Key Provisions of Tax Collected at Source (TCS) Under the Income Tax Act, 1961

Until recently, sellers with a turnover exceeding ₹10 crore were required to collect tax under Section 206C(1H) when they received over ₹50 lakh from a single buyer in a financial year. This process often added complexity to business operations. 

However, with the Union Budget 2025, this requirement has been eliminated. Effective April 1, 2025, Tax Collected at Source (TCS) on the sale of goods under this section has been removed. 

In this blog, we will walk you through a comprehensive guide on Tax Collected at Source, highlighting applicable TCS rates, important due dates, the additional payments required if those due dates are missed and other crucial details. 

Quick Synopsis

• TCS shall apply to sellers who have an annual sales of over ₹50 lakh.
• TCS rates may vary: 1% for liquor, 2.5% for timber, 5% for tendu leaves, 0.1% for goods which are sold domestically.
• TCS is collected at the time of sale/payment receipt.
• Sellers are required to deposit TCS within 7 days of the following month.
• Quarterly TCS returns (Form 27EQ) & TCS certificates (Form 27D) are required.
• Buyers shall claim TCS credit as they file their Income Tax Return.

Tax Collected at Source Meaning

TCS is the tax that buyers are responsible for paying at the time of purchase while sellers are liable to collect it. Collection of TCS is essential while:

• Selling merchandise
• Making purchases
• Raising a refund of cash from a customer
• Issuing a cheque or draft under Section 206C of the Income Tax Act, 1961.

Let us understand this tax mechanism with the help of an example. 

• Mr. X has sold certain goods to Mr. Y worth ₹100, on which TCS is applicable. 
• Mr. X shall then collect the TCS at 1% from the buyer.
• He shall then collect ₹101 from Mr. Y (applying the formula; ₹100 + 1%of 100)
• The money thereafter, collected as TCS, must be deposited with the government within a particular due date.
• Mr. X is only responsible for collecting the tax and then depositing it with the Indian government.

Applicability of Tax Collected at Source 

Only certain individuals or entities are classified as sellers for the purpose of collecting tax at source. No other sellers of goods are authorised to collect tax at source from buyers, except for those listed in this section. 

A buyer is defined as an individual who acquires goods of a specified nature through a sale or obtains the right to receive such goods, whether by auction, tender or any other method.

Here is the seller classification of Tax Collected at Source: 

• Central and State Governments
• Local Authority
• Companies registered under the Companies Act
• Statutory Authority or Corporation
• Partnership Firms
• Co-operative Society
• Individuals or HUFs whose accounts are subject to audit under the Income Tax Act for a financial year

Now that we know the list of entities that are eligible to collect tax at source, let us take a look at the buyer classifications that are exempt from the requirement to have tax collected at source. In other words, TCS does not need to be collected from the following individuals: 

• Public Sector Companies
• Central and State Governments
• Embassy of High Commission
• Trade Representation of a Foreign Nation and Consulate
• Sports and Social Clubs
• Where a resident buyer uses the purchased goods for manufacturing, processing or producing articles or things, or for generating power (and not for trading) and provides a written declaration in duplicate

Key Tax Collected at Source Updates 2025 

In the Union Budget, the Centre introduced key reforms aimed at simplifying TCS provisions. Effective from April 1, 2025, the following changes are designed to reduce compliance burdens for businesses: 

• If you are sending money overseas, for your child’s education, family support or other personal needs, there is some welcome relief. As per the latest update, the TCS threshold has been raised from ₹7 lakh to ₹10 lakh, meaning you will now pay TCS only if your annual remittance exceeds ₹10 lakh.
• Earlier, individuals who failed to file their ITR faced higher TCS rates. However, Budget 2025 proposes to scrap this provision. 
• If you run a business with high sales volumes, there is some good news for you. The requirement to collect 0.1% TCS on sales exceeding ₹50 lakh has been scrapped.
• Earlier, if someone failed to deposit the collected TCS amount to the government on time, they faced severe penalties, including imprisonment from 3 months to 7 years. Now, if the pending TCS amount is deposited within the prescribed time, no legal action will be taken. 

When is TCS Collected?

The seller is required to collect TCS at either of the following two dates, whichever is earlier:

• At the time of the seller passing the entry in the accounts books for credit sales.
• At the time of the seller receiving money from the buyer via any mode (cash/cheque/draft)

Note that if a motor vehicle sale is concerned, the TCS is levied upon receipt of money from the respective buyer.

