The Income-tax Act, 2025 (New Act) marked a historic shift from the Income-tax Act, 1961 (Old Act) by eliminating provisos and explanations, making substantive law clearer and more accessible. However, the Income-tax Rules continue to create procedural complexity and hardships for many taxpayers.

Taxpayers still continue to struggle with few cumbersome Income-tax Rules. From denial of TDS credit due to deductor defaults, to NRIs facing double taxation through overlapping TDS and TCS on property sales, these rules often create unnecessary financial stress and compliance hurdles.

In some cases, taxpayers end up paying nearly 3.5 times their actual tax liability, only to wait months for refunds. Procedural delays, outdated reporting requirements, and avoidable certification burdens further complicate matters. Unless aligned with the spirit of the new Act, these rules risk undoing the reforms.

Here are the five key issues with the income tax rules and suggestions on how these could be improved

1. Credit of TDS/TCS – Conflict between Income Tax Act and Income Tax Rule

Issue: Section 401 of the New 2025 Act (Section 205 of the Old 1961 Act) provides that once tax is deducted at source, it cannot be collected again from the deductee. Similarly, Section 391 (Section 191 of the Old Act) requires the assessee to pay tax only to the extent TDS has not been deducted.
However, under Rule 37BA, credit of TDS is allowed only when the deducted tax is actually deposited with the Government. This results in:

• Deductees not getting credit for tax already deducted, if the deductor fails to deposit or misreports.
• Refunds being denied or withheld, and demands raised against taxpayers, despite the law requiring recovery from deductors.

Suggestion: Introduce a new Rule (corresponding to Rule 37BA) to allow credit based on evidence produced by the deductee (e.g., payslip, Form 16/16A) where the deductor fails to deposit or report TDS. This will align the Rules with Sections 391 and 401 and protect genuine taxpayers.

2. Overlap of TDS and TCS for NRIs selling property

Issue: Section 393(2) of the New 2025 Act (Section 195 of the Old Act) mandates TDS on payments to non-residents, while Section 394 (Section 206C(1G) of the Old 1961 Act) mandates TCS on foreign remittances. In immovable property sale cases, NRIs may face both TDS and TCS depending on how the sale proceeds are handled:

Situation 1: The purchaser deducts TDS at 12.5% on the gross sale consideration and deposits the balance into the NRI’s NRO account (or issues a cheque/draft drawn on an Indian bank). When the NRI later remits the remaining 87.5% funds abroad from the NRO account, the bank levies TCS at 20% on the remittance exceeding Rs 10 lakh.

Situation 2: If the purchaser pays the sale consideration directly in foreign currency, Section 394(5) of the New Act (6th proviso to Section 206C(1G) of the Old Act) exempts the transaction from TCS, provided TDS has already been deducted.

Thus, the same type of transaction may or may not attract TCS, depending solely on the mode of payment.

Illustration (Residential property sold in FY 2025–26)

#Cess and surcharge not considered to simplify the example

This table highlights the anomaly:

• In Situation 1, excess collection (TDS + TCS) is almost 3.5 times the actual liability.
• In Situation 2, it is double the actual liability.
• In both cases, NRIs have to wait for refunds after filing ITR, resulting in unnecessary blockage of substantial funds.

Suggestion: Remedies available under the New 2025 and the Old 1961 Act:-

• Purchasers can apply to the Assessing Officer for lower/no TDS certificates under Sections 395(1)(a) and 395(2)(a) of the New Act (Section 195(2) of the Old Act).
• Non-residents can apply for lower TCS certificates under Section 395(3) of the New Act (Section 206C(9) of the Old Act).
• However, these procedures increase compliance cost and complexity. To resolve this grievance, the Central Government, using its powers under Section 400(1) of the New Act, should:
• Notify that in cases such as Situation 1, where TDS has already been deducted, no TCS is to be collected.
• Alternatively, insert a new sub-section in Section 394, similar to sub-section (5), to explicitly exempt such transactions from TCS.

3. Reforms in TDS/TCS Rules

Time lag in payment to Government

Issue: Rule 30 (TDS) and Rule 37CA (TCS) currently allow up to 7 days (or longer in specific cases) to deposit deducted/collected taxes into the Government account. The time gap between deduction/collection and payment creates defaults in remitting the money and reporting errors.Deductors face interest liabilities even for a delay of a single day.

Suggestion: Mandate same-day or next-day deposit of TDS/TCS through online systems and prescribe a uniform timeline for all sections. This will minimise defaults and timely credit to deductee.

4. Quarterly TDS/TCS statements vs. Challan-cum-statement

Issue: Under most TDS/TCS provisions, deductors/collectors are required to file quarterly statements. Delay attracts a penalty of Rs 200 per day. In contrast, under certain sections (194-IA, 194-IB, 194M, 194S of the Old Act, 1961), Challan-cum-Statement forms (26QB/26QC/26QD/26QE) are prescribed. Quarterly filing creates Compliance burden, Reporting errors, and Delayed credit to deductees.

Suggestion: Replace quarterly TDS/TCS statements with a Challan-cum-statement system across the board, with a multiple-entry option to ensure instant reporting, timely credit and reduced compliance costs.

5. Relief under Section 398 of the New Income Tax Act, 2025

Issue: Section 398(1) of the New Act (Section 201 of the Old Act) treats a deductor as assessee-in-default, if tax deducted is not deposited with the Government. Section 398(2) provides relief if the payee has filed an ITR, disclosed income, and paid tax, subject to furnishing a CA’s certificate.

In the digital era, when ITRs are already available with the Department , requiring a CA’s certificate adds unnecessary compliance burden and cost.

Suggestion: Frame rules to accept ITR filed by the payee, with system-based verification, as sufficient compliance. CA certification should be required only in exceptional cases, such as where income is not separately disclosed.

The author - O. P. Yadav, is Tax Evangelist at Prosperr.io and Former Principal Commissioner of Income-Tax Department.