TDS and TCS under Income Tax Act — Sections 194, 195, 206C Guide
Authoritative guide — legal provisions, leading case laws, and expert FAQs, all in one place.
What is TDS & TCS under Income Tax (Sections 194, 195 & 206C)?
TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) are withholding tax mechanisms under the Income Tax Act. TDS applies on specified payments (salary, interest, rent, professional fees) at prescribed rates. TCS applies on sale of specified goods (timber, scrap, LRS remittances). Non-deduction/non-collection attracts disallowance under Section 40(a)(ia) and penalty under Section 271C.
What is TDS & TCS under Income Tax (Sections 194, 195 & 206C)?
Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) are withholding tax mechanisms under the Income Tax Act, 1961. They ensure advance collection of tax at the point of payment, improving compliance and reducing tax evasion.
TDS is deducted by the payer (deductor) at the time of credit or payment (whichever is earlier) on specified payments such as salary, interest, rent, professional fees, contractor payments, and royalties. The deducted amount is deposited to the government and a TDS certificate (Form 16/16A) is issued to the payee, who claims credit in their income tax return.
TCS is collected by the seller from the buyer on sale of specified goods/transactions (scrap, timber, tendu leaves, motor vehicles exceeding ₹10 lakh, overseas remittances, etc.) under Section 206C.
Budget 2025 announced significant TDS rationalization — combining sections and revising thresholds — effective FY 2025-26.
Key Legal Provisions
- Section 192 — TDS on salary at applicable slab rates.
- Section 194C — TDS on payment to contractors: 1% (individuals/HUF), 2% (others); threshold ₹30,000 per transaction / ₹1 lakh aggregate.
- Section 194H — TDS on commission/brokerage: 5%; threshold ₹15,000.
- Section 194I — TDS on rent: 10% (land/building/furniture) or 2% (plant & machinery); threshold ₹2.4 lakh per year.
- Section 194J — TDS on professional/technical fees: 10% (professional), 2% (technical); threshold ₹30,000.
- Section 194N — TDS on cash withdrawals exceeding ₹1 crore: 2%; 5% for non-filers.
- Section 195 — TDS on payments to non-residents at rates in force (DTAA may reduce or eliminate liability; certificate from AO required under 197).
- Section 206C — TCS on specified goods: 1% on motor vehicles >₹10 lakh, overseas remittances under LRS: 20% (5% for education/medical); sale of goods >₹50 lakh: 0.1%.
- Section 234E — Fee of ₹200 per day for late filing of TDS return.
- Section 271C — Penalty equal to TDS amount for failure to deduct.
Relevant Statutory Sections
§192 — Tax deduction at source from salary
ITA§194C — TDS on payments to contractors
ITA§194I — TDS on rent
ITA§194J — TDS on fees for professional or technical services
ITA§195 — TDS on payment to non-residents
ITA§206C — Tax collected at source
ITA§234E — Fee for default in furnishing statements
ITA§271C — Penalty for failure to deduct TDS
Frequently Asked Questions All FAQs →
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If a person fails to deduct TDS, or deducts but does not deposit it with the government, the following consequences apply: (1) Section 201 — the person is treated as 'assessee in default' and the TDS amount becomes recoverable; (2) Interest under Section 201(1A) at 1% per month for failure to deduct and 1.5% per month for failure to deposit; (3) Disallowance of the expense under Section 40(a)(ia) — 30% of the payment is disallowed as deduction in the payer's income if TDS is not deducted (applicable to resident payees); (4) Penalty under Section 271C equal to the TDS not deducted.
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TDS credit is reflected in Form 26AS (Annual Information Statement) and the AIS (Annual Information Statement) on the Income Tax Portal. Taxpayers claim credit by filling in the TDS details in the relevant schedules of their ITR. The department matches the declared TDS with amounts reported by deductors in their quarterly TDS returns (Form 24Q/26Q/27Q). Mismatches can trigger demands. Taxpayers should verify Form 26AS before filing.
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Section 194J prescribes: (a) 2% on technical services (including call centre payments); (b) 10% on professional services (CA, lawyer, doctor, etc.), royalty, non-compete fees, and director remuneration (other than salary). The threshold is ₹30,000 per year per payee. Budget 2024 did not change 194J rates, but Budget 2025 announced rationalization of TDS sections effective FY 2025-26.
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Per CBDT Circular No. 23/2017 (as reiterated in subsequent circulars), TDS is required to be deducted only on the amount excluding GST — i.e., TDS is not applicable on the GST component if GST is shown separately in the invoice. Where GST is not separately indicated, TDS applies on the gross invoice amount. This applies to all TDS sections except Section 194-IA (TDS on immovable property) and Section 192 (salary).
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Under Section 206C(1G), TCS at 20% is levied on overseas remittances under the Liberalised Remittance Scheme (LRS) exceeding ₹7 lakh per financial year (reduced rate of 5% applies if remittance is for education financed by a loan from an approved institution, or for medical treatment). TCS at 5% applies on remittances for education or medical treatment from own funds. The collected TCS can be claimed as credit in the remitter's income tax return.
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Practical Implications
- Deduct TDS on time — Deposit by 7th of next month; Form 26AS reflects TDS credit for the deductee; delays attract interest under Section 201.
- Section 194Q vs 206C(1H) — 194Q (buyer's TDS at 0.1%) overrides 206C(1H) (seller's TCS at 0.1%) for purchase of goods exceeding ₹50 lakh.
- Lower deduction certificate — If TDS is excessive, apply for a lower deduction/nil deduction certificate under Section 197.
- Non-residents — Section 195 requires TDS on all payments to non-residents (unless DTAA benefit applies); obtain a CA certificate if in doubt.