TDS and TCS in India Explained with Key Differences and Rates

TDS and TCS form an essential part of India’s tax collection framework. They help the department track income at the point where it arises and ensure that tax does not remain unpaid until the end of the year.

For businesses, handling these obligations correctly has become a routine part of compliance, especially when timely deposits and TDS return filing determine whether penalties can be avoided.

This guide explains how TDS and TCS work, where they apply, and the differences that matter for anyone managing accounts or payments today.

What is TDS?

TDS, or Tax Deducted at Source, requires the payer to deduct a prescribed percentage of tax before making certain payments. This ensures that tax is collected at the moment income arises, and the recipient receives credit for the amount in their tax records.

The law specifies where TDS applies, covering payments such as salaries, rent, professional services, interest, contractual work, and goods purchased under Section 194Q.

Who must deduct TDS

• Companies and firms must deduct TDS whenever the law requires it.
• Individuals deduct TDS only if they were covered under the income tax audit section 44AB in the preceding financial year, except where the law creates specific obligations, such as rent above ₹50,000 under Section 194-IB.
• TDS is deducted at the earlier of credit or payment.

Section 194Q: TDS on Purchase of Goods

This section applies when:

1. The buyer’s turnover in the preceding financial year exceeds ₹10 crore, and
2. Purchases from a single seller in the current year exceed ₹50 lakh.

The buyer must deduct 0.1% TDS on the amount exceeding ₹50 lakh. TDS is deducted on the value excluding GST if GST is shown separately (CBDT Circular 13/2021).

If both Section 194Q and Section 206C(1H) appear to apply, TDS prevails. In such cases, the seller must not collect TCS.

Parties Involved

• The person deducting tax is the deductor
• The person receiving the payment is the deductee

Once tax is deducted, it must be deposited within the prescribed due dates. Each delay or omission triggers separate consequences under the Act.

What is TCS?

TCS, or Tax Collected at Source, is a system under the Income Tax Act where the seller collects a specified percentage of tax from the buyer at the time of receiving payment for certain goods. The collected amount is deposited with the government and appears as a tax credit for the buyer.

The rules for TCS are laid out in Section 206C, which divides collections into two main categories:

Category 1: TCS on Specified Goods

TCS applies to certain goods such as:

• Scrap
• Minerals
• Tendu leaves
• Alcoholic liquor
• Timber
• Forest produce

These items fall under their own subsections and do not require any turnover threshold.

Category 2: TCS on Sale of Goods (Section 206C(1H))

Section 206C(1H) applies when both conditions below are met:

• The seller’s turnover in the preceding financial year exceeds ₹10 crore.
• Amounts received from a buyer in the current year cross ₹50 lakh.

This provision covers goods not taxed under any other TCS section; motor vehicles, taxed under 206C(1F), are excluded. TCS is collected on receipts, including advances, with adjustments only upon refund of the original amount. The applicable rate is 0.1% on receipts beyond ₹50 lakh.

Examples of TDS and TCS

To understand the distinction better, here are two simple examples showing how TDS and TCS apply in everyday business scenarios.

Example of TDS

Consider a monthly salary of ₹50,000 paid to an employee. Assume the employee’s estimated tax calculation places them at a 10% TDS rate for illustration purposes.

• Salary: ₹50,000
• TDS at 10%: ₹5,000
• Net salary paid: ₹45,000

The employer deposits the ₹5,000 with the department. The employee sees this amount as tax credit in Form 26AS and the Annual Information Statement. At the time of filing the return, this credit reduces the employee’s final tax payable.

For a detailed look at how salary TDS is actually calculated under the law, you can refer to our guide on TDS on salary: TDS on Salary under Section 192  

(Note: Actual TDS on salary depends on income slabs, regime choice, exemptions, and declarations.)

Example of TCS

A business sells a consignment of alcoholic liquor worth ₹10,000. If the applicable TCS rate for this category is 5%, the seller collects:

• TCS = ₹10,000 × 5% = ₹500
• Total collected from buyer = ₹10,500

The seller deposits the TCS with the department. The buyer claims this amount as tax credit while filing the income tax return.

(TCS rates vary depending on the category of goods.)

