TDS Challan for FY 2025-26 Valid for TY 2026-27: Cross-Year Utilisation Rules Explained

Introduction

The transition to the Income-tax Act, 2025, from 1 April 2026 has introduced important changes in the terminology and compliance framework for tax deduction at source (TDS). One practical issue arising during this transition concerns deductors who deposited TDS using the previous financial-year or assessment-year selection when the payment was actually intended for compliance under the new Tax Year framework.

In a clarification reported in October 2026, the Income Tax Department indicated that a TDS challan deposited for Financial Year (FY) 2025–26 may be utilised while furnishing a TDS statement for Tax Year (TY) 2026–27, subject to the applicable cross-year utilisation rules. The Department also indicated that a dedicated facility for correcting challans across tax years was under development.

This clarification is particularly relevant for businesses, employers, accountants and tax professionals dealing with TDS payments and quarterly statements during the transition between the two income-tax laws.

Understanding the Change from Assessment Year to Tax Year

Under the Income-tax Act, 1961, taxpayers and deductors were accustomed to the distinction between a financial year and an assessment year.

For example, FY 2025–26 relates to Assessment Year (AY) 2026–27 under the earlier framework.

The Income-tax Act, 2025, introduces the concept of a Tax Year, which aligns with the financial year in which the income arises. Accordingly, income and relevant TDS compliance for the period beginning 1 April 2026 fall under TY 2026–27.

This means that the following periods must be distinguished carefully:

• FY 2025–26 / AY 2026–27: The earlier Income-tax Act, 1961, framework continues to govern the relevant transactions and compliance.

• FY 2026–27 / TY 2026–27: The Income-tax Act, 2025, applies to transactions governed by the new law from 1 April 2026 onwards.

The transition does not mean that every earlier-year compliance obligation shifts to the new Act. The applicable law depends on the relevant transaction and transitional provisions.

What Is the Cross-Year Utilisation Clarification?

The reported clarification addresses cases where a deductor deposited a TDS challan under FY 2025–26 or the corresponding earlier-year framework but subsequently needed to use the payment for a TDS statement relating to TY 2026–27.

According to the Department’s reported response, cross-year challan utilisation is permitted within a range of plus or minus one Tax Year, subject to the applicable system rules.

This provides a potential route for deductors who selected the wrong year while making a payment during the transition.

However, an important distinction must be kept in mind: permission to utilise an eligible challan for a statement relating to an adjacent year is not necessarily the same as correcting the tax year recorded on the original challan.

The reported clarification should therefore be read in the context of the relevant TRACES functionality and applicable procedural requirements. It should not be interpreted as a blanket permission to use every challan across tax years or to disregard other errors in challan details.

Why Has This Issue Arisen?

The transition to the new tax framework requires deductors to update their payment processes, payroll systems, accounting software and TDS return preparation procedures.

During the transition, errors may occur because of:

1. Incorrect year selection

A deductor may have selected AY 2026–27 while making a payment that was intended for TDS compliance relating to TY 2026–27.

2. Differences in terminology

Professionals familiar with the earlier Assessment Year system may continue using the old terminology or selecting the old year in payment interfaces.

3. Changes in the applicable law

Transactions governed by the Income-tax Act, 2025, require the relevant provisions and reporting requirements under the new Act to be considered.

4. Challenges in challan-to-statement matching

A challan may have been paid successfully but may not match the year selected in the TDS statement. This can create reconciliation difficulties or prevent the expected utilisation of the payment.

The cross-year utilisation clarification is relevant because it may help address certain mismatches arising from year selection. It does not, however, eliminate the need for accurate payment and statement reporting.

Practical Example: TDS Challan Deposited Under FY 2025–26

Suppose ABC Private Limited deducts TDS in April 2026 for a transaction governed by the Income-tax Act, 2025.

While depositing the amount, the accounts team inadvertently selects the earlier-year option and deposits the challan under the FY 2025–26 / AY 2026–27 framework.

