage settlements also pay a dearness allowance or variable DA, and the same tax rules apply.

What is dearness relief?

The equivalent of DA for pensioners. It is paid on pension and is taxable as pension, which is part of salary.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

When No TDS Is Deducted: Form 121 (Old Form 15G and 15H), Exempt Payees and Personal-Purpose Payments under Section 393 (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 20 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A resident whose estimated total income for the year will be nil can give the payer a declaration in Form 121 under section 393(6) so that no tax is deducted on interest, dividend, units, rent, insurance commission, life insurance receipts and an accumulated provident fund balance; it replaces Forms 15G and 15H.
  • The declaration does not work for a person other than a resident individual aged 60 or more if the total of the income exceeds the maximum amount not chargeable to tax in the year (note to section 393(6)), and it is invalid without a valid PAN (section 397(2)(f)).
  • The payer gives each declaration a unique identification number, reports it in the quarterly statement whether or not tax was deducted, and must keep the declaration for seven years (Rule 211).
  • Other cases of no deduction include payments to the Government, RBI and certain corporations and mutual funds (section 393(5)), payments by individuals and HUFs for personal purposes to contractors and professionals, dividends of ₹10,000 or less paid to an individual by a non-cash mode, and e-commerce payments of up to ₹5 lakh to individuals and HUFs with a PAN or Aadhaar.

Tax is not deducted at source in every case. Section 393 of the Income-tax Act, 2025 (from 01/04/2026) lists payments and payees where there is no deduction, and lets a person claim receipt without deduction by giving a declaration to the payer. This post explains the declaration in Form 121 and the main no-deduction cases.

The declaration: section 393(6) and Rule 211

A person can receive certain incomes without deduction of tax if he gives the payer a written declaration in duplicate (in the prescribed form) that the tax on his estimated total income of the year in which the income is to be included will be nil.

Who can give it and for which income (section 393(6), Table)

Person Incomes covered
An individual who is a resident Accumulated balance due under section 392(7) (provident fund); insurance commission (Table Sl. No. 1(i)); rent (Table Sl. No. 2(ii)); income from units (4(i)); interest (5(i), (ii) and (iii)); sums under a life insurance policy (8(i)); dividend (7)
Any person who is not a company, a firm or the individual above The same incomes except provident fund balance and dividend: insurance commission, rent, units, interest, life insurance sums

Condition for people other than senior resident individuals

The declaration does not apply to a person (other than a resident individual who is 60 years or more at any time in the tax year) if the aggregate of the incomes of that kind credited, paid or likely to be credited or paid during the year exceeds the maximum amount not chargeable to tax (note to section 393(6)).

How the form works (Rule 211)

  1. The declaration is made in Form 121, electronically (after verification) or in paper form.
  2. The payer gives each declaration a unique identification number for the quarter.
  3. The payer reports the declarations in the quarterly statement (Rule 219) with the number, even if no tax was deducted that quarter.
  4. The authority can ask for the declaration up to seven years from the end of the tax year in which it was received.
  5. The payer delivers the declarations to the prescribed authority by the 7th of the month after the end of each quarter (section 393(7), as substituted by Finance Act 2026). From 01/04/2027 the declaration for units, interest on securities and dividend can also be filed electronically with a depository holding the securities (new clause 393(6)(b)).

PAN is compulsory

A declaration without a valid PAN is invalid, and the payer must deduct tax as if no declaration was given, at the higher rate under section 397(2) (section 397(2)(f) and (g)).

Payments where no tax is deducted (section 393(4) and (5))

Payment No deduction where
Contract payments (Table Sl. No. 6(i)) A goods carriage operator with ten or fewer carriages gives a declaration with PAN and the payer furnishes the particulars; or an individual or HUF pays exclusively for personal purposes
Professional and technical fees (6(iii)) Paid by an individual or HUF exclusively for personal purposes
Dividend (7) To LIC, GIC and its subsidiaries, other insurers, a business trust by an SPV, other notified persons; or to an individual by a mode other than cash if the total is ₹10,000 or less in the year
E-commerce payments (8(v)) To an individual or HUF e-commerce participant, if gross sales or services are up to ₹5 lakh in the year and the participant has given PAN or Aadhaar
Virtual digital asset (8(vi)) Consideration up to ₹50,000 in the year when paid by an individual or HUF with turnover up to ₹1 crore (business) or ₹50 lakh (profession) and no business income; ₹10,000 in other cases
Interest (5(ii), (iii)) Interest credited to banks and certain financial institutions; interest by co-operative societies to members or other societies; interest on deposits (other than time deposits made on or after 01/07/1995) with a banking company; deposits with primary agricultural credit societies; interest on Motor Accidents Claims Tribunal compensation; interest on zero coupon bonds of specified issuers; interest paid by a firm to a partner
Cash payments (393(3) Sl. No. 5) Payments to the Government, banks, post offices, business correspondents and white label ATM operators

No deduction at all from payments to the Government, the Reserve Bank of India, a corporation established by a Central Act that is exempt from income-tax, and a specified mutual fund (interest, dividend and other income), under section 393(5). Tax is also not deducted from interest paid by an Offshore Banking Unit to a non-resident (section 393(8)) or on payments to the NPS Trust (section 393(9)).

