Section 397 · Collection & recovery
Section 397 of the Income-tax Act, 2025 — Compliance and Reporting for TDS/TCS (Returns, Statements, TAN and Correction Statements)
By CA Rajat Agrawal
Updated 05 Jul 2026
Chapter XIX
📜 What the law says — Section 397, Income-tax Act 2025
397. (1)(a) Every person deducting or collecting tax shall apply for allotment
of a tax deduction and collection account number to the Assessing Officer
within such time as may be prescribed, if that person has not already been allotted
such number;
(b) where a tax deduction and collection account number has been allotted to a
person, such person shall quote such number in all challans, statements, certificates
referred to in this Chapter, and in all documents pertaining to such transactions as
may be prescribed in the interests of revenue;
[(c) the provisions of clause (a) shall not apply to—
92
(i) a person in respect of a transaction where he is required to deduct tax under
section 393(1) [Table: Sl. No. 2(i), 3(i) or 6(ii)]; or
(ii) a person referred to in section 393(4) [Table: Sl. No. 12.C(a)] in respect of a
transaction where he is required to deduct tax on consideration for transfer
of a virtual digital asset under section 393(1) [Table: Sl. No. 8(vi)]; or
(iii) a resident individual or Hindu undivided family in respect of a transaction
where he is required to deduct tax on any consideration for the transfer of
any immovable property under section 393(2) [Table: Sl. No. 17]; or
(iv) a person notified in this regard by the Central Government.]
(2)(a) Irrespective of anything contained in any other provision of this Act, every
person, entitled to receive any amount on which tax is deductible or, paying any
amount on which tax is collectible, shall furnish his valid Permanent Account Num-
ber to the person responsible for deducting or collecting tax;
(b) in case of failure to comply with provisions of clause (a)—
(i) tax shall be deducted at the higher of the following rates:—
(A) at the rate specified in the relevant provision of this Act; or
(B) at the rate or rates in force; or
(C) at the rate of 5% where tax is required to be deducted under section
393(1) [Table: Sl. No. 8(ii) or 8(v)]; or 20% in any other case;
92. Substituted by the Finance Act, 2026, w.e.f. 1-10-2026. Prior to its substitution, clause (c)
read as under :
“(c) the provisions of clause (a) shall not apply—
(i) to a person who is required to deduct tax under provisions of section 393(1) [Table:
Sl. Nos. 2(i), 3(i) and 6(ii)];
(ii) to a person referred to in section 393(4) [Table
In plain language
What Section 397 is about
Section 397 is the compliance and reporting backbone of the entire TDS and TCS system under the Income-tax Act, 2025 (effective 1 April 2026). Once tax has been deducted (TDS) or collected (TCS) under Sections 392, 393 and 394, Section 397 tells you what to do next — deposit the money with the Government, file quarterly statements (returns) in the prescribed forms, quote your TAN and the payee's PAN, issue certificates, and file correction statements within the allowed window. It broadly corresponds to Sections 200, 203A, 206AA, 200A and parts of 206C of the old Income-tax Act, 1961, now consolidated into one cleaner section.
Who it applies to
- Every deductor — employers deducting TDS on salary, businesses paying rent, interest, professional fees, commission, contractor payments, etc.
- Every collector — sellers collecting TCS on specified goods, sale of motor vehicles, foreign remittances under LRS, overseas tour packages, and so on.
- Banks and specified persons who must report interest paid even below the deduction threshold.
- Buyers/tenants in property, rent and virtual digital asset transactions who deduct tax and file challan-cum-statements.
The core obligations under Section 397(3)
- Deposit the tax: Pay the deducted/collected amount to the credit of the Central Government within the prescribed time. Delay attracts interest under Section 396 and can make you an "assessee in default".
- File the statement (return): Deliver a verified quarterly statement in the prescribed form, containing prescribed particulars, within the prescribed time to the prescribed authority.
- Report non-resident payments and specified high-value transactions.
- Correction statements: Any correction to an already-filed statement must be delivered within two years from the end of the tax year in which the original statement was due — a sharp reduction from the earlier six-year practice.
New forms from 1 April 2026 (Income-tax Rules, 2026)
The Act renamed almost every TDS/TCS form. The numbers you knew for decades are gone:
- Form 138 replaces Form 24Q — quarterly TDS statement on salary.
- Form 140 replaces Form 26Q — TDS on non-salary payments to residents.
- Form 141 replaces Forms 26QB/26QC/26QD/26QE — challan-cum-statement for property, rent, VDA and contractor/professional payments under Section 393(1).
- Form 144 replaces Form 27Q — TDS on payments to non-residents.
- Form 143 replaces Form 27EQ — quarterly TCS statement.
- Certificates: Form 130 (replaces Form 16), Form 131 (replaces 16A), Form 133 (replaces 27D for TCS).
TAN and PAN — the identity rules
- Section 397(1) requires every deductor/collector to obtain and quote a TAN (Tax Deduction and Collection Account Number) on all challans, statements and certificates.
- Section 397(2) requires the payee to furnish a valid PAN. If PAN is not furnished, tax is deducted at the higher of the applicable rate or 20% (this carries forward the old Section 206AA rule).
How it interacts with related sections
Section 397 sits at the centre of Chapter on TDS/TCS. Deduction rates come from Sections 392–394; interest for late deposit/late deduction comes from Section 396; penalties and the "assessee in default" treatment flow from the penalty provisions. If you file the statement late, a fee (mirroring the old Section 234E) and penalty (mirroring Section 271H) apply.
