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Quick Snapshot
Tax Collected at Source is the mirror image of TDS. In TDS, the payer deducts tax before paying. In TCS, the seller collects tax on top of the sale consideration and deposits it with the government. The buyer is not paying extra tax permanently. They get full credit for whatever TCS is collected when filing their ITR.
Think of it this way. You run a scrap dealership. Every time you sell scrap to a factory, you collect a small extra amount from the buyer and deposit it with the government. That amount is TCS. The buyer later claims it as a tax credit. The government gets the money upfront. That is the whole mechanism.
Under the Income Tax Act 2025, all TCS provisions from Section 206C of the 1961 Act are consolidated under Section 394. The Finance Act 2026 (Act No. 4 of 2026, effective 1 April 2026) has revised several rates. The rates for alcoholic liquor, tendu leaves, scrap, and minerals have all been raised from 1% to 2%. The LRS education and medical rate has been reduced from 5% to 2%. Overseas tour package TCS is now a flat 2%. The old Section 206C(1H) on sale of goods above Rs. 50 lakh is not carried forward into the 2025 Act.
Under Income Tax Act 1961: All TCS provisions were under Section 206C of the Income Tax Act 1961. The 2025 Act moves them to Section 394.
Who Is a Seller and Who Is a Buyer
Seller (Section 402(33) of the 2025 Act)
For Sl. Nos. 1 to 6 (goods and motor vehicles), a seller means any of the following:
- The Central Government or any State Government.
- Any local authority or corporation established by a Central, State, or Provincial Act.
- Any company, firm, or co-operative society.
- An individual or HUF whose total sales, gross receipts, or turnover from business exceeds Rs. 1 crore or from profession exceeds Rs. 50 lakh in the preceding Tax Year.
For Sl. No. 8 (overseas tour programme package), a seller is any person who sells such packages.
Buyer (Section 402(5) of the 2025 Act)
A buyer is any person who obtains specified goods. The following are excluded and TCS is not collected from them:
- Public sector companies and the Central or State Government.
- An embassy, High Commission, legation, commission, consulate, or trade representation of a foreign state.
- A club.
- A retail buyer purchasing for personal consumption.
Part 1: TCS on Specified Goods (Section 394(1) Sl. Nos. 1 to 5)
Under Income Tax Act 1961: Section 206C(1) of the Income Tax Act 1961
The seller must collect TCS at the time of debiting the buyer’s account or at the time of actual receipt, whichever is earlier.
| Nature of Goods | TCS Rate under 2025 Act | Rate under 1961 Act |
| Alcoholic liquor for human consumption | 2% | 1% |
| Tendu leaves | 2% | 5% |
| Timber (under forest lease or any other mode) | 2% | 2% |
| Any other forest produce (not timber or tendu leaves) | 2% | 2% |
| Scrap | 2% | 1% |
| Minerals: coal, lignite, or iron ore | 2% | 1% |
Scrap (Section 402(31)): waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear, and other reasons.
Forest produce (Section 394(6)): carries the meaning defined in any State Act for the time being in force, or in the Indian Forest Act, 1927.
Example: A seller sells scrap worth Rs. 5 lakh to a factory. TCS = 2% = Rs. 10,000. The factory pays Rs. 5,10,000. The seller deposits Rs. 10,000 as TCS with the government. The factory claims Rs. 10,000 as TCS credit in its ITR.
Exemption for Manufacturing or Power Generation: Section 394(2)
Under Income Tax Act 1961: Section 206C(1A) of the Income Tax Act 1961
No TCS is required on Sl. Nos. 1 to 5 if a resident buyer furnishes a written declaration in duplicate in the prescribed form to the seller, stating that the goods will be used:
- For manufacturing, processing, or producing articles or things, or for generating power; and
- Not for trading purposes.
Under Section 394(3), the seller must forward one copy of this declaration to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner on or before the 7th day of the month following the month of receipt.
Example: A paper mill buys timber for paper production. It provides a written declaration in duplicate to the timber seller. The seller collects no TCS and sends one copy of the declaration to the Commissioner by the 7th of the following month.
Part 2: TCS on Lease of Parking Lots, Toll Plazas, Mines and Quarries (Section 394(1) Sl. No. 9)
Under Income Tax Act 1961: Section 206C(1C) of the Income Tax Act 1961
When a licensor or lessor grants a lease, licence, or contract for use of any of the following to any person other than a public sector company, for business purposes, TCS at 2% applies at the time of receipt:
| Nature of Lease or Licence | TCS Rate |
| Parking lot | 2% |
| Toll plaza | 2% |
| Mine or quarry | 2% |
Mining and quarrying of mineral oil (including petroleum and natural gas) is specifically excluded from this provision.
A licensee or lessee (Section 402(21)) means any person, other than a public sector company, who has been granted a lease, licence, or contract, or otherwise received any right or interest in any parking lot, toll plaza, mine, or quarry, from the licensor or lessor, for the purpose of business.
Example: A private company wins a contract to operate a mine. The licensor collects TCS at 2% on the lease consideration at the time of receipt. If a public sector company were awarded the same contract, no TCS would apply since public sector companies are outside the definition of licensee or lessee.
