The government of India recovers taxes in the form of direct taxes such as Income Tax and indirect taxes such as Goods and Services Tax (GST). TDS and TCS are two modes of tax collection. To enable the government to earn cash inflow to carry out its various expenditures , both TDS and TCS were introduced to collect tax from the same source of income during a financial year. It also helps the government to minimize tax evasion. Although most people use these terms interchangeably, there's a significant difference between the two.Read more
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As per Income Tax Act, 1961, any individual or entity shall deduct tax at source at the time of payment for the purchase of goods (e.g., real estate) or services (e.g., salary, rent, professional fees, contractual expenses, royalty, technical assistance, etc.) or interest (e.g., interest on fixed deposit), if the payment amount breaches a pre-notified threshold amount. This is TDS or Tax Deducted at Source.
Where TDS is applicable, the individual or entity deducting tax is known as the deductor, while the individual or entity receiving the payment is known as the deductee. With the TDS system in place, the tax on income gets collected in advance during a financial year rather than at the end of a financial year when the recipient files income tax returns.
It is a tax collected by the seller at the time of sale of specified goods to a buyer. Section 206C (1H) of the Income Tax Act, 1961 stipulates the goods and services applicable to TCS. As per this section, a seller whose turnover is above Rs 10 crore should collect tax when he/she receives more than Rs 50 lakh from one buyer during a financial year. Please note that TCS should be collected at the time of receipt of the sale amount. However, if the buyer has deducted tax as per any other provisions of the Income Tax Act, 1961 on the goods purchased by him/her from the seller, then the seller is not required to collect tax on such dealings. This denotes TCS or Tax Collected at Source.
The sale of goods does not cover:
Export of goods such as tendu leaves, forest produce, alcohol, and scrap – under Section 206C (1)
Export of motor vehicles – under Section 206C (1F)
Foreign remittance – under Section 206C (1G)
TCS is not required to be deducted if the buyer is a Central Government employee, State Government employee, employee at High Commission, Embassy, Local Authority, Consulate, etc. This provision also does not apply to imports.
Although both tax collection methods are levied at the point of origin of income or payment, there are significant differences between the two.
TDS denotes tax deducted at source by any individual or entity while making a payment if the payment exceeds the threshold amounts mentioned as per applicable provisions of the Income Tax Act. TCS denotes tax that has to be collected by the seller at the time of sale.
TDS is applicable on salaries, interest, professional fees, rent, contractual payments, etc. TCS applies to the sale of scrap, timber, liquor, minerals, forest produce, cars, tendu leaves, and toll tickets.
Under Sections 192 to 194Q of the Income Tax Act, TDS applies to payments made towards various services upon breach of different threshold levels at rates mentioned in the following table:
|Section||Nature of Payment||Threshold (Rs.)||Individual/ HUF||Others|
|TDS Rate (%)||TDS Rate (%)|
|192||Salaries||–||As per the employee's declaration||–|
|192A||Premature withdrawal from EPF||50000||10||–|
|193||Interest on securities||10000||10||10|
|194C||Single contractor payment||30000||1||2|
|194C||Aggregate contractor payment||1 Lakh||1||2|
|194D||Commission on insurance (15G-15H allowed)||15000||5||10|
|194DA||The policy of life insurance||1 Lakh||1||1|
|194F||MFs Repurchase units||–||20||20|
|194H||Brokerage / Commission||15000||5||5|
|194I(a)||Rent of Plant / Equipment/ Machinery||2.40 Lakh||2||2|
|194I(b)||Rent of Furniture & Land Building||2.40 Lakh||10||10|
|194IA||Transfer of some immovable property except agricultural land||50 Lakh||1||1|
|194IB||Rent by HUF / Individual (w.e.f 01.06.2017)||50000/PM||5||–|
