Income Tax Act 2025 — TDS/TCS correction window cut to 2 years | What taxpayers must do

Professional accountant finalizing TDS/TCS correction under the new two-year rule introduced in the Income Tax Act 2025.

Income Tax Act 2025 alert: Time limit for filing TDS, TCS correction statements reduced — Key details & what you must do

TL;DR — Quick summary (read first)

The Income Tax Act, 2025 (and related TRACES/CBDT advisory) has curtailed the window to file correction statements for TDS and TCS. What used to be a much longer or even open-ended opportunity to revise previously filed TDS/TCS statements is now limited to two years from the end of the tax year in which the original statement was required to be filed. Regulatory advisories also say historical corrections for certain past years will be accepted only up to 31 March 2026. If you are a deductor/collector (employer, payer, bank, etc.) — or a deductee/collectee who depends on correct TDS credits — you MUST review past filings and make corrections urgently where needed.

1. Background — why this matters

TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) are the backbone of India’s withholding tax mechanism. For years, while there were deadlines for original TDS/TCS statements, correction statements (used to fix mistakes in names, PAN, challan details, amounts, etc.) could often be filed long after the fact — creating uncertainty for recipients about their tax credits and opening doors to prolonged mismatches between deductor/collector records and Form 26AS.

To increase certainty and speed up credit reconciliation, lawmakers first proposed limits (Finance Act changes) and the new Income Tax Act, 2025 further tightened the timeline — reducing the correction window to two years. The tax department/TRACES portal has issued advisories to alert stakeholders of the change and the immediate cut-off dates for historical corrections.

2. What exactly changed? (The legal & administrative view)

Short answer: A statutory time limit has been introduced/curtailed — correction statements for TDS/TCS can now be furnished only within two years from the end of the tax year in which the original statement was required to be filed (as per section references in the Income Tax Act, 2025 and TRACES advisory).

Key points:

• The Income Tax Act, 2025 (section often quoted as 397(3)(f) in media/advisories) provides the two-year limit.

•  Previously, the Finance (No. 2) Act, 2024 and related Budget proposals had introduced a six-year limit to impose finality; however, the Income Tax Act, 2025 curtailed that period further to two years. This change is effectively a stricter standard than earlier amendments.

• TRACES portal and CBDT advisories clarify operational timelines and note transitional cut-offs for older years — several advisories state correction statements for older financial years (notably FY 2018-19 Q4 through certain quarters up to FY 2023-24) will only be accepted up to 31 March 2026; after that, those historic corrections will be time-barred.

«Why two years? The government’s stated objective is to bring finality to withholding records earlier, reduce mismatches in taxpayer credit records (Form 26AS), speed up assessments/refunds, and discourage prolonged and potentially abusive corrections long after transactions have settled.»

3. Who is affected?

Deductors/collectors: employers, banks, financial institutions, corporates, government departments, any entity required to deduct or collect tax at source. They will now have a stricter window to correct mistakes.

Deductees/collectees (employees, vendors, investors, taxpayers): if the payer fails to correct an error within the 2-year window, the recipient may permanently lose the benefit of TDS/TCS shown (and will have to claim the credit via other routes or pay tax); mismatches may also trigger notices.

Tax practitioners and payroll/accounting teams: compliance calendars and reconciliation processes must be updated immediately.

4. Transitional deadlines — the immediate compliance cliff

Multiple TRACES/CBDT and tax industry advisories highlight an important transition deadline: correction statements for certain historical periods will only be accepted up to 31 March 2026 (after which corrections for those periods become time-barred). Practical examples frequently mentioned in advisories include Q4 FY 2018-19 and subsequent years up to FY 2023-24 (selected quarters). Check the TRACES portal default/announcement page for exact FY/quarter lists relevant to your case.

Action implication: If you have pending corrections for older financial years (or received notices showing mismatched TDS), file those corrections before the specific cut-off published on TRACES (commonly reported as 31-Mar-2026 for historical batches).

5. Typical cases that require correction statements

• Incorrect or missing PAN for a deductee (leading to higher TDS rate).

• Wrong amount of tax deducted/collected.

• Incorrect challan details or date of payment.

• Incorrect nature of payment code or section code.

• Duplicate entries or omission of entries in the original statement.

These errors must now be corrected within 2 years from the end of the tax year in which the original statement was due (or else they may be disallowed via correction statement route).

6. Step-by-step: How to check & file correction statements (practical)

Step 1 — Reconcile your records

• Pull your TDS/TCS reconciliation report and match with payroll/vendor ledgers and Form 26AS for the deductee. Identify differences in PAN, amounts, challan no., or deductee names.

Step 2 — Login to TRACES

• Use the deductor’s credentials on the TRACES portal (tdscpc.gov.in or the TRACES portal page used by your tax team). Check the ‘default summary’ and the list of statements for the period in question.

Step 3 — Prepare correction statement

• Prepare a correction statement in the prescribed format (File Type: correction, same quarter/year as original). Ensure you follow TRACES format rules (file type, sequence, and validation). Many payroll/accounting software packages have built-in correction export features — use them to avoid format errors.