Part 3: TCS on Motor Vehicles and High-Value Goods (Section 394(1) Sl. No. 6)
Under Income Tax Act 1961: Section 206C(1F) of the Income Tax Act 1961
TCS at 1% applies on the full consideration received for sale of a motor vehicle or any other goods notified by the Central Government, where the sale consideration exceeds Rs. 10 lakh per transaction.
Example: A car dealership sells a car for Rs. 22 lakh. TCS = 1% on Rs. 22 lakh = Rs. 22,000. The buyer pays Rs. 22,22,000. The dealership deposits Rs. 22,000 as TCS. The buyer claims Rs. 22,000 as TCS credit in their ITR.
Part 4: TCS on LRS Remittances (Section 394(1) Sl. No. 7)
Under Income Tax Act 1961: Section 206C(1G)(a) of the Income Tax Act 1961
When an authorised dealer remits money abroad under the RBI’s Liberalised Remittance Scheme, TCS applies on the amount remitted exceeding Rs. 10 lakh in a Tax Year. Finance Act 2026 revised the rates as follows:
| Purpose of Remittance | Threshold | TCS Rate (from 1 April 2026) | Rate under 1961 Act |
| Education (self-funded) or medical treatment | Above Rs. 10 lakh in Tax Year | 2% | 5% |
| Education funded by loan from financial institution under Section 129(3)(b) of 2025 Act (old Section 80E) | Any amount | Nil | Nil |
| All other purposes | Above Rs. 10 lakh in Tax Year | 20% | 20% |
Example: Rahul remits Rs. 15 lakh for overseas studies from his own savings. TCS = 2% on Rs. 5 lakh (the amount above Rs. 10 lakh) = Rs. 10,000. Had this been an education loan from a bank, no TCS would apply.
Example: Priya remits Rs. 20 lakh for overseas investment under LRS. TCS = 20% on Rs. 10 lakh (the amount above Rs. 10 lakh) = Rs. 2,00,000.
Section 394(4)(a): the authorised dealer does not collect TCS on LRS remittance where TCS has already been collected by the seller on the same amount under Sl. No. 8 (overseas tour package). This prevents double collection on the same transaction.
Part 5: TCS on Overseas Tour Programme Packages (Section 394(1) Sl. No. 8)
Under Income Tax Act 1961: Section 206C(1G)(b) of the Income Tax Act 1961
A seller of overseas tour programme packages must collect TCS when aggregate receipts in a Tax Year exceed Rs. 10 lakh. Finance Act 2026 has simplified the rate to a flat 2% on amounts exceeding Rs. 10 lakh.
Under the 1961 Act the rates were 5% on amounts up to Rs. 10 lakh and 20% above Rs. 10 lakh. The 2025 Act simplifies this to a single 2% rate on the excess over Rs. 10 lakh.
An overseas tour programme package (Section 402(26)) means any tour package offering a visit to any country or territory outside India, including expenses for travel, hotel stay, boarding, lodging, or any other similar expenditure.
Example: A travel agency collects Rs. 14 lakh from a customer for an international tour package in Tax Year 2026-27. TCS = 2% on Rs. 4 lakh (the amount above Rs. 10 lakh) = Rs. 8,000.
Section 394(5): No TCS is collected under Sl. Nos. 7 and 8 if the buyer is liable to deduct TDS under any other provision of this Act and has deducted such tax. Additionally, no TCS applies if the buyer is the Central or State Government, an embassy or High Commission, a local authority, or any person notified by the Central Government.
What Happened to TCS on Sale of Goods Above Rs. 50 Lakh
Under Income Tax Act 1961: Section 206C(1H) of the Income Tax Act 1961
Section 206C(1H) of the 1961 Act required TCS at 0.1% on sale of goods exceeding Rs. 50 lakh where the seller’s turnover exceeded Rs. 10 crore. This provision was not applicable from 1 April 2025 onwards under the 1961 Act itself. The Income Tax Act 2025 does not carry it forward. There is no equivalent of Section 206C(1H) in Section 394.
The corresponding obligation on the buyer side now operates through Section 393(1) Sl. No. 8(ii) of the 2025 Act (TDS on purchase of goods above Rs. 50 lakh by a buyer with turnover exceeding Rs. 10 crore).
Other Important Rules
Lower TCS Certificate: Section 395(3)
Under Income Tax Act 1961: Section 206C(9) and (10) of the Income Tax Act 1961
A buyer, licensee, or lessee may apply to the Assessing Officer under Section 395(3) for collection of TCS at a lower rate. If the AO is satisfied that the total income of the applicant justifies a lower rate, a certificate is issued. The collector must then collect TCS at the rate in the certificate until its validity expires.
Credit to Buyer: Section 395(4) and Section 397(3)(c)
Under Income Tax Act 1961: Section 206C(4) of the Income Tax Act 1961
Every TCS amount collected and deposited with the Central Government is treated as tax paid on behalf of the buyer, licensee, or lessee. The buyer gets full credit for it against their total tax liability for the Tax Year. This credit appears in the buyer’s Form 26AS.