|194IC||Payment under certain agreements applicable for F.Y: 2017-18 onwards||–||10||10|
|194J (a)||Fees-tech services, royalty, call center, for sale, etc.||30000||2||2|
|194J (b)||Fee for royalty or professional service etc.||30000||10||10|
|194K||Dividends payment by mutual funds||5000||10||10|
|194LA||Transfer compensation of certain immovable property except for agricultural land||2.50Lakh||10||10|
|194LA||Immovable property (RFCTLARR Act exempts TDS) (w.e.f 01.04.2017)||–||–||–|
|194LB||Infrastructure debt fund income (non-resident)||–||5||5|
|194LBA||Business trust income (applicable from 01.10.2014)||–||10||10|
|194LBA||Business trust to non-resident income (applicable from 01.10.2014)||–||5||5|
|194LD||Interest on some Govt. securities and bonds (from 01.06.2013)||5||5|
|194M||Payment to commission or brokerage by individual & HUF||50 Lakh||5||5|
|194N||During the preceding year, cash withdrawals from one or more bank or cooperative society accounts totaled more than one crore (w.e.f 01.09.2019)||1 Cr||2||2|
|1940||TDS on e-commerce participants||5 Lakh||1% (01.10.2020)||1% (01.10.2020)|
|194Q||Purchase of Goods||50 Lakh||0.10% (01.07.2021)||0.10% (01.07.2021)|
Under Section 206C, TCS is applicable on the goods sale if the amount is more than ₹ 50 lakh @ 0.1% of sale consideration.
TDS is applicable whenever an amount is due or paid, whichever is earlier. On the other hand, the seller collects TCS at the time of sale.
TDS is to be deducted by the individual or entity making the payment. TCS is to be collected by the individual or entity selling the specified goods.
The due date for depositing TDS is the 7th of the following month, and TDS returns have to be submitted every quarter. TCS shall be deducted in the month in which the supply of goods is made and deposited in the designated banks of the government within ten days from the end of the month of goods supply.
There are three different returns to be filed for TDS - Form 24Q (about salaries), Form 26Q (about other than salaries), and Form 27Q (remittances to NRIs). For TCS, there is a single quarterly return in Form 27EQ.
As per Income Tax Act's section 206 AA, those who do not give PAN - Permanent Account Number to the person making the payment, will be charged TDS at the following higher rates:
The rate specified in the corresponding provision of the Act or
As per Section 206CC, anyone paying an amount liable to TCS shall provide their PAN to the person collecting the tax. If not, the tax will be collected at the higher of the following rates:
Twice the rate specified in the corresponding provision of this Act or
PNR Group Ltd. pays ₹ 50,000 rent per month for their office space. Their annual rent amounts to ₹ 6 lakh. This amount is more than the TDS non-deduction limit of Rs 2.4 lakh. Therefore, PNR Group Ltd. shall deduct TDS @ 10%, i.e., ₹ 5,000 per month, and pay ₹ 45,000 per month as rental payment.
The owner of the office space will declare gross income as ₹ 6.00 lakh and claim TDS of ₹ 60,000 (previously deducted) as a total tax obligation credit, known as the TDS credit, on his or her annual income tax return.
As the case may be, the deductor or the collector of the taxes is liable to face legal consequences for any delay in deposit of TDS or TCS or the filing of TDS or TCS details as per provisions of Section 271H. A fine ranging from an ₹ 10,000 to ₹ 1,00,000 may be imposed as a failure to deposit the taxes.
Further, as per Section 201(1A) of the Income Tax Act, it is mandatory to pay an interest @ 1.50% per month in case of non-deduction of TDS or late deposit of TDS - from the date on which TDS was deductible. For TCS, the rate of interest levied is 1.00% for any delay in the deposit of TCS. Additionally, the individual may also be imprisoned for 3 to 7 years.
It is essential for an individual or a company to accomplish their tax obligations on time. If excess TDS has been deducted from your income, you can get it refunded, provided you file your income tax returns on time. On the other hand, you should ensure that the collected TCS is deposited with the government-designated banks on time if you have collected TCS.
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