Goods Which Come Under Tax Collected at Source

Here are the goods covered under TCS:

• Goods Trading: Certain goods on which duty applies, are subject to TCS when used for trading purposes. Trading indicates the act of purchasing and selling goods between two parties.
• Manufacturing/Processing/Producing Other Products: Certain goods are exempted from tax when used for manufacturing, processing or producing additional products. As a result, no TCS applies to such goods.

Types of Goods & Their Applicable TCS Rate

The following are the applicable TCS rates for various goods:

Return Due Dates for Tax Collected at Source 

Here are the due dates to submit TCS:

Tax Collected at Source Certificate 

Here are the details pertaining to the Certificate of TCS:

• When a tax collector files quarterly returns in Form 27EQ, he/she needs to provide a TCS certificate to the buyer.
• For the TCS return filed, you receive Form 27D containing details like the name of the seller and buyer, the TAN of the seller filing TCS returns, the buyer's and seller's PAN, the total tax that the seller collects, collection date and the tax rate applicable.
• The seller has to issue the certificate within 15 days from the date of TCS quarterly returns filing.

TCS Tax Payment Discrepancy: Associated Interest & Penalty 

If the tax collector does not collect TCS or fails to remit it to the government, an interest of 1% applies after the due date. Moreover, if the tax collector submits an incorrect TCS return, a penalty applies under Section 271H. The penalty amount ranges between ₹10,000 to ₹1,00,000.

TCS Provision Under GST with Respect to E-commerce Sales

The following rules apply for TCS on e-commerce sellers:

• A seller trading goods on an e-commerce platform will receive payment after a 1% tax deduction as per the IGST Act (Integrated Goods and Services Act). 

For instance, a seller who trades online through Flipkart receives an order worth ₹20,000, which includes the commission. In this case, Flipkart will deduct a tax of ₹200, which is 1% of the total amount of ₹20,000.

• The collected tax needs to be deposited with the government within the 10th of the following month.
• All the sellers need to be GST-registered.
• The above-mentioned provisions are applicable from 1^st October 2018.

Tax Collected at Source on Foreign Remittance

Here is the applicable TCS on foreign remittance:

• Outward Foreign Remittance (except for educational or medical purposes) attract 20% TCS (remittance amount exceeding ₹7 lakh). It includes the purchase of equity shares of a foreign company or purchases from a foreign e-commerce website.
• For overseas travel packages, a TCS rate of 5% applies below ₹7 lakh and a 20% TCS rate applies for amounts above ₹7 lakh.
• Foreign remittance for medical purposes attracts 5% TCS if the amount is above ₹7 Lakh.
• For educational purposes, if the loan of amount not exceeding ₹7 lakh is taken from a financial institution under Section 80E, no TCS applies; if the amount exceeds ₹7 lakh, 0.5% TCS applies.
• If the loan is taken from a financial institution not covered under the mentioned section, 5% TCS applies. 

TCS Exemption

In the following circumstances, TCS is exempted:

• If the eligible goods are utilised for personal purposes
• In case the buyer purchases the goods for manufacturing, processing and production or other goods and does not trade them

Electronic TCS (e-TCS) Filing

Filing TCS electronically is termed e-TCS. Corporate collectors and the Government have to file TCS returns electronically. Other TCS collectors can choose between electronic or paper filing options. The NSDL collects e-TCS returns from the Income Tax Department’s collectors.

Scenarios Where a Higher TCS Rate Shall be Applicable 

Here are the cases where higher TCS rates apply:

• If the TCS collector has not filed an ITR (Income Tax Return) in the years preceding the TCS collection year
• The due date for ITR filing has expired
• If the total TCS and TDS exceeded ₹50,000 in each of these two financial years

The TCS rate will be the higher of the following rates:

• Double the TCS rate as specified in the Income Tax Act
• 5% TCS

TCS Payments & Returns

Here are the rules and regulations pertaining to TCS payments and returns:

• A Government Office collecting TCS should deposit it on the same day
• Sellers need to deposit TCS in Challan 281 within 7 days from the last date of the month in which he/she collects TCS
• 1% interest per month or part of the month applies if a seller fails to collect or deposit the collected TCS
• Tax collectors need to submit quarterly TCS returns in Form 27EQ

Difference Between TCS vs. TDS

The following table highlights the differences between TCS and TDS:

Final Word

The rate of tax collected at source varies based on the goods traded by sellers. It is essential for sellers to deposit the collected TCS with the government within the due date to avoid interest payment and imposition of penalty. As a seller, ensure you are aware of the due date of the TCS deposit and return filing for tax compliance.