Other rules in section 393

  • Tax borne by the payer (section 393(10)): if the payer agrees to bear the tax, the income is grossed up so that the payee receives the net amount agreed.
  • Credit to a suspense account (section 393(11)): treated as credit to the payee, so the TDS duty arises.

Practical points

  1. Get Form 121 early in the year, and renew it each year.
  2. A senior citizen below the exemption limit can use it; other persons must check the maximum amount not chargeable to tax.
  3. Do not give a declaration if your total income will be taxable: the declaration is for nil tax only.
  4. Payers should keep the declaration and its number, and report it every quarter.

How CSM & Co LLP can help

We prepare declarations, review TDS exemptions for employers and payers, and file the TDS statements. Please reach out to our team and we will be happy to assist.

Frequently asked questions

What replaces Form 15G and Form 15H?

Form 121 under Rule 211 of the Income-tax Rules, 2026: the declaration under section 393(6) for receiving certain incomes without deduction of tax. Section 393(6) gives one declaration for the persons listed in the Table, instead of separate Forms 15G and 15H.

Who can give the declaration?

A resident individual, for an accumulated provident fund balance under section 392(7), insurance commission, rent under Table Sl. No. 2(ii), units, interest, life insurance receipts and dividend; and any person who is not a company, a firm or the individual above, for the income in clauses (a) to (f) of the first entry (section 393(6), Table). The declaration states that the tax on the person’s estimated total income of the year will be nil.

When does the declaration not work?

For a person other than a resident individual aged 60 or more at any time during the tax year, the declaration is not available if the aggregate of the income of that kind credited or paid or likely to be credited or paid in the year exceeds the maximum amount not chargeable to tax (note to section 393(6)). A declaration without a valid PAN is invalid, and the payer must then deduct tax under section 397(2) (section 397(2)(f) and (g)).

What must the payer do with the declaration?

Allot a unique identification number to each declaration received in a quarter, report the declarations in the quarterly TDS statement of that quarter (even if no tax was deducted), and keep the declaration so that it can be produced for verification for seven years from the end of the tax year in which it was received (Rule 211(3) to (5)). Section 393(7), as substituted by Finance Act 2026, requires the declarations to be delivered to the prescribed authority by the 7th of the month after the end of each quarter.

Is TDS deducted when an individual pays a contractor or professional for personal use?

No. No tax is deducted on payments to contractors (Table Sl. No. 6(i)) or fees for professional or technical services (Table Sl. No. 6(iii)) when credited or paid by an individual or HUF exclusively for personal purposes of the individual or a member of the HUF (section 393(4), Table Sl. Nos. 8(b) and 9).

Are there other no-deduction cases?

Yes: payments to the Government, the Reserve Bank, a corporation exempt under its Act, and specified mutual funds (section 393(5)); interest on deposits with a banking company other than time deposits made on or after 01/07/1995; interest on deposits with primary agricultural credit societies; interest on a Motor Accidents Claims Tribunal compensation to an individual (or up to ₹50,000 in the year to others); dividend of ₹10,000 or less to an individual paid by a mode other than cash; e-commerce payments to an individual or HUF up to ₹5 lakh of gross sales with PAN or Aadhaar; and VDA consideration up to ₹50,000 (or ₹10,000 in other cases) in the year (section 393(4)).

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

What is Income Tax? Meaning, Rules, Tax Slabs, Types and Tax Guide for Tax Year 2026-27

Posted on by CA Meet Dhrangadhariya

Last updated: 11 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Income tax is a direct tax on income, administered by the CBDT. Income up to 31 March 2026 is taxed under the 1961 Act and the Income-tax Act, 2025 applies from 1 April 2026.
  • The new regime is the default: nil tax up to ₹4 lakh, rising in steps to 30% above ₹24 lakh, with a ₹75,000 standard deduction and nil tax up to ₹12 lakh after the rebate.
  • Capital gains, lottery winnings and crypto income are taxed at special rates.
  • Choose the right ITR form, meet the due dates and pay tax through TDS, advance tax and self-assessment tax.

Income tax is the most important direct tax in India. It is charged on the income a person earns in a year, and it is administered by the Central Board of Direct Taxes (CBDT). Income earned up to 31 March 2026 (FY 2025-26, AY 2026-27) is taxed under the Income-tax Act, 1961. From 1 April 2026 a new law, the Income-tax Act, 2025, applies, and income is reported for a “Tax Year” (see our note on the Tax Year). Individuals can choose between the new and the old tax regime.

What is Income Tax?

Income tax is a tax on the income earned by a person in a year. The rate depends on the amount of income, the type of taxpayer and, for individuals, the regime chosen.

Who pays Income Tax?

The person who is liable to pay tax or any other sum under the Act is called the assessee. The Act recognises these kinds of persons:

  1. Individual
  2. Hindu Undivided Family (HUF)
  3. Company
  4. Firm, including a limited liability partnership (LLP)
  5. Association of Persons (AOP) or Body of Individuals (BOI)
  6. Local authority
  7. Artificial juridical person

The Income Tax Act

Under Article 265 of the Constitution, no tax can be levied or collected except under the authority of law. The rules for computing income, deductions, rates, surcharge, cess, due dates and penalties are in the Income-tax Act. After more than six decades of amendments the 1961 Act had become long and hard to follow, so the Income-tax Act, 2025 replaced it from 1 April 2026 with a simpler structure. Section numbers have changed, but most of the rates and rules are carried over.

