Difference between TDS and TCS

Imagine you walk into a luxury car showroom, ready to buy your dream car worth more than ₹10 lakh. As you finalize the payment, you notice an extra tax amount added to your bill. 

Meanwhile, you receive a payment from one of your corporate clients—only to find that a certain percentage has been deducted before the money even reaches your account.

What just happened?

As a car buyer, you have been associated with Tax Collected at Source (TCS). You are the source of income for the car dealer and tax is collected from you in the first situation.  As a consultant, you were associated with Tax Deducted at Source (TDS). Your source of Income - your client, has deducted TDS from you so that only net amount is settled.

TDS and TCS are one of the most familiar forms of direct tax levying mechanism by the Indian Government. TDS represents the tax deducted by the buyers from payments made when the amount exceeds a set limit. Conversely, TCS refers to the tax collected by the sellers during transactions with buyers.

However, taxpayers often mix up these terms and use them interchangeably. If you want a thorough understanding of the difference between TDS and TCS and their implications, check out the details below.

What are TDS and TCS with Examples?

Tax Deducted at Source (TDS)

• It is the tax amount that the government collects directly from the recipient’s income immediately when it is earned. 
• The payment is made to the recipient only after deducting prescribed TDS percentage.
• As per the IT Act, an individual or any company can deduct this tax at the source of income if the payment for any goods or services crosses a certain amount. 

The Government decides the TDS rates and thresholds for different types of goods and services for a particular financial year. 

The services include the following:

• Royalty
• Technical services
• Legal fees
• Consulting
• Rent, etc. 

In a transaction where TDS is applicable, the person or firm receiving the payment is called the deductee. On the other hand, the individual or business deducting TDS from the payment is called a deductor. 

Take a look at the TDS rates for some payment types:

Illustration

Let’s take an example for better understanding. Suppose ABC Ltd. pays a rent of Rs.80,000 per month for a warehouse, which is above the threshold of Rs.50,000 per month. 

Thus, ABC Ltd. will deduct the TDS at the rate of 10%, amounting to Rs.8,000 and then pay Rs.72,000 as monthly rental charges. 

Now, the warehouse’s owner will list Rs.9,60,000 gross income in his income tax return and claim a TDS of Rs.96,000, which has already been deducted, as a total tax liability credit, also known as a TDS credit.   

Tax Collected at Source (TCS)

According to Section 206C of the Income Tax Act, seller imposes TCS on their goods and collect them from buyers at the time of sale.

Here are the TCS rates for some commonly bought goods:

Illustration

Suppose Mr Mishra purchases tendu leaves worth Rs.60,000 from Mr Desai. However, Mr Mishra will pay the following amount:

Rs.{60,000 + (5% of 60,000)} = Rs.63,000

Mr Desai will collect the extra Rs.3,000, also known as TCS credit. 

What is the Difference between TDS and TCS?

You can understand the difference between TDS and TCS through the following illustration:

Is TCS Applicable if TDS is Deducted?

During a transaction, if a buyer deducts TDS based on the provisions in the Income Tax Act, then, TCS is not applicable.  

Final Word

There are TDS and TCS provisions levied for preventing tax evasion, keep a track record of transactions undertaken by taxpayers, etc., So it becomes necessary to understand the key differences between TDS and TCS to understand the compliance requirements and adhere accordingly.