Section 394 Income Tax Act 2025 – TCS Provisions Explained

Section 394 of the Income Tax Act 2025 deals with provisions related to Tax Collected at Source. The person responsible for receiving the money should collect tax from the payer and remit the same to the government for prescribed transactions.

What is Tax Collected at Source?

Tax Collected at Source (TCS) is one of the tax recovery mechanisms adopted by the Indian income tax system. In this method, the person responsible for receiving money collects TCS along with the receivables, and remits the same to the department, as per the applicable timeline. TCS collected is credited to the payer, and it can be used to adjust against the tax liability at the time of filing the returns. Usually, TCS rates are lower than TDS and other tax rates. The primary objective behind the levy of TCS is monitoring critical transactions rather than recovering taxes.

What is Section 394 of the Income Tax Act 2025?

Section 394 deals with TCS provisions. It prescribes applicable transactions, rates, timing of collection and exceptions. Parallel provisions are dealt with under section 206C of the Income Tax Act, 1961.

TCS Rate Chart FY 2026-27

The following table shows the TCS rates applicable for FY 2026-27, as covered under section 394(1) of the Income Tax Act, 2025.

Timing of TCS Collection Under Section 394

There had been minor differences in the timing of TCS collection based on the nature of transactions under the Income Tax Act, 1961. However, under the provisions of section 394, TCS needs to be collected at the time of debit of the amount to the buyer’s account or receipt, whichever is earlier.

Section 394 vs Section 206C (Old Act) - Key Differences

When is TCS not Required? – Exemptions Under Section 394

• For TCS collection of sale of alcoholic liquor, tendu leaves, timber and other forest produce, scrap and minerals, when the sale is made for manufacture, further processing, or for generation of power, the seller does not have to collect TCS, if a declaration in this regard is provided by the buyer in the manner prescribed. 
• Also, for a transaction to which TDS is already applicable as per the relevant provisions of the Act, TCS is not applicable. These overriding provisions are covered under section 394(5) of the Income Tax Act 2025.

Penalties for Non-Compliance with Section 394

Assessee in Default

If the TCS is not collected or not paid to the government as per the prescribed provisions, the person responsible for such collection and payment will be deemed an assessee in default. As per the provisions of section 412 of the Act, the assessing officer may levy penalty and interest as he deems fit. 

However, if the assessee has reported such income, paid the tax and furnishes a certificate from an Accountant as prescribed under the section, the person responsible for TCS collection is not deemed to be the assessee in default. 

Interest liability 

Interest is charged at 1% per month (or part thereof) from the date on which the tax was collectable to the date it is actually collected, and at 1.5% per month (or part of a month) from the date of collection to the date it is remitted to the government.

How to Claim Credit for TCS Collected Under Section 394?

The TCS collected against the assessee is reflected in Form 168, as tax credit against them. It can be adjusted against the pending tax liability, if any. When the total of TCS collected, TDS deducted, and tax paid by the assessee in other forms, like self-assessment tax and advance tax, is more than the actual tax liability, the excess taxes paid can be claimed as a refund.