The five heads of income

Income is computed under five heads: salary, income from house property, profits and gains of business or profession, capital gains, and income from other sources.

Income Tax Slab Rates

Individuals and HUFs are taxed on slab rates. The new regime is the default; an individual may opt for the old regime. Budget 2026 did not change the slab rates.

New tax regime

Total income Rate
Up to ₹4,00,000 Nil
₹4,00,001 to ₹8,00,000 5%
₹8,00,001 to ₹12,00,000 10%
₹12,00,001 to ₹16,00,000 15%
₹16,00,001 to ₹20,00,000 20%
₹20,00,001 to ₹24,00,000 25%
Above ₹24,00,000 30%
  • A standard deduction of ₹75,000 is allowed to salaried taxpayers and pensioners.
  • A rebate of up to ₹60,000 makes the tax nil for a total income up to ₹12 lakh (see rebate under section 87A).

Old tax regime (individuals below 60 years)

Total income Rate
Up to ₹2,50,000 Nil
₹2,50,001 to ₹5,00,000 5%
₹5,00,001 to ₹10,00,000 20%
Above ₹10,00,000 30%

The basic exemption limit is ₹3 lakh for resident senior citizens (60 to 79 years) and ₹5 lakh for resident super senior citizens (80 years and above) in the old regime. The standard deduction is ₹50,000 for salaried taxpayers and pensioners. The old regime allows many deductions and exemptions; the new regime allows very few.

Surcharge and cess

A surcharge is added to the tax of high-income individuals, and health and education cess of 4% is added on the tax plus surcharge. In the new regime the surcharge is capped at 25%.

Special tax rates

Income type Rate
Long-term capital gains on listed equity shares and equity mutual funds (held over 12 months) 12.5% on gains above ₹1.25 lakh in a year
Short-term capital gains on listed equity shares and equity mutual funds 20%
Long-term capital gains on other assets such as property and gold (held over 24 months) 12.5% without indexation
Winnings from lotteries, game shows, online games and betting 30% flat
Income from transfer of virtual digital assets (crypto assets) 30% flat

Debt mutual funds bought after 1 April 2023 and certain similar investments are taxed at your slab rate and not at the rates above.

Deductions

The following popular deductions are mainly available in the old regime:

  • Section 80C: up to ₹1.5 lakh for specified investments and payments.
  • Section 80CCD(1B): an additional ₹50,000 for contributions to the National Pension System.
  • Section 80D: health insurance premium and medical expenses.
  • Section 80E: interest on an education loan.
  • Section 24(b): interest on a home loan.
  • Sections 80TTA and 80TTB: interest on savings accounts, and for senior citizens interest from deposits.

The employer’s contribution to NPS under section 80CCD(2) is allowed in both regimes, up to 10% of salary in the old regime and 14% in the new regime. Under the Income-tax Act, 2025 these deductions carry new section numbers.

Income Tax Return (ITR)

Who need not file a return

  • A person whose total income is within the basic exemption limit (₹4 lakh in the new regime, ₹2.5 lakh in the old regime for those below 60) and who does not fall under the other mandatory filing cases.
  • A resident senior citizen aged 75 or more who has only pension and interest income from the same bank, where the bank deducts tax on the person’s declaration.

ITR forms

  • ITR-1: resident individuals with income up to ₹50 lakh from salary, one house property and other sources, and long-term capital gains under section 112A up to ₹1.25 lakh.
  • ITR-2: individuals and HUFs with capital gains, income above ₹50 lakh or no business income.
  • ITR-3: individuals and HUFs with business or professional income.
  • ITR-4: resident individuals, HUFs and firms (other than LLPs) opting for presumptive taxation, with income up to ₹50 lakh.
  • ITR-5: firms, LLPs, AOPs and BOIs.
  • ITR-6: companies other than those claiming exemption under section 11.
  • ITR-7: trusts and institutions under specified sections.

Documents to keep ready

Form 16, Form 26AS, the Annual Information Statement (AIS) and Taxpayer Information Summary (TIS), bank statements and interest certificates, proof of deductions, and your bank account details.

Due dates

The due dates are fixed each year and can be extended by the CBDT. For AY 2026-27 the usual dates were:

Taxpayer Due date
Individuals and others not requiring audit 31 July 2026
Taxpayers whose accounts require audit 31 October 2026, extended to 21 November 2026
Taxpayers with transfer pricing reports 30 November 2026

For the audit extension see our note on the ITR deadline extension for AY 2026-27. Late filing attracts a fee and interest.

How tax is paid

  • Tax deducted at source (TDS): the payer deducts tax from salary, interest, rent, professional fees and similar payments and deposits it with the government.
  • Advance tax: payable in instalments if the tax liability for the year is ₹10,000 or more: 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March. Taxpayers under presumptive taxation pay in one instalment by 15 March.
  • Self-assessment tax: any balance tax paid before filing the return.

Final Word

Income tax rules change often, especially around the move to the Income-tax Act, 2025. Choose the regime that suits you each year, keep your records ready, meet the due dates and take advice from a qualified professional where needed.

Frequently asked questions

What is income tax?

Income tax is a direct tax charged on the income a person earns in a year. In India it is administered by the Central Board of Direct Taxes and levied under the Income-tax Act.

Which tax regime is the default?

The new tax regime is the default. An individual can opt for the old regime, which allows deductions such as section 80C but has higher slab rates.