The company subsequently prepares its TDS statement for TY 2026–27 and discovers that the challan details do not match the intended reporting period.

In such a case, the reported cross-year utilisation clarification may provide a route for using an eligible challan in the TY 2026–27 statement, subject to the system’s validation and applicable conditions.

The deductor should verify the challan details, available balance, relevant statement period and portal instructions before proceeding.

If the system does not permit utilisation or the underlying challan details require correction, the deductor should follow the applicable TRACES procedure or seek assistance from the relevant authority.

Cross-Year Utilisation Versus Challan Correction

Understanding the difference between these two processes is essential.

The availability of cross-year utilisation should not be treated as confirmation that every challan correction can be completed through the same process.

The Income Tax Department’s general e-filing challan correction FAQs also distinguish between correction of regular tax-payment challans and TDS/TCS challans. TDS/TCS challan correction is handled through the applicable TRACES procedures or by approaching the Assessing Officer, as appropriate.

Is a Dedicated Correction Facility Available?

The October 2026 reports state that the Income Tax Department indicated that a dedicated facility for correcting challans across tax years was under development.

The reported response did not provide a confirmed launch date. Therefore, deductors should check the latest official TRACES announcements and instructions before relying on the availability of a new facility.

Until the relevant functionality is confirmed as operational, professionals should avoid assuming that a cross-year correction can be completed automatically through the portal.

Where an error remains unresolved, the deductor should retain the challan receipt, payment details, relevant TDS statement information and records of any communication with the Department.

What Should Businesses and Tax Professionals Do?

Businesses should review their TDS payment and reporting procedures to reduce the risk of incorrect year selection and statement mismatches.

The following practical steps can help:

1. Verify the applicable tax year

Determine whether the transaction falls under the earlier Income-tax Act, 1961, framework or the Income-tax Act, 2025, framework.

2. Review challan particulars

Check the payment receipt, selected year, TAN, amount, payment date and other relevant particulars before preparing the TDS statement.

3. Reconcile challans with TDS statements

Ensure that the amount deposited is appropriately reflected and utilised in the relevant statement. Investigate any unmatched or unconsumed balance.

4. Check portal instructions

Refer to the latest TRACES guidance and system validations before attempting cross-year utilisation or correction.

5. Maintain supporting documentation

Keep challan receipts, statement acknowledgements, reconciliation workings and relevant correspondence in an organised file.

6. Update internal processes

Businesses should instruct accounts and payroll teams to use the correct tax-year options and applicable statutory references for transactions from 1 April 2026 onwards.

7. Escalate unresolved mismatches

If the challan cannot be utilised or corrected through the available functionality, seek guidance through the appropriate official channel rather than making repeated, unsupported adjustments.

Key Takeaway

The reported clarification allowing eligible TDS challans deposited for FY 2025–26 to be utilised for TY 2026–27 statements may provide practical relief to deductors affected by incorrect year selection during the transition to the Income-tax Act, 2025.

However, the relief should be understood within its proper scope. Cross-year utilisation does not automatically mean that the original challan has been corrected, nor does it remove the need to comply with applicable TDS reporting requirements.

Businesses and tax professionals should verify the relevant law, confirm the portal’s current functionality and maintain a clear audit trail of payments and statements.

As the new tax framework becomes operational, accurate year selection, timely reconciliation and careful monitoring of official instructions will be essential to avoiding unnecessary TDS compliance difficulties.

Disclaimer: This article is intended for general informational purposes and should not be treated as individual tax advice. The cross-year utilisation position discussed above is based on the Department’s reported clarification. Readers should verify the latest official instructions and applicable TRACES functionality before acting.

The author, CA Harsimran Kaur, is a Chartered Accountant associated with HKC Chartered Accountants & Business Advisors. Her professional interests include taxation, audit, compliance and business advisory. She focuses on helping businesses and individuals understand regulatory developments and make informed financial decisions.