How the New Income-tax Act, 2025 Affects Freelancers and the Businesses That Hire Them

If you've searched "TDS on freelancer payments" or "Section 194J" recently, you may have landed on an article that's now technically out of date — not because the numbers changed, but because the law itself did. On 1 April 2026, the Income-tax Act, 2025 came into force and replaced the Income-tax Act, 1961 entirely. Six months in, a lot of freelancers and the businesses hiring them still don't know this happened, or assume it's just a renumbering exercise with nothing practical to check.

Here's the honest picture: most of the actual numbers — thresholds, rates — haven't changed. What's changed is the section numbers, and if you're relying on an old article or an old contract template that cites the 1961 Act, you're citing a law that no longer governs your current transactions. This guide walks through exactly what freelancers and the businesses hiring them need to know, in plain terms, with the correct section numbers for FY 2026-27 onwards.

The short version: old Act vs. new Act

The Income-tax Act, 1961 still governs income and transactions from FY 2025-26 and earlier. The Income-tax Act, 2025 governs FY 2026-27 onwards (from 1 April 2026). If you're deducting TDS, filing returns, or signing a contract today, the new Act's section numbers are the ones that actually apply — even though, in most cases, the underlying rule is the same one you already knew under its old number.

TDS on freelancer payments: Section 194J is now Section 393(1)

If a business is paying a freelancer for professional or technical services, the TDS obligation that used to sit under Section 194J of the 1961 Act now sits under Section 393(1) of the Income-tax Act, 2025. The mechanics are unchanged:

1. Threshold: TDS applies once payments to a single freelancer cross ₹50,000 in a financial year.
2. Rates: 10% for most professional/technical services, 2% for technical services specifically falling under certain categories, and 20% if the freelancer hasn't provided a PAN.
3. Who must deduct: Businesses are generally required to deduct TDS once they cross the threshold. Individuals and HUFs who are not themselves subject to a tax audit are generally exempt from this TDS obligation — unless their own turnover/receipts exceed ₹1 crore (business) or ₹50 lakh (profession), in which case the exemption doesn't apply to them either.

Practical takeaway for businesses hiring freelancers: if your freelancer payments are crossing ₹50,000/year per freelancer, you need to be deducting TDS under the new section number, not the old one — your accountant or payroll software should already reflect this, but it's worth a direct check rather than assuming.

Tax audit threshold: Section 44AB is now Section 63

The tax-audit requirement that used to sit under Section 44AB of the 1961 Act is now Section 63 of the Income-tax Act, 2025. The thresholds themselves are unchanged — this is purely a section-number update, not a new compliance burden. Freelancers and businesses that were previously tracking their turnover against the 44AB thresholds should now reference Section 63 in any new documentation, contracts, or compliance checklists going forward.

What happens if TDS isn't deducted: Section 40(a)(ia) is now Section 35(b)(i)

This is the one businesses hiring freelancers most need to know, because it's a real financial consequence, not just a filing technicality. If a business is required to deduct TDS on a freelancer payment and doesn't, Section 35(b)(i) of the Income-tax Act, 2025 (replacing Section 40(a)(ia) of the 1961 Act) disallows 30% of that expense when the business calculates its own taxable income. In plain terms: skipping TDS doesn't just risk a penalty on the TDS itself — it can directly increase the business's own tax liability by making a chunk of a legitimate expense non-deductible.

A quick, separate note on GST

GST is governed by a different law altogether — the CGST Act, 2017 — which has not been replaced or renumbered. It's easy to conflate the two because both come up in the same "freelancer compliance" conversations, so to be clear: nothing here changes GST registration or collection rules. The short version, for reference: a freelancer generally needs to register for GST once turnover crosses ₹20 lakh (₹10 lakh in Manipur, Mizoram, Nagaland, and Tripura specifically — not the full conventional "special category states" list, which is a common misconception), and an unregistered freelancer cannot legally charge or collect GST at all, registration requirement or not.

These Section 22/24 CGST Act rules are worth knowing but are a separate topic from the Income-tax Act transition covered above.

What this means in practice

For freelancers: if your contracts, invoices, or your own compliance notes still cite Section 194J or Section 40(a)(ia), it's worth updating them to the current section numbers — not because the deduction changes, but because citing a superseded Act in a formal document is the kind of small inaccuracy that looks worse than it is once someone notices it.

For businesses hiring freelancers: this is a good moment to confirm with your accountant that your TDS deduction process has actually been updated to reference the 2025 Act, rather than running on autopilot from a 1961-Act-era checklist. The thresholds and rates haven't moved, so there's nothing new to budget for — it's purely a "make sure the paperwork says the right thing" check.

This article is general information for freelancers and businesses, not tax or legal advice for your specific situation — for anything with real financial stakes, loop in a qualified CA who can look at your actual numbers.

Related reading: For a broader look at hiring freelancers in India, see our guide on how to hire freelancers in India. If you're specifically hiring a web developer, see our guide to hiring a freelance web developer in India.

Frequently Asked Questions on the Income-tax Act, 2025 for Freelancers

Q1: Do I need to do anything differently because of the new Income-tax Act, 2025?

A1: In most cases, no — the thresholds and rates for TDS, tax audit, and disallowance are unchanged. What matters is making sure any contracts, invoices, or compliance documentation reference the correct current section numbers (like Section 393(1) instead of Section 194J) rather than the superseded 1961 Act sections.

Q2: I'm a freelancer earning under ₹50,000 a year from one client — does TDS apply to me?

A2: No. TDS under Section 393(1) only applies once payments from a single payer to a single freelancer cross ₹50,000 in a financial year. Below that threshold, there's no TDS deduction obligation on that payment.

Q3: What happens to a business if it forgets to deduct TDS on a freelancer payment?

A3: Under Section 35(b)(i) of the Income-tax Act, 2025, 30% of that expense can be disallowed when the business calculates its own taxable income — on top of any separate TDS-related penalty. It's a direct hit to the business's own tax position, not just a freelancer-side issue.

Q4: Is this the same law as GST registration for freelancers?

A4: No — GST is governed separately by the CGST Act, 2017, which hasn't changed. The Income-tax Act, 2025 only affects income-tax-related rules like TDS, tax audit, and disallowance. GST registration thresholds (₹20 lakh generally, ₹10 lakh in a few specific states) are a separate, unrelated set of rules.

Q5: Where can I read the actual text of the new sections?

A5: The Income-tax Act, 2025 is a public statute — the full text is available through official government tax portals and legal reference sites. If your situation involves real money at stake, it's worth having a CA confirm the specific section's application to your case rather than relying on a summary article (including this one).