Is income up to ₹12 lakh really tax free?

In the new regime, a resident individual with total income up to ₹12 lakh pays no tax because of the section 87A rebate of up to ₹60,000. Salaried taxpayers get a further ₹75,000 standard deduction. Special-rate capital gains are not covered by the rebate.

What is the due date for filing an income tax return?

For AY 2026-27 the due date was 31 July 2026 for taxpayers not requiring audit, and 31 October 2026 for audit cases, extended to 21 November 2026. Due dates are fixed each year and can be extended.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Section 80C of Income Tax Act: 80C Deduction List, Limit and Examples

Posted on by CA Meet Dhrangadhariya

Last updated: 11 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 80C lets individuals and HUFs deduct up to ₹1,50,000 a year from total income for specified savings and payments, in the old tax regime only.
  • The limit is a combined one: PPF, ELSS, EPF, life insurance, NSC, tax-saver FD, home loan principal, tuition fees and others together cannot exceed ₹1.5 lakh.
  • From Tax Year 2026-27 the provision sits in section 123 of the Income-tax Act, 2025; for FY 2025-26 (AY 2026-27) it is still section 80C of the 1961 Act.
  • NPS gives an extra ₹50,000 under section 80CCD(1B), so the total can reach ₹2 lakh.

How to claim the section 80C deduction

1. Choose eligible investments or payments in your own name
↓
2. Invest or pay before 31 March of the year
↓
3. Keep receipts, statements and premium certificates
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4. Declare the investments to your employer so TDS is adjusted
↓
5. Report the total in the deductions schedule of your ITR under the old regime

Section 80C is the most widely used tax-saving deduction. It allows individuals and Hindu undivided families (HUFs) to reduce their total income by up to ₹1,50,000 in a year by investing in, or paying for, specified items such as PPF, ELSS, life insurance, EPF, NSC, tax-saver fixed deposits, home loan principal and children’s tuition fees. It is available only under the old tax regime.

What is section 80C?

Section 80C is a deduction from gross total income, not from the tax itself. If your taxable income falls by ₹1.5 lakh, the tax saved is that amount multiplied by your slab rate (plus cess).

The limit is one combined limit. If you invest ₹60,000 in PPF, ₹50,000 in ELSS and pay ₹60,000 as life insurance premium, the total is ₹1,70,000 but only ₹1,50,000 is allowed.

Section 80C in the Income-tax Act, 2025

The Income-tax Act, 2025 applies from 01/04/2026, that is from Tax Year 2026-27. Income earned up to 31/03/2026 (FY 2025-26, assessment year 2026-27) is still taxed under the 1961 Act, so section 80C continues to apply to the return you file for that year. The deduction is retained in the new Act under section 123, read with Schedule XV, with the same ₹1.5 lakh limit and the same old regime condition.

Item Income-tax Act, 1961 Income-tax Act, 2025
Specified savings and payments Section 80C Section 123 read with Schedule XV
Pension fund contribution to LIC or an insurer Section 80CCC Section 123 read with Schedule XV
Employee’s NPS contribution Section 80CCD(1) Section 124 (within the combined limit)
Additional NPS contribution Section 80CCD(1B) Section 124(3)
Deductions chapter Chapter VI-A Chapter VIII

Section 80C list: what qualifies

  • Life insurance premium (for policies issued after 31/03/2012 the premium must not exceed 10% of the sum assured; 15% for a disabled person or specified diseases)
  • Public Provident Fund (PPF)
  • Employees’ Provident Fund (employee’s own contribution)
  • Equity Linked Savings Scheme (ELSS) mutual funds
  • National Savings Certificate (NSC)
  • Sukanya Samriddhi Yojana (SSY)
  • 5 year tax-saver fixed deposit with a bank or post office
  • Senior Citizens’ Savings Scheme (SCSS)
  • Unit Linked Insurance Plans (ULIPs)
  • Employee’s contribution to NPS under section 80CCD(1)
  • Repayment of home loan principal
  • Stamp duty and registration charges on buying a house
  • Tuition fees for full time education of up to two children in India (not development fees or donations)

A home loan principal or stamp duty deduction is reversed if the house is sold within 5 years of getting possession.

Maximum limit and the extra NPS deduction

Section What it covers Limit Inside the ₹1.5 lakh combined limit?
80C Investments and payments listed above ₹1,50,000 Yes
80CCC Contribution to a pension fund of an insurer ₹1,50,000 Yes
80CCD(1) Employee’s NPS contribution ₹1,50,000 Yes
80CCD(1B) Own contribution to NPS (including Atal Pension Yojana) ₹50,000 No, it is additional

So the largest deduction from these sections together is ₹2,00,000.

Popular 80C options compared

The rates below are the government-notified rates for October to December 2026. They are revised every quarter, so check the current rate before you invest.

Option Return Lock-in Risk
PPF 7.1% a year, interest tax-free 15 years Low
NSC 7.7% a year, interest taxable 5 years Low
Sukanya Samriddhi Yojana 8.2% a year, interest tax-free 21 years from opening (part withdrawal allowed after 18 for education or marriage) Low
SCSS (age 60 or more) 8.2% a year, interest taxable 5 years, extendable by 3 Low
Tax-saver FD Set by the bank, interest taxable 5 years Low
ELSS Market linked, no assured return 3 years High
ULIP Market linked 5 years Medium
EPF Declared yearly by EPFO Until retirement, with conditions Low

Gains on ELSS held more than a year are taxed at 12.5% on the amount above ₹1.25 lakh in a year.

