How to Configure the New Income Tax Act, 2025 TDS & TCS Sections in Tally Prime

The implementation of the **Income Tax Act, 2025**, starting April 1, 2026, represents the most significant overhaul of India's direct tax administration in decades. By repealing the Income Tax Act, 1961, the government has consolidated multiple overlapping sections, standardized tax rates, and introduced a modernized digital filing system based on 4-digit numeric payment codes.

For businesses and Chartered Accountants using Tally Prime, this transition requires auditing existing ledger groups, redefining the Nature of Payments, and ensuring that all statutory calculations align with the consolidated sections. Let's look at how to adapt your accounting database for this new legal framework.

1. The Shift to Consolidated Sections: 392, 393, and 394

Under the legacy 1961 Act, taxpayers had to navigate dozens of individual TDS sections (e.g., 194C for contractors, 194J for professional fees, 194H for commission). The Income Tax Act, 2025 simplifies this by consolidating legacy sections into three main umbrellas:

• Section 392 (TDS on Salaries): Consolidates salary-related tax deductions previously governed under Section 192.
• Section 393 (TDS on Non-Salaries): Consolidates non-salary deductions including contract payments, professional fees, commission, brokerage, and rent under a single section.
• Section 394 (Tax Collected at Source): Consolidates all TCS provisions, replacing the various sub-clauses under Section 206C.

This consolidation reduces the administrative burden of choosing between different sections, especially when contracts involve a mix of service types.

2. Transitioning to 4-Digit Numeric Payment Codes (1001-1092)

Along with the consolidated sections, the tax department has introduced a **4-digit numeric code system** for quarterly return filings. These codes specify the exact nature of the payment being reported:

When preparing Form 26Q or 27Q files, Tally must insert these 4-digit codes. Quoting old code letters will result in file rejection by NSDL/TIN validation utilities.

3. Step-by-Step TDS Configuration in Tally Prime

Follow these steps to update your TDS settings in TallyPrime Release 7.1:

Step 1: Verify Company TDS Activation

Press **F11 (Features)**, ensure **Enable Tax Deducted at Source (TDS)** is set to **Yes**, and confirm that your TAN and Deductor Type details are correct.

Step 2: Alter/Create TDS Nature of Payments

Instead of creating generic text headers, you should update your Nature of Payments:

1. Go to **Gateway of Tally > Create > TDS Nature of Payments** (or Alter if editing existing ones).
2. Press **Alt + H (Helper)** to open the built-in Income Tax Act, 2025 code library.
3. Select the appropriate payment description (e.g., Code 1027 for Professional Services). Tally will automatically populate the section as **393** and the correct payment code.
4. Enter the statutory tax rate (e.g., 2% for corporate, 1% for individuals) and define the exemption threshold limit. Press **Ctrl + A** to save.

4. Mapping Ledgers and Vendor Masters

Once your TDS Nature of Payments are defined, map them to your active ledgers:

Navigate to **Gateway of Tally > Alter > Ledger**, select your Expense Ledger (e.g., "Professional Consultation Fees"), enable **TDS Applicable**, and choose the newly created Nature of Payment.

For Creditor Ledgers (Vendor Masters), set **Is TDS Deductible** to **Yes**, select the appropriate **Deductee Type** (e.g., Company Resident or Individual Resident), and ensure their **PAN (Permanent Account Number)** is correct. Under the new regulations, failure to provide a valid PAN triggers a default TDS rate of **20%**.

5. Recording Transactions under the New Act

To record a purchase transaction subject to TDS under the new rules:

Create a **Purchase Voucher (F9)**. Select the Party Ledger, map the purchase expense, and add the TDS duty ledger. Tally Prime will evaluate the transaction against the Section 393 threshold, deduct the tax amount, and post the entry.

Verify the deduction by clicking **GST/Tax Analysis (Alt + A)** on the voucher screen to confirm that the calculation uses the consolidated Section 393 rules.