Section 394 Income Tax Act 2025 – TCS Provisions Explained

Section 394 of the Income Tax Act 2025 governs Tax Collected at Source (TCS). It is covered under Section 206C of the Income Tax Act, 1961. The provisions under section 394 take effect from the tax year 2026-27, effective from 1 April 2026.

In this guide, we break down every sub-section, every rate, and every exemption under Section 394 - in plain language, with the Finance Act 2026 amendments factored in.

What is Section 394 of the Income Tax Act 2025?

For certain transactions, the Income Tax Act, 2025, requires the seller to collect a specified percentage of the transaction value from the payer and remit it to the government. More than a tax recovery mechanism, the Tax Deducted at Source serves as a monitoring mechanism that identifies high-value, potentially risky transactions and brings them into tax radar.

The provisions of Tax Collected are covered under section 394 of the Income Tax Act, 2025, effective from 01st April, 2026. The equivalent provisions are covered under section 206C of the Income Tax Act, 1961.

Who is responsible for collecting TCS under Section 394?

Section 394(1) identifies three categories of persons who are legally obligated to collect TCS:

• Sellers - for the sale of specified goods like alcohol, scrap, minerals, motor vehicles, luxury goods and overseas tour packages
• Authorised Dealers - for foreign remittances under the Liberalised Remittance Scheme (LRS) 
• Licensors or Lessors - for receipts from the use of parking lots, toll plazas, mines, and quarries

These persons are required to collect TCS either at