Who can claim section 80C?

Only individuals and HUFs. Companies, firms and LLPs cannot. Some items, such as tuition fees and NPS, are for individuals only.

Example: how 80C saves tax

Mr A has a salary of ₹10,00,000 and other income of ₹1,00,000, and invests ₹1,50,000 in PPF. He is under the old regime.

Particulars With 80C Without 80C
Salary 10,00,000 10,00,000
Less: standard deduction (50,000) (50,000)
Other income 1,00,000 1,00,000
Gross total income 10,50,000 10,50,000
Less: section 80C (1,50,000) -
Taxable income 9,00,000 10,50,000
Tax including 4% cess 96,200 1,32,600

Section 80C saves Mr A ₹36,400. The old regime slabs are unchanged for Tax Year 2026-27.

How to claim section 80C

  1. Invest or pay before 31 March of the financial year.
  2. Keep proofs: deposit receipts, premium certificates, ELSS statements, fee receipts.
  3. Declare the investments to your employer so that less TDS is cut from salary.
  4. Report the total in the deductions schedule of your ITR. Your employer’s Form 16 may already show it.

Old regime or new regime?

The new regime has lower slab rates but does not allow 80C. If your total deductions (80C, 80D, HRA, home loan interest and others) are large, the old regime may still cost less. Work out both before choosing.

Tips to use section 80C well

  • Start early in the year instead of rushing in March.
  • Count what you already pay: EPF, life insurance premium, home loan principal and tuition fees may fill the limit without new investment.
  • Match the product to your goal: ELSS for long term growth, PPF or SSY for safety.
  • Use the extra ₹50,000 for NPS under section 80CCD(1B) if you have used the full ₹1.5 lakh.
  • Make the investment in your own name, unless the rule for that item allows a spouse or child.

Frequently asked questions

What is the maximum deduction under section 80C?

₹1,50,000 in a financial year, as a combined limit for all eligible investments and payments.

Is section 80C available in the new tax regime?

No. It can be claimed only if you opt for the old tax regime.

Who can claim section 80C?

Individuals and Hindu undivided families. Companies, firms and LLPs cannot.

What is the new section number of 80C?

Section 123 of the Income-tax Act, 2025, read with Schedule XV, applies from Tax Year 2026-27.

Can I claim more than ₹1.5 lakh?

Yes, up to ₹50,000 more for NPS contributions under section 80CCD(1B), which is outside the ₹1.5 lakh limit.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

TDS on Payments to Non-Residents and NRIs under Section 393(2): Rates in Force, Property Sale and Surcharge (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 11 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Payments to non-residents are covered by section 393(2) of the Income-tax Act, 2025 (old section 195): special rates for sportsmen, certain bonds and funds, and for everything else “rates in force”, which Part II of the First Schedule to the Finance Act 2026 sets: for a non-resident Indian 20% on investment income, 12.5% on long-term capital gains, 20% on short-term gains under section 196, 20% on royalty, fees for technical services and foreign currency interest, 30% on winnings and 30% on other income.
  • For other non-residents (not NRI) the rates are the same except the residual rate is 30% for non-company and 35% for a foreign company, with 10% on dividend referred to in section 207(1) and 20% on other dividend.
  • Where a tax treaty applies and the payee furnishes the residence certificate under section 159(8), the treaty rate applies for units of specified mutual funds and Foreign Institutional Investor income if lower than 20% (Note 2).
  • The tax is increased by surcharge calculated on the income, and a payer who doubts that the whole payment is chargeable can apply to the Assessing Officer in Form 129 to fix the taxable proportion (section 395(2)); a payee can seek a lower deduction certificate in Form 128.

When an Indian payer pays a non-resident a sum that is chargeable to tax in India, tax must be deducted at source. In the Income-tax Act, 2025 (from 01/04/2026) this is section 393(2), which replaces section 195 of the 1961 Act. The table in the section gives special rates for a few payments and says “rates in force” for most; the rate in force is fixed each year by the Finance Act.

How section 393(2) works

  • The payer deducts tax on the amount of the income or sum, at the rate in column E, at the earlier of credit and payment (section 393(2)(a) and (b)).
  • The table covers payments to a non-resident (and, for some items, a foreign company). Item 17, the main one, covers any interest (other than interest in items 2 to 5) or any other sum chargeable under the Act, not being salary, paid to a non-resident other than a company, or to a foreign company, at the rates in force.
  • The obligation applies to all payers, resident or non-resident, whether or not the non-resident payee has a residence, place of business, business connection or other presence in India (Note 3(b) to item 17).
  • Where interest is paid by the Government or a public sector bank or public financial institution (item 17), tax is deducted only at the time of payment (Note 3(a)).