Step 4 — Submit & validate

• Upload the correction file to TRACES and validate. The portal will accept or show errors — correct those and reupload until validation succeeds.

Step 5 — Communicate to deductee

• Notify the affected deductee/collectee (employee, vendor) once the correction is accepted so they can verify Form 26AS and confirm the TDS credit. If accepted before the applicable cut-off, the deductee’s Form 26AS should reflect corrected entries, removing mismatch risks.

7. Consequences of missing the two-year window

• No more corrections via TRACES: Once the two-year window (or the transitional cut-off for historical years) expires, correction statements will be rejected for those periods — deductors cannot use the ordinary correction route.

• Deductees may lose credit: Deductees who relied on TDS credits may find the records mismatched — they will have to claim relief via other tax return mechanisms (e.g., self-assessment, filing return and claiming credit) or face paying taxes without the withheld credit.

• Higher compliance risk: Deductors may receive notices for short/delayed deposit if reconciliation shows unpaid liabilities; inability to correct the filed statement might increase disputes and penalties.

8. Examples (short scenarios)

Scenario A — Employer payroll PAN mismatch

Company X deducted tax for FY 2024-25 but used an incorrect PAN for Employee Y. Under the new rule, Company X must file a correction statement within two years from the end of FY 2024-25 (i.e., by 31-Mar-2027) to ensure Employee Y’s Form 26AS gets the corrected credit.

Scenario B — Old fiscal year correction window

A bank spotted a challan mismatch for interest TDS in Q4 FY 2018-19. Advisory indicates authoritatively that historical corrections for certain past quarters will only be accepted up to 31-Mar-2026 — so the bank must correct that record before that cut-off or face permanent mismatch.

9. Practical checklist — immediate actions for organisations (must do)

1. Run a TDS/TCS reconciliation for last 6 years (and prioritize FY 2018-19 to FY 2023-24 batches called out in TRACES advisory).
2. Identify pending correction statements and group them by urgency and cut-off date (historical deadlines may be 31-Mar-2026).
3. Prepare correction files now — don’t wait. Use validated software to generate TRACES-compliant correction files.
4. Update internal processes: add a compliance control to reconcile monthly/quarterly TDS vs payroll/vendor data so mistakes are caught well within the 2-year window.
5. Notify affected deductees proactively if corrections are being filed so they can monitor Form 26AS.
6. Talk to your tax advisor if you have complex cross-period issues or if notices have already been issued.

10. FAQs for Income Tax Act 2025

Q. Is correction of original statements still allowed at all?

A. Yes — correction statements continue to be a permitted mechanism, but only within two years from the end of the tax year in which the original statement was due (per Income Tax Act, 2025 and TRACES advisory). For certain historical periods, TRACES has set specific cut-offs (e.g., 31-Mar-2026).

Q. If the deadline passes, is there any alternate remedy?

A. Potentially yes, but not via routine correction statements. Options may include claiming credit in the taxpayer’s return of income, filing appeals, or raising rectification requests where legally appropriate — but these routes are generally slower and may not fully substitute the clarity that a corrected TDS/TCS entry provides. Seek professional tax advice.

Q. Does the two-year rule apply retrospectively?

A. The Act and TRACES advisory are designed with transitional rules. Practical effect: historical windows are being closed by specific cut-offs (e.g., 31-Mar-2026 for certain years). Always check the TRACES advisory applicable to your specific period.

Q. Will the government further change timelines?

A. Tax law and administrative rules can change; keep an eye on official CBDT/TRACES updates and consult your tax advisor for certainty. The most reliable source is the Income Tax Department/CBDT circulars and the TRACES portal.

11. Expert tips to avoid future problems

• Automate reconciliation monthly (not quarterly) so common problems are detected early and can be corrected within the 2-year window.

• Validate PANs at the point of data entry — use NSDL/PAN verification APIs where possible.

• Maintain audit trails: save the original and corrected files, challan receipts, and communication logs with deductees to defend any later queries.

• Train payroll/accounts teams about the new statutory timeline and update SOPs accordingly.

12. Official references & reading (where we found this)

• TRACES / Income-tax portal advisories and portal notifications (check TRACES login/announcements).

• Taxmann & industry analysis summarising the Income Tax Act, 2025 changes and CBDT advice.

• Press coverage and advisory notes from major financial media (Economic Times, Upstox, GoodReturns, Taxscan, etc.) summarising the two-year window and the 31-Mar-2026 transitional cut-off.

13. Conclusion — immediate takeaways

1. The correction window for TDS/TCS has been reduced to two years under the Income Tax Act, 2025 (with TRACES/CBDT advisories implementing this change).
2. Transitional cut-offs — notably 31 March 2026 for several historical periods — mean there’s a compliance cliff for older corrections; act now if you have pending corrections.
3. Reconcile, prepare corrections, and upload on TRACES without delay. Update internal controls so future mistakes are caught well within the 2-year window.