Mandatory PAN Requirement: Section 396(2)
Under Income Tax Act 1961: Section 206CC of the Income Tax Act 1961
Every person on whom TCS is collectible must furnish their valid PAN to the collector. If they fail to do so, TCS is collected at the higher of:
- Twice the applicable rate, or
- 5%.
Subject to a ceiling: the rate shall not exceed 20%.
| Situation | Normal Rate | Rate Without PAN |
| Sale of scrap | 2% | Higher of 4% or 5% = 5% |
| LRS remittance (non-education) | 20% | Higher of 40% or 5% = 40%, but capped at 20% |
| Motor vehicle sale | 1% | Higher of 2% or 5% = 5% |
If the buyer does not furnish PAN in the manufacturing declaration under Section 394(2), that declaration becomes invalid under Section 396(2)(f). The seller must then collect TCS as if no declaration was submitted.
Compliance: Due Dates and Returns
Due Date for TCS Deposit
TCS collected during a month must be deposited by the 7th day of the following month. For amounts collected in March, the due date is 30th April.
Due Dates for TCS Returns (Form 27EQ)
| Quarter Ended | Due Date |
| 30th June | 15th July |
| 30th September | 15th October |
| 31st December | 15th January |
| 31st March | 15th May |
Consequences of Non-Collection or Non-Payment: Section 398
Under Income Tax Act 1961: Section 206C(7) and related provisions of the Income Tax Act 1961
Deemed Assessee in Default
Under Section 398(1), any person required to collect TCS who does not collect or pay the whole or any part of the tax is deemed to be an assessee in default.
Exception: Section 398(2)
A collector who fails to collect TCS is not deemed to be in default if the buyer has filed their ITR, taken into account the relevant amount in computing income, and paid the tax due on it. The collector must obtain a CA certificate confirming this.
Interest on Non-Collection or Non-Payment: Section 398(3)
| Situation | Interest Rate | Period |
| TCS collectible but not collected | 1% per month or part thereof | From date TCS was collectible to date actually collected |
| TCS collected but not paid to government | 1.5% per month or part thereof | From date collected to date actually paid |
Example: A seller collects TCS of Rs. 6,000 on 5 April 2026 but deposits it on 20 June 2026 (2 months late). Interest = 1.5% per month for 2 months = 3% on Rs. 6,000 = Rs. 180.
Fees for Late Filing of TCS Return: Section 234E
A fee of Rs. 200 per day applies for each day of delay in filing Form 27EQ. The total fee cannot exceed the TCS amount. Since this is a fee and not a penalty, it is deductible as a business expense.
Penalty: Section 398(7)
No penalty under Section 412 is levied on a person who failed to collect and pay TCS unless the Assessing Officer is satisfied that the failure was without good and sufficient reason.
Time Limit for Default Order: Section 398(5)
No order deeming a person an assessee in default for failure to collect TCS can be passed after six years from the end of the Tax Year in which TCS was collectible.
TCS vs TDS: The Key Difference
| Feature | TDS | TCS |
| Who acts | Payer (buyer or service recipient) | Seller or collector |
| When | At time of payment or credit to payee | At time of debit or receipt from buyer |
| Provision in 2025 Act | Section 393 | Section 394 |
| Old Act provision | Sections 192 to 195 | Section 206C |
| Credit goes to | The payee (recipient) | The buyer or licensee or lessee |
Practical Compliance Checklist
- If you are a seller of scrap, timber, minerals, tendu leaves, or alcoholic liquor: collect TCS at 2% at the time of debiting the buyer’s account or receipt of payment. Deposit by the 7th of the following month.
- If your buyer provides a manufacturing declaration under Section 394(2): keep one copy and send the other to the Commissioner by the 7th of the following month. Do not collect TCS.
- If your buyer does not provide PAN: collect TCS at the higher of twice the applicable rate or 5%, subject to a ceiling of 20%.
- If you are an authorised dealer processing LRS remittances above Rs. 10 lakh: collect 2% for education or medical remittances and 20% for all other purposes.
- If you sell overseas tour packages and aggregate receipts exceed Rs. 10 lakh: collect TCS at 2% on the excess amount.
- If you are a licensor granting use of a toll plaza, mine, or parking lot: collect TCS at 2% at the time of receiving the lease consideration.
- If you collected TCS but deposited late: pay interest at 1.5% per month from the date of collection to the date of deposit before filing the return.
- If you missed the quarterly TCS return deadline: file at the earliest. Fees of Rs. 200 per day apply under Section 234E, capped at the TCS amount.
- For a lower TCS rate: the buyer must apply to the Assessing Officer under Section 395(3). Collect at the reduced rate only after the certificate is in hand.
Section 394 of the Income Tax Act 2025 consolidates all TCS provisions from Section 206C of the 1961 Act. Finance Act 2026 revised several rates. The practical obligations are unchanged: collect on time, deposit on time, and file on time. If you fall into any of the categories above, build these deadlines into your accounting calendar.