Special rates in the table

Item Payment Rate
1 Income of a non-resident sportsman or entertainer who is not an Indian citizen, or a non-resident sports association or institution (section 211) 20%
2 Interest on foreign currency loans or long-term infrastructure bonds, 01/07/2012 to 30/06/2023, by an Indian company or business trust 5%
3 Interest on rupee denominated bonds issued before 01/07/2023 5%
4 Interest on long-term or rupee denominated bonds listed only on an IFSC exchange 4% (issued 01/04/2020 to 30/06/2023); 9% (issued on or after 01/07/2023)
5 Interest paid by an infrastructure debt fund 5%
6 Distributed income of a business trust to a non-resident unit holder 5% or 10% by type of income
10 and 15 Income from units of specified mutual funds, and income of a Foreign Institutional Investor from securities 20%, or the lower treaty rate where the payee furnishes the residence certificate under section 159(8) (Note 2)
11, 12 Offshore fund: income from units, and long-term capital gains 10%; 12.5%
13, 14 Interest, dividend and long-term capital gains on bonds or Global Depository Receipts 10%; 12.5%
16 Income of a specified fund 10%
17 Any other sum chargeable Rates in force

For interest in items 2 to 4, the deduction applies only on interest up to the amount at the rate approved by the Central Government (Note 1).

“Rates in force” for tax year 2026-27 (Finance Act 2026, First Schedule Part II)

Non-resident Indian (investment income, capital gains and others):

Income Rate
Investment income 20%
Long-term capital gains under section 214 or 197(4), and other long-term capital gains (not those in Schedule II items 14 and 17 relating to old section 10(36)) 12.5%
Long-term capital gains under section 198 above ₹1,25,000 12.5%
Short-term capital gains under section 196 20%
Interest payable by the Government or an Indian concern on money borrowed in foreign currency (other than items 2 to 5) 20%
Royalty or fees for technical services payable by the Government or an Indian concern under approved agreements (and royalty on copyright or software to a resident, as listed) 20%
Winnings from lotteries, games, horse races and net winnings from online games 30%
Dividend referred to in section 207(1) Table Sl. No. 2 10%
Other dividend 20%
Whole of the other income 30%

Other non-residents who are not companies: the same list for royalty, fees, winnings, capital gains and dividends, and 30% on the whole of the other income.

Foreign company: 20% on interest, royalty and fees under the cases above, 30% on winnings, 20% on short-term gains under section 196 and 12.5% on long-term gains, with 35% on the whole of the other income.

Surcharge

The tax deducted is increased by a surcharge on a non-resident individual, HUF, association of persons, body of individuals or artificial juridical person (other than where income is taxed under section 202): 10% where the income subject to deduction exceeds ₹50 lakh and up to ₹1 crore, 15% above ₹1 crore up to ₹2 crore, 25% above ₹2 crore up to ₹5 crore and 37% above ₹5 crore, with the surcharge on dividend income and capital gains under sections 196, 197 and 198 limited to 15%. Companies have their own table in Part II. Check the Schedule for the exact conditions for each class of payee.

Property sold by an NRI

The buyer deducts tax under item 17 at the rate for the type of gain: 12.5% on long-term capital gains and, it appears, the residual 30% rate on short-term gains on property (confirm for the case), plus surcharge. The text of the Act applies the rate to the sum chargeable, so a buyer who deducts on the whole sale price without a certificate may deduct much more than the tax on the actual gain. To avoid this, the payee can apply in Form 128 for a lower deduction certificate (section 395(1)), or the payer can apply in Form 129 for the taxable proportion (section 395(2)). A resident individual or HUF buyer does not need a TAN for this deduction (section 397(1)(c)(iii)).

Treaty relief and documents

The payee who wants a treaty rate must hold a certificate of residence from its government and furnish the information in Form 41 (section 159(8), Rule 75). The payer reports payments to non-residents in Form 145 and, where required, a certificate of an accountant in Form 146 (Rule 220). Deductions on non-residents are reported in Form 144 (quarterly statement; Rule 219).

Practical points

  1. Decide whether the sum is chargeable in India before deciding to deduct; use Form 129 if it is only partly so.
  2. Use the right rate for the payee’s category (NRI, other non-resident or foreign company) and the nature of the payment.
  3. Deposit the tax by the 7th of the next month and file Form 144 on time; the late fee under section 427 applies to late statements.
  4. Obtain the residence certificate and Form 41 before applying a treaty rate.

How CSM & Co LLP can help

We advise on deduction of tax on foreign payments, apply for lower deduction and taxable proportion certificates, and file Forms 144, 145 and 146. Please reach out to our team and we will be happy to assist.

Frequently asked questions

What is the TDS rate on an NRI’s sale of property?

Tax is deducted under section 393(2), Table Sl. No. 17, at the “rates in force”, which Part II of the First Schedule to the Finance Act 2026 sets as 12.5% for long-term capital gains on assets other than those covered by special rules, 20% for short-term capital gains under section 196 (equity shares and equity-oriented fund units on which securities transaction tax is paid), and, for short-term gains on property, it appears the residual “other income” rate of 30% applies (confirm for the case), increased by surcharge where the surcharge conditions are met. A payer or payee can apply for a certificate so that tax is deducted only on the gain.

Does the buyer of an NRI’s property need a TAN?

A resident individual or HUF who must deduct tax on consideration for the transfer of immovable property to a non-resident under section 393(2), Table Sl. No. 17 is exempt from applying for a TAN (section 397(1)(c)(iii)), but the deduction and deposit are still required.

What rate applies to royalty and fees for technical services paid to a foreign company?

For payments by the Government or an Indian concern under approved agreements, 20% where the agreement is made after 31 March 1976 (royalty and fees for technical services). For other foreign company income the residual rate is 35% on the whole of other income. Check the treaty, which can reduce the tax if the payee holds a residence certificate and furnishes the information in Form 41.

