Old Section 40(a)(ia) vs Income-tax Act 2025 Business Deduction Rules: TDS Default Mapping
Reviewed by Ravi Sisodia · Last reviewed 13 August 2026
Finin2min 2-Minute Summary
- The Income Tax Department expressly maps old section 40(a)(ia) to section 35(b) of the Income-tax Act, 2025.
- Section 35(b) continues the 30% business-income disallowance for a sum payable to a resident where tax was deductible but not deducted, or after deduction was not paid by the return-filing due date specified in section 263(1).
- The disallowance test is separate from the deductor-default, interest, penalty and prosecution consequences under the TDS chapter; fixing one consequence does not automatically close the others.
- For Tax Year 2026-27, ERP/TDS masters should use the new Act's section references and event dates. A March 2026 credit can remain governed by the old Act even if cash payment occurs after 1 April 2026.
- A defensible year-end file ties vendor ledger, TDS trigger, deduction date, deposit challan, return reporting and deduction allowance to the same transaction.
Section 35(b) is the current business-computation control
The Department's transition FAQ removes the ambiguity: section 35(b) corresponds to old section 40(a)(ia). For resident payments, 30% of the relevant sum can be disallowed when TDS that was required has not been deducted or, after deduction, has not been deposited up to the return due date. The tax computation should therefore identify the specific expenditure and not simply book a generic 'TDS disallowance provision'.
The deduction disallowance is only one layer. The deductor may separately face recovery as assessee-in-default, interest and other consequences under the TDS machinery. A tax-computation reversal does not by itself correct a TDS statement or extinguish interest.
The March-April transition needs event-date discipline
The official transition FAQ states that TDS is governed by the law in force when the earlier of credit or payment occurs. If professional fees are credited on 30 March 2026 and paid in April, the old Act controls that deduction event. If the credit/payment event first occurs on or after 1 April 2026, the new Act controls. Accounting systems should therefore preserve the trigger date rather than decide the statute from the bank-payment date alone.
Vendor masters should also be updated to the new TDS section numbering. The Department warns that using old section numbers for post-1-April events can create reporting/processing errors even when the rate and threshold have not changed.
Worked example: professional fee booked in May 2026
A company books Rs 8 lakh of resident professional fees in May 2026 but does not deduct the required TDS. At year-end the expense remains in P&L. The finance team should first establish the applicable TDS provision under the 2025 Act, quantify the TDS and interest exposure, correct the deduction/deposit/statement position, and separately determine the section 35(b) disallowance. If the payment conditions for later allowance are satisfied, the tax working should track the reversal in the appropriate tax year rather than permanently losing the expense.
TDS default close file
- Create a ledger-to-TDS reconciliation by vendor and nature of payment.
- Record the earlier-of-credit-or-payment trigger date.
- Identify section, rate, threshold and deductee residential status under the governing Act.
- Match deduction to challan and TDS statement reporting.
- Quantify section 35(b) disallowance separately from interest/penalty consequences.
- Track later allowable amounts with the prior-year disallowance reference.
Questions readers commonly ask
What replaces old section 40(a)(ia)?
The Income Tax Department states that section 35(b) of the Income-tax Act, 2025 corresponds to old section 40(a)(ia).
Is the disallowance still 30%?
Yes, section 35(b) retains the 30% disallowance architecture for the covered resident-payment default.
If tax is deposited later, is the expense lost forever?
No. The section contains later-allowance mechanics; the tax working should track the amount to the year in which the statutory conditions are met.
Which Act applies to a March 2026 credit paid in April?
The official transition guidance uses the earlier of credit or payment. A March credit is therefore governed by the old Act even if payment occurs after 1 April.
Official / primary sources
- Income-tax Act, 2025 - section 35 - Section 35(b): amounts not deductible in certain circumstances
- Income Tax Department transition FAQs - Q6.20: section 35(b) corresponds to old section 40(a)(ia); TDS transition rules
- Income-tax Act, 2025 current consolidated text - Current law as amended by Finance Act, 2026
Disclaimer
Educational and professional reference only; confirm the current law, rates and the facts of your case before relying on this page.