India’s payroll ecosystem hasn't changed this quickly or on this scale in a very long time. With the Labour Codes already applicable from November 21, 2025, and the new Income Tax Act 2025 replacing the old 1961 version this April, we are seeing the most significant compliance shift in over 60 years.
According to experts, these 2026 tax rules move payroll from a basic back-office chore to a high-stakes tax function for every employer. The CBDT’s updated rules require a lot more detail, introducing component-level transparency for salaries, perks, and benefits.
If you treat 2026-27 as just another routine update, you are opening the door to audits, penalties, and trust issues with your team. Setting up a systematic framework now will help you maintain accuracy for years to come.
The Income Tax Act 2025 replaces the Income Tax Act of 1961 from 1st April 2026. The Income Tax Rules 2026, notified by the CBDT, introduce new forms, revised TDS reporting formats and revised valuation rules for taxable perquisites and salary components. The key changes every employer needs to incorporate are covered below.
Your payroll system must reflect Section 392(1) of the Income Tax Act 2025 for every salary paid from April 2026. The governing principle is simple: the date of payment determines which Act applies, not the period the salary covers. All investment declarations from employees for Tax Year 2026-27 must also reference the new Act.
The Income Tax Rules 2026 rename every TDS form your team currently uses. The table below maps old form numbers to the new ones your payroll system must generate.
| Form No. (IT Rules 2026) |
Form No. (IT Rules 1962) |
Form Summary |
| 130 | 16 | Certificate under Section 395 of the Act for tax deducted at source on salary paid to an employee under section 392 or pension or interest income of a specified senior citizen under section 393(1) [Table: Sl. No. 8(iii)] |
| 138 | 24Q | Quarterly statement of deduction of tax under section 397(3)(b) of the Act in respect of salary paid to an employee under section 392, or income of a specified senior citizen under section 393(1) Table: Sl. No. 8(iii)] |
| 122 | 12B and 12BAA | One single form for furnishing details of income under section 392(4)(a) for the purposes of making a deduction where income is chargeable under the head "Salaries" |
| 123 | 12BA | Statement showing particulars of perquisites, other fringe benefits or amenities and profits in lieu of salary with value thereof. |
| 124 | 12BB | Statement showing particulars of claims by an employee for deduction of tax under Section 392(5)(b) of the Act. |
India's four Labour Code reforms, covering Code on Wages, Code on Social Security, Industrial Relations Code and Occupational Safety, Health and Working Conditions Code, came into effect on 21st November 2025 with certain state-level exceptions. They fundamentally redefine how wages are classified, calculated and recorded across Indian organisations.
The Code on Wages mandates that basic salary, including dearness allowance, must account for at least 50% of total CTC. Any allowances that push the non-wage portion above 50% are automatically added back to the wage base for statutory calculations. This single rule carries significant downstream effects for payroll compliance in India.
Under the Code on Wages, employers must now settle all wages payable on separation within two working days of an employee's exit date. This is a strict departure from legacy practices, where full and final settlement in India routinely stretched to 45 or 90 days. Employers must now address the following to meet this requirement reliably.
Employers must now maintain fully digitised records covering employee wages, attendance, PF and ESI contributions, payslips and statutory registers across all locations. Physical records or partially digital systems no longer meet the compliance standard that the Labour Codes set for payroll compliance in India.
Your records need to meet a higher standard than mere storage. Here is what auditors and inspectors will look for.
Indian enterprises should treat FY 2026-27 as a structured realignment exercise across salary structure reconfiguration, TDS calculation methodology, F&F workflow automation and digital record infrastructure. Companies with integrated payroll and HRMS systems will manage this transition with significantly lower compliance risk than those relying on disconnected tools.
Work through these five actions in priority to protect payroll compliance in India from this financial year:
For Indian enterprises managing high-volume, multi-location payroll across a rapidly changing statutory environment, payroll automation in India is now a compliance necessity. The scale and simultaneity of the 2026 reforms make manual coordination across salary structures, TDS calculations and F&F workflows operationally unsustainable.
Ramco Payce covers PF, ESI, TDS, PT, LWF, Gratuity and Bonus processing for Indian payroll, with multi-state expertise and real-time HRMS integration. Our platform is aligned with the Income Tax Act 2025 and Labour Code requirements, supporting updated TDS calculation, revised Form 138 and Form 130 generation and automated F&F settlement workflows.
Book a free one-on-one consultation with our team to learn how Ramco Payce can streamline the integration of the new payroll reforms.