What if the whole payment is not income in India?

The payer can apply to the Assessing Officer in the prescribed form (Form 129, Rule 214) to determine the appropriate proportion of the sum chargeable to tax, and tax is deducted only on that proportion (section 395(2)).

Do foreign payers or non-residents also have to deduct tax?

Yes. The obligation to deduct tax under item 17 extends to all persons, resident or non-resident, whether or not the non-resident has a residence, place of business, business connection or other presence in India (section 393(2), Note 3(b)).

Can the payee get a lower rate?

Yes, by applying in Form 128 for a lower or nil deduction certificate (section 395(1), Rule 213). The payer must then deduct at the rate in the certificate for its validity (section 395(1)(c)).

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

TDS and TCS Compliance under the Income-tax Act, 2025: TCS Rates, Due Dates, Quarterly Statements, PAN Rule and Late Fee (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 23 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Tax collected at source (TCS) is in section 394: 2% on liquor, tendu leaves, timber and forest produce, scrap, coal, lignite and iron ore, overseas tour packages and parking lots, toll plazas and mines, 1% on motor vehicles above ₹10 lakh, and on Liberalised Remittance Scheme remittances above ₹10 lakh 2% for education or medical treatment and 20% for other purposes (Finance Act 2026 cut several rates).
  • TDS and TCS must be deposited by the 7th of the next month (30th April for March, 30 days for property, rent of a non-specified person, contract and professional payments by individuals and VDA purchases through Form 141); quarterly statements go in Forms 138, 140, 143 and 144 by 31 July, 31 October, 31 January and 31 May.
  • A payee who does not give a valid PAN suffers deduction at the higher of the normal rate, rates in force, 5% (for goods and e-commerce) or 20%, and TCS at twice the rate or 5%, up to 20% (section 397(2)).
  • A late statement costs ₹200 a day, up to the tax deductible, payable before filing (section 427); certificates are issued under section 395(4) and lower-deduction certificates under section 395(1) on Form 128.

This post covers the other half of Chapter XIX-B: tax collected at source (TCS) in section 394, and the compliance for both TDS and TCS in sections 395 to 397, with the Rules that fix the due dates.

TCS rates (section 394(1))

Item Receipt Collected by Rate
1 Sale of alcoholic liquor for human consumption Seller 2% (was 1%)
2 Sale of tendu leaves Seller 2% (was 5%)
3 Sale of timber, or forest produce (other than tendu leaves) obtained under a forest lease Seller 2%
4 Sale of scrap Seller 2% (was 1%)
5 Sale of coal, lignite or iron ore Seller 2% (was 1%)
6 Sale consideration above ₹10 lakh for a motor vehicle or other goods notified by the Central Government Seller 1%
7 Liberalised Remittance Scheme remittance of ₹10 lakh or more in aggregate Authorised dealer 2% for education or medical treatment (was 5%); 20% for other purposes
8 Sale of an overseas tour programme package (including travel, hotel and related expenses) Seller 2% (earlier 5% up to ₹10 lakh and 20% above)
9 Use of a parking lot, toll plaza, mine or quarry for business (not mineral oil) Licensor or lessor 2%

The “was” figures are from the footnotes to section 394 as substituted by Finance Act 2026 from 01/04/2026.

Time and exceptions. TCS is collected at the earlier of debit to the buyer’s account and receipt of the amount (section 394(1)(c)). A resident buyer who declares that goods under items 1 to 5 are for manufacturing, processing, producing articles or generating power, and not for trading, is not charged TCS, and the seller sends a copy of the declaration to the Commissioner by the 7th of the following month (section 394(2) and (3)). The authorised dealer does not collect TCS on LRS where the overseas tour package TCS was collected by the seller, or the remittance is an education loan from a notified financial institution, or the buyer has already had tax deducted at source (section 394(4) and (5)).

Payment to the government (Rule 218)

Case Due date
Government office, without a challan Same day
Government office, with a challan Within seven days from the end of the month
Other deductors and collectors, tax deducted or collected in March 30th April
Other deductors and collectors, any other month 7th of the next month
Rent under Table Sl. No. 2(i), property transfer (3(i)), contract, professional fees and commission by an individual or HUF not a specified person (6(ii)), virtual digital asset purchases (8(vi)) Within thirty days from the end of the month, with the challan-cum-statement in Form 141
Quarterly payment in special cases approved by the Assessing Officer 7 July, 7 October, 7 January, 30 April

(Rule 218(1) to (4).)

Quarterly statements (section 397(3)(b), Rule 219)

Form Used for
138 Salary under section 392 (other than section 392(7)), and income of a specified senior citizen under Table Sl. No. 8(iii)
140 Section 392(7), section 393(1) (other than 8(iii)) and 393(3), for deductees other than those in Form 144
144 Sections 392(7), 393(2) and 393(3) for a deductee who is a non-resident (not being a company or foreign company) or a resident but not ordinarily resident
143 Section 394(1) (TCS)
142 Exchange’s statement on virtual digital asset transactions, where it pays the tax instead of the buyer

Due dates (Rule 219(4)): 31 July (quarter ending 30 June), 31 October (30 September), 31 January (31 December) and 31 May of the following financial year (31 March). A refund claim by the deductor is made in Form 139 (Rule 219(6)).

