Difference Between TDS and TCS – Complete Guide with Updated Insights
When you step into a high-end showroom to purchase a luxury car costing more than ₹10 lakh, you may notice an additional tax component added to your invoice. On the other hand, imagine receiving a payment from a corporate client and discovering that the amount credited to your account is slightly lower than the billed value because tax has been deducted beforehand.
These two situations highlight two important tax collection mechanisms in India — Tax Collected at Source (TCS) and Tax Deducted at Source (TDS). Although both are designed to ensure smooth tax collection and prevent tax evasion, they operate differently and are often misunderstood by taxpayers.
This blog explains TDS and TCS in detail, including their meaning, applicability, examples, rates, and key differences, along with the latest update from Budget 2026.
Budget 2026 Update
The Union Budget 2026 proposed a reduction in TCS under the Liberalised Remittance Scheme (LRS) for specific categories such as healthcare expenses, educational payments, and overseas tour packages. The revised rate is proposed to be 2%, providing relief to taxpayers making international payments for these purposes.
Understanding TDS and TCS with Practical Examples
What is Tax Deducted at Source (TDS)?
TDS is a taxation system where tax is deducted directly from income at the time of payment or credit, whichever occurs earlier. The deducted amount is deposited with the government by the payer on behalf of the recipient.
Under the Income Tax Act, individuals, companies, or organisations making specified payments must deduct TDS if the payment exceeds the prescribed threshold limit. The government sets different TDS rates depending on the nature of the payment.
Common Payments Covered Under TDS
- Salary payments
- Professional and technical service fees
- Royalty payments
- Rent payments
- Interest income
- Commission or brokerage
In TDS transactions:
- The person deducting the tax is known as the Deductor.
- The person receiving the payment is called the Deductee.
|
Type of Payment |
TDS Rate |
|
Salaries |
As per the tax slab |
|
Rental charges greater than Rs.50,000 per month for buildings, land, plant and machinery |
10% for land, building and furniture and 2% for plant and machinery and equipment |
|
Prize money for a lottery, horse race, crossword puzzle, etc., more than Rs.10,000 per transaction |
30% |
|
Brokerage or commission from lottery ticket sales amounting to more than Rs.20,000 |
2% |
|
Purchase of immovable property of more than Rs.50,00,000 |
1% |
|
Single payment of Rs.30,000 or aggregate payment of Rs.1,00,000 during a year to a contractor |
1% for individuals or HUF, 2% for Others |
Example of TDS
Suppose XYZ Pvt. Ltd. pays a monthly rent of ₹80,000 for an office space. Since the rent exceeds ₹50,000, TDS is applicable.
- Rent Amount: ₹80,000
- TDS @ 10% = ₹8,000
- Net Payment to Owner = ₹72,000
At the end of the financial year, the property owner must report the full rental income of ₹9,60,000 while claiming ₹96,000 as TDS credit in the income tax return.
What is Tax Collected at Source (TCS)?
TCS refers to the tax collected by a seller from the buyer at the time of selling specified goods. The seller collects this additional tax and deposits it with the government. TCS provisions are governed by Section 206C of the Income Tax Act.
Goods Commonly Covered Under TCS
|
Good Purchased |
TCS Rates |
|
Tendu leaves |
2% |
|
Alcohol |
2% |
|
Timber wood from a forest on lease |
2.5% |
|
Scrap |
2% |
|
Motor vehicles worth more than Rs.10 lakh |
1% |
|
Toll plaza, quarry, mine and parking lot |
2% |
|
Metals (including iron ore, lignite and coal) |
2% |
|
Forest produce (excluding tendu leaves and timber) |
2.5% |
Example of TCS
Assume Mr. Sharma purchases scrap materials worth ₹60,000 from a registered seller.
- Purchase Value = ₹60,000
- TCS @ 2% = ₹1,200
- Total Amount Payable = ₹61,200
The seller collects the additional amount as TCS and deposits it with the government. The buyer can later claim this amount as tax credit while filing income tax returns.
