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Often mistaken for one another, Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are very different things

TDS vs TCS. Here’s what you need to know

Understanding your tax liability is a critical aspect of financial planning. While we primarily tend to focus on ‘income tax’ (that is, direct tax on income), many of us may also be paying or collecting indirect taxes in the form of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS). 

Let’s see how the two differ from each other.

What is TDS?

At the outset, you should bear in mind that TDS and TCS are technically not taxes but an obligation that is deducted at the source of income or transaction. However, while the former is an expense, the latter is income.

TDS functions on the principle of ‘pay as you earn’. What this means is that the tax is deducted in advance on your income at a pre-determined percentage as specified by Section 192 of the Income Tax Act 1961. Salary, payment of fees, brokerage or commission, interest on securities, etc. are some instances where tax is deducted at source.

Example: Mr X is a freelance graphic designer. For a particular project, he raises an invoice for Rs 25,000. The client deducts TDS at 10% and pays Mr X Rs 22,500 as net settlement. The client in turn will deposit the TDS against the freelancer’s PAN with the government.

The rate of TDS differs from one category to another. While deductions on payment to contractors and professionals range between 1% and 10%, TDS on rental income is deducted at 5% and on windfall gains at 30%, excluding surcharge and educational cess.

Related: New TDS/TCS Rules in India from July 1; here's how you can effectively avoid it

What is TCS?

TCS, on the other hand, is collected by a seller at the point of sale or transaction. TCS is usually charged on sale of specific goods or trade transactions in India. The seller collects the tax from the buyer and issues a TCS certificate, which the buyer can use as input credit. Some items that come under the purview of TCS include sale of alcohol, timber, scrap, minerals such as coal and iron ore, bullion, motor vehicles, etc.

Example: Ms Y purchases a vehicle worth Rs 25,00,000 for her transport business. The automobile distributor adds Rs 25,000 as TCS (calculated at 1%) on the invoice. As the vehicle is being used for business purposes, Ms Y can claim the TCS as input credit to reduce her tax liability.

TCS is not applicable on goods that are intended for further processing or production. Again, just as with TDS, the applicable rate of TCS can differ from one category to another.

Primary differences between TDS and TCS

Tax Deducted at Source (TDS)

Tax Collected at Source (TCS)

Is deducted by the payer at the time of settling a bill or invoice

Is collected by the seller from the buyer at the point of sale

Usually deducted from payments

Usually added to invoice value

Deducted on every invoice

Collected only when purchases cross a certain threshold

Applicable on salary, payment of fees, brokerage or commission, rent, interest on securities, etc.

Applicable on sale of alcohol, timber wood, tendu leaves, scrap, minerals such as coal and iron ore, bullion, motor vehicle, etc.

Deducted at source by any individual or business that makes payments as specified under the IT Act 1961

Collected at source only by entities authorized under the TCS mechanism as specified under the IT Act 1961

Paying the penalty

Failing or delaying to deposit or collect tax is a serious offence. Companies have to bear a penalty of Rs 200 per day under Section 234E of the Income Tax Act for any delay in filing TDS or TCS returns after the due date. In case the company provides wrong information or fails to submit returns on time, it could also face a penalty raging from Rs 10,000 to Rs 1 lakh under Section 271H. 

In addition to heavy penalties, there is also the possibility of the defaulter facing imprisonment of between three and seven years. Further, companies are liable to pay interest on the monthly tax amount liable for deduction. The interest rate is 1.5% in case of TDS and 1% for TCS per month.

Last words

Staying on top of your taxes is one of the most crucial aspects of running a business. If you have deducted TDS or collected TCS, make it a priority to pay the same to the credit of the government to ensure your business runs smoothly. If tax has been deducted from your income, ensure you file your returns on time and use tax saving tools such as insurance, mutual funds, etc. You just might get a neat little refund!