Difference between TDS and TCS

Point	TDS	TCS
Meaning	Tax deducted by the payer before making certain payments	Tax collected by the seller when receiving payment for specified goods or high-value receipts
Purpose	Captures tax when income is earned or credited	Captures tax during sale or receipt of goods prone to under-reporting
Where It Applies	Salaries, rent, professional fees, interest, commission, brokerage, contractual payments, purchase of goods (194Q)	Scrap, liquor, timber, minerals, forest produce, motor vehicles, toll tickets, and goods taxed under 206C(1H)
Threshold Conditions	Applies when buyer’s turnover exceeds ₹10 crore (previous year) and purchases from a seller exceed ₹50 lakh	Applies when seller’s turnover exceeds ₹10 crore (previous year) and receipts from a buyer exceed ₹50 lakh
Rate	0.1% on the amount above ₹50 lakh under 194Q	0.1% on the amount above ₹50 lakh under 206C(1H)
Calculation Basis	Deducted on amount excluding GST, if GST appears separately	Collected on the actual amount received, including advances
Timing	At credit or payment, whichever occurs earlier	At the time of receipt
Responsibility	The payer (deductor)	The seller (collector)
Deposit Due Date	By the 7th of the following month; quarterly TDS returns required	Within 10 days after month-end; quarterly TCS return in Form 27EQ
Return Forms	Forms 24Q, 26Q, and 27Q (for non-residents)	Form 27EQ
If PAN Is Not Available	Higher rate under 206AA (usually 20%)	Higher rate under 206CC (twice the rate or 5%)
Lower/Nil Certificate	Deductee may apply under Section 197	Buyer may apply under Section 206C(9)
How Credit Appears	Shows in Form 26AS, AIS, and TIS for the payee	Shows in Form 26AS, AIS, and TIS for the buyer
When Both 194Q and 206C(1H) Apply	TDS overrides TCS; seller must not collect TCS	TCS not collected if TDS is applicable

Most taxpayers rely on Form 26AS to check whether their TDS credits match the figures reported by deductors. This statement is the first place to look when reconciling income and taxes before filing a return. For a clear breakdown on Form 26AS, read this full blog: What is form 26AS

TDS and TCS Statutory Certificates Requirements

Businesses must issue the prescribed certificates to confirm the tax deducted or collected during the year.

• Form 16 – issued for TDS on salary
• Form 16A – issued for TDS on non-salary payments
• Form 27D – issued for TCS collected

These certificates must be issued within the timelines notified by the department every quarter or financial year.

Consequences of Incorrect or Delayed TDS and TCS Compliance

Late deduction, late deposit, or incorrect filing often leads to additional financial consequences. If you have filed a TDS form with an error, you can make the necessary updates through the different types of corrections in TDS forms available under the rules.

Interest

• 1% per month for delay in deduction
• 1.5% per month for delay in the deposit

Expense Disallowance

Under Section 40(a)(ia), 30% of specified payments made to residents can be disallowed as an expense if the applicable TDS is not deducted or not paid on time.

Late Filing Fee and Penalty

• Section 234E imposes a late filing fee of ₹200 per day until the return is filed
• Section 271H provides for a penalty ranging from ₹10,000 to ₹1 lakh for incorrect or delayed returns

These consequences can be avoided with proper internal calendars and reconciliations.

How TDS and TCS Work Under GST

Income tax rules are separate from GST rules, though both systems use the terms TDS and TCS.

TDS under GST

• Applicable only to notified government departments, local authorities, government agencies, and specified public sector undertakings
• Deduction rate is 2% (1% CGST and 1% SGST or 2% IGST)
• Applies when contract value exceeds ₹2.5 lakh
• The deducted amount is reflected in the supplier’s electronic cash ledger

TCS under GST

• Applies to e-commerce operators collecting payment on behalf of sellers
• Collected at 1% total (0.5% CGST + 0.5% SGST or 1% IGST) of the net taxable value of supplies
• Deposited by the 10th of the next month
• The amount appears in the supplier’s ledger and can be used to pay GST

Why Reconciliation Matters in Tax Compliance

Businesses must reconcile:

• TDS deducted vs. entries reflecting in Form 26AS, AIS, and quarterly statements
• TCS collected vs. buyer-side credit
• GST TCS vs. supplies through e-commerce
• Vendor invoices vs. TDS entries in Form 26Q

Mismatches affect vendors, customers, and cash flow and may lead to notices under Section 133C. Regular reconciliation prevents most issues.

If the TDS deducted exceeds the employee’s final tax liability, the balance can be claimed as a refund at the time of filing the return. You can read more in our guide on TDS Refund Status: How to Check & Claim Your Refund.

Why TDS and TCS Compliance Matters for Businesses

TDS and TCS look routine at first, though they influence cash flow management, vendor relations, procurement planning, and audit readiness. Incorrect deductions or delays when you file your TDS return can prevent the deductee from claiming credit and may reflect poorly in future assessments or loan evaluations.

A simple year-round checklist helps businesses stay compliant and reduces the chance of avoidable penalties.

Conclusion

TDS and TCS sit at the very start of India’s tax system, and most businesses deal with them long before they think about annual filings. Once you understand when to deduct, when to collect, and how to report these amounts, the process becomes much easier to manage. The rules follow a steady pattern, and good habits keep the compliance side running without stress.

If you want guided support to file TDS return or prefer a team that manages monthly GST filings and deadlines for you, our experts at LegalWiz.in can keep your tax compliance steady throughout the year.