TAN and PAN rules (section 397(1) and (2))

  • Every deductor and collector must apply for a TAN (Forms 134 and 135) unless exempt, and quote it in challans, statements and certificates. TAN is not required for rent under Table Sl. No. 2(i), property transfer under 3(i), the ₹50 lakh individual and HUF payments under 6(ii), and certain other cases (section 397(1)(c)).
  • The payee must furnish a valid PAN. If not, tax is deducted at the higher of the rate in the provision, the rate in force, or 5% (goods purchase and e-commerce operator) or 20% (any other case); TCS is collected at the higher of twice the rate or 5%, not exceeding 20% (section 397(2)(b)).
  • A declaration under section 393(6) or 394(2) without a valid PAN is invalid, and a certificate application without PAN is refused (section 397(2)(f)).
  • The 20% rule does not apply to a non-resident (not a company) for interest on long-term bonds in section 393(2) Table Sl. Nos. 2 to 4, and TCS at the higher rate does not apply to a non-resident without a permanent establishment in India (section 397(2)(c) and (d)).

Certificates and lower deduction (section 395)

  • TDS and TCS certificates (section 395(4), Rule 215): Form 130 for salary, Forms 131 and 132 for other deduction, Form 133 for TCS.
  • Lower or nil deduction: the payee applies in Form 128 (Rule 213); the Assessing Officer or the prescribed authority issues a certificate valid for the period shown, and the payer then deducts at the rate in the certificate or not at all (section 395(1) and (6)).
  • Lower collection: a buyer, licensee or lessee can apply for a certificate for TCS at a lower rate (section 395(3)).
  • Non-resident payments: the payer can apply to the Assessing Officer to decide the proportion of the sum chargeable to tax under section 393(2) Table Sl. No. 17 (section 395(2), Form 129 under Rule 214).

Late fee and other consequences

  • Fee for a late statement: ₹200 for every day of delay, not more than the tax deductible or collectible, paid before the statement is delivered (section 427(1) and (2)). It replaces section 234E.
  • Correction statement: within two years from the end of the tax year in which the statement is required to be furnished (section 397(3)(f)).
  • Penalty: failure to deduct or pay: equal to the tax (section 448); failure to collect: equal to the tax (section 449). The deductor can be treated as an assessee in default (section 391(3)).
  • Credit to the payee: tax deducted is treated as income received by the payee, and credit follows the deductor’s statement (sections 390(5) and 396).

How CSM & Co LLP can help

We prepare TDS and TCS returns, deposits, certificates and corrections, and handle notices on defaults. Please reach out to our team and we will be happy to assist.

Frequently asked questions

What are the TCS rates for 2026-27?

Under section 394(1): 2% on sale of alcoholic liquor for human consumption, tendu leaves, timber and forest produce, scrap, coal, lignite or iron ore, overseas tour programme packages, and use of parking lot, toll plaza, mine or quarry; 1% on sale of a motor vehicle or other notified goods for more than ₹10 lakh; and on Liberalised Remittance Scheme remittances above ₹10 lakh through an authorised dealer, 2% for education or medical treatment and 20% for other purposes. Finance Act 2026 reduced liquor, tendu leaves, scrap, coal and ore (earlier 1% or 5%), the LRS education or medical rate (earlier 5%) and the overseas tour package rate (earlier 5% up to ₹10 lakh and 20% above).

When must TDS and TCS be deposited?

By the 7th of the month following the month of deduction or collection; for amounts deducted or collected in March, by 30th April (Rule 218(2)). For rent under Table Sl. No. 2(i), property transfer, contract and professional payments by an individual or HUF who is not a specified person, and virtual digital asset purchases, within thirty days from the end of the month, with the challan-cum-statement in Form 141 (Rule 218(3)). Government offices deposit on the same day without a challan or by the 7th with a challan (Rule 218(1)).

What are the due dates for the quarterly statements?

For the quarters ending 30 June, 30 September and 31 December, by 31 July, 31 October and 31 January; for the quarter ending 31 March, by 31 May of the following financial year (Rule 219(4)). Form 138 is for salary and senior citizen tax, Form 140 for payments other than salary to residents (and certain others), Form 144 for non-residents (other than companies) and residents not ordinarily resident, and Form 143 for TCS (Rule 219(1)).

What if the payee does not give a PAN?

Tax is deducted at the higher of the rate in the relevant provision, the rate in force, or 5% (goods purchase and e-commerce) or 20% in any other case; TCS is collected at the higher of twice the rate or 5%, not exceeding 20% (section 397(2)(b)). A declaration without a valid PAN becomes invalid (section 397(2)(f)). Non-resident exceptions are in section 397(2)(c) and (d).

What is the fee for a late TDS statement?

₹200 for every day of delay, not exceeding the tax deductible or collectible, and it must be paid before the statement is delivered (section 427(1) and (2)). A correction statement can be filed within two years from the end of the tax year in which the original statement was due (section 397(3)(f)).

Who issues TDS certificates and when can the rate be lowered?

Every deductor and collector issues a certificate of the tax deducted or collected, rate and other particulars, within the prescribed period (section 395(4)); the forms are 130 to 133 (Rule 215). A payee can apply for a lower or nil deduction certificate in Form 128 (section 395(1) and Rule 213), and a buyer can apply for lower TCS (section 395(3)).

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.