Major Differences Between TDS and TCS
Although TDS and TCS serve the same purpose of ensuring tax compliance, they differ in application and responsibility.
|
Parameters |
TDS |
TCS |
|
Meaning |
TDS amount is the tax deducted by a person while making a payment. |
TCS amount is the tax collected by the seller during the time of sale. |
|
|
|
|
|
|
|
|
|
Time of Incidence |
Purchase of goods and services |
Sale of goods and services |
|
Transactions covered |
Rent, commission, interest, salaries, brokerage and more |
Selling of toll tickets, forest products, cars, tendu leaves, minerals, liquor, timber, scrap, etc. |
|
Time of Deduction |
When payment is due or made, whichever comes sooner |
At the time of sale |
|
Due dates for TCS payment |
The 7th of next month from which the purchase is made |
7th of next month from which sale is made. The returns have to be submitted quarterly. |
|
Person responsible |
Individual or company making the payment (the customer) |
Person receiving the payment (the supplier) |
|
Filing quarterly statements |
Form 24Q (in case of salaries, pension and interest income of senior citizen), Form 26Q (for others except salaries), and Form 27Q (for payments to NRIs). The returns have to be submitted quarterly except under exceptional circumstances. |
Form 27EQ. The returns have to be submitted quarterly. |
Applicability of TCS When TDS is Deducted
In cases where a transaction qualifies for TDS deduction under the Income Tax Act, the seller is not required to collect TCS on the same transaction. This avoids duplication of tax collection and simplifies compliance for taxpayers.
Importance of TDS and TCS in the Tax System
Both TDS and TCS play a crucial role in India’s taxation framework by:
- Ensuring regular inflow of revenue to the government
- Reducing chances of tax evasion
- Creating a digital trail of financial transactions
- Making tax collection more systematic and transparent
- Encouraging timely tax compliance
Conclusion
TDS and TCS are two essential components of India’s tax collection structure that help streamline compliance and maintain transparency in financial transactions. While TDS is deducted by the payer while making payments such as salaries, rent, or professional fees, TCS is collected by sellers when specific goods are sold.
Understanding their applicability, rates, and compliance requirements helps taxpayers avoid penalties and ensures smooth filing of income tax returns. With continuous updates such as the proposed Budget 2026 TCS reduction for overseas payments, staying informed about these provisions is increasingly important for individuals and businesses alike.
Frequently Asked Questions (FAQs)
Q1. What is TDS?
Answer:
TDS (Tax Deducted at Source) is a system where tax is deducted by the payer while making certain payments such as salary, rent, professional fees, interest, or commission. The deducted tax is deposited with the government on behalf of the recipient.
Q2. What is TCS?
Answer:
TCS (Tax Collected at Source) is a tax collected by the seller from the buyer at the time of selling specific goods such as scrap, motor vehicles above ₹10 lakh, timber, minerals, and liquor. The seller then deposits this tax with the government.
Q3. What is the main difference between TDS and TCS?
Answer:
The main difference lies in who collects the tax. In TDS, the buyer or payer deducts tax before making payment, whereas in TCS, the seller collects tax from the buyer during the sale of goods.
Q4. When is TDS deducted?
Answer:
TDS is deducted at the time of payment or credit of income, whichever occurs earlier.
Q5. When is TCS collected?
Answer:
TCS is collected by the seller at the time of sale of specified goods or receipt of payment from the buyer.
Q6. Who is responsible for depositing TDS and TCS with the government?
Answer:
The deductor (payer) is responsible for depositing TDS, while the seller who collects TCS is responsible for depositing TCS with the government.
Q7. Can taxpayers claim credit for TDS and TCS?
Answer:
Yes, taxpayers can claim credit for both TDS and TCS while filing their income tax returns, as these taxes are adjusted against their total tax liability.
Q8. What are some common payments covered under TDS?
Answer:
TDS generally applies to payments such as salary, rent, professional or technical fees, royalty, interest income, and commission or brokerage.
Q9. Which goods are commonly covered under TCS?
Answer:
TCS usually applies to goods like scrap, timber, tendu leaves, minerals, alcohol, toll plaza operations, and motor vehicles costing above ₹10 lakh.
Q10. What happens if TDS is applicable on a transaction? Is TCS still required?
Answer:
If TDS is deducted on a transaction as per the Income Tax Act, TCS is generally not applicable to avoid double taxation.
Q11. What are the due dates for depositing TDS and TCS?
Answer:
Both TDS and TCS must generally be deposited with the government by the 7th day of the following month. Quarterly returns must also be filed as per prescribed forms.
Q12. Which forms are used for filing TDS returns?
Answer:
TDS returns are filed using Form 24Q for salary payments, Form 26Q for non-salary payments, and Form 27Q for payments made to non-residents.
Q13. Which form is used for filing TCS returns?
Answer:
TCS returns are filed using Form 27EQ on a quarterly basis.
Q14. What is the Budget 2026 update related to TCS?
Answer:
Budget 2026 proposed reducing TCS to 2% under the Liberalised Remittance Scheme (LRS) for expenses related to education, healthcare, and overseas tour packages.
Q15. Why are TDS and TCS important in the tax system?
Answer:
TDS and TCS help the government collect taxes regularly, reduce tax evasion, maintain transaction transparency, and improve tax compliance among taxpayers.
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