Practical implications
- Update payroll/ERP/TDS software to the new form names and FVU codes before the first FY 2026-27 quarter.
- Do not sit on correction statements — the two-year window is strict and, once lapsed, even genuine errors cannot be fixed, blocking the deductee's credit.
- Reconcile Form 138/140/143 data with the deductees' Annual Information Statement to avoid mismatch notices.
💡 Example
Worked example 1 — a company deducting TDS on rent. ABC Pvt Ltd pays office rent of ₹1,00,000 per month and deducts TDS at 10% = ₹10,000 per month. For the April–June 2026 quarter it deducts ₹30,000. Under Section 397(3), it must (a) deposit each month's ₹10,000 by the 7th of the next month, and (b) file its quarterly non-salary TDS statement in Form 140 (which replaces the old Form 26Q) by 31 July 2026. It then issues the TDS certificate in Form 131 to the landlord.
Worked example 2 — TCS and the two-year correction rule. A car dealer collects TCS of ₹1,00,000 on luxury car sales in the quarter ended 30 June 2026 and files Form 143. In August 2028 it discovers a wrong PAN was quoted for a buyer. Since the statement related to tax year 2026-27, the correction window runs only up to 31 March 2029 (two years from the end of tax year 2026-27). If it had discovered the error in 2030, the correction would be permanently time-barred and the buyer would lose the credit.
A relatable story. Meena runs a small design studio and hires three freelancers. In her first year under the new law she deducted TDS correctly but forgot that Form 26Q no longer exists. Her accountant reminded her that the return is now Form 140, due 31 October for the July–September quarter. She also learned that one freelancer had not given a PAN, so tax had to be cut at 20% instead of 10%. Filing on time in the right form saved her the late-filing fee and kept her freelancers' Form 26AS clean.
| Purpose | Old form (1961 Act) | New form (2025 Act, from 1 Apr 2026) | Quarterly due date (FY 2026-27) |
|---|
| TDS on salary | Form 24Q | Form 138 | Q1: 31 Jul 26 · Q2: 31 Oct 26 · Q3: 31 Jan 27 · Q4: 31 May 27 |
| TDS on non-salary (residents) | Form 26Q | Form 140 | Same quarterly dates as above |
| TDS challan-cum-statement (property/rent/VDA/contractor) | 26QB/26QC/26QD/26QE | Form 141 | Within 30 days from end of month of deduction |
| TDS on payments to non-residents | Form 27Q | Form 144 | Same quarterly dates as above |
| TCS statement | Form 27EQ | Form 143 | Q1–Q3: 15 days after quarter end · Q4: 15 May 27 |
| TDS/TCS certificates | 16 / 16A / 27D | 130 / 131 / 133 | As prescribed after statement processing |
| Correction statement window | ~6 years (practice) | 2 years from end of tax year | Strict; no extension after lapse |
Related sections
Section 392 — TDS on salary (deduction and computation) Section 393 — TDS on non-salary payments to residents and non-residents Section 394 — Tax Collection at Source (TCS) Section 396 — Interest on late deduction, collection or deposit Section 395 — Consequences of failure to deduct or pay (assessee in default) Section 398 — Processing of TDS/TCS statements and intimation
Forms under this section
Income-tax forms (2025) prescribed under Section 397:
Frequently asked questions
What does Section 397 of the Income-tax Act, 2025 deal with?
It covers compliance and reporting for TDS and TCS — depositing the tax with the Government, filing quarterly statements in the prescribed forms, obtaining and quoting TAN, furnishing PAN, and filing correction statements. It consolidates the old Sections 200, 203A and 206AA of the 1961 Act.
Which form replaces Form 24Q and Form 26Q from 1 April 2026?
Form 24Q (salary TDS) is replaced by Form 138, and Form 26Q (non-salary TDS to residents) is replaced by Form 140. TCS Form 27EQ is replaced by Form 143 and non-resident Form 27Q by Form 144.
By when must I file the TDS return each quarter for FY 2026-27?
The quarterly due dates are 31 July 2026 (Q1), 31 October 2026 (Q2), 31 January 2027 (Q3) and 31 May 2027 (Q4) for salary and non-salary TDS statements. TCS statements are due within 15 days of the quarter end (Q4 by 15 May 2027).
What is the new time limit for filing a correction statement?
Under Section 397(3), a correction statement must be filed within two years from the end of the tax year in which the original statement was due. This is much shorter than the earlier six-year practice, and after it lapses errors cannot be corrected.
What happens if the payee does not provide a PAN?
Under Section 397(2), if a valid PAN is not furnished, tax must be deducted at the higher of the applicable rate or 20% — the same principle as the old Section 206AA. A PAN is also required before a TDS certificate can be issued.
What if I deposit the TDS or file the statement late?
Late deposit attracts interest under Section 396 and can make you an assessee in default liable to recover the tax. Late filing of the statement attracts a late-fee and can attract penalty, mirroring the old Sections 234E and 271H.
Do I need a TAN if I only deduct tax occasionally?
Yes. Section 397(1) requires every person deducting or collecting tax to obtain a TAN and quote it on all challans, statements and certificates, subject to limited exceptions (for example certain property-transaction deductors who use PAN-based challan-cum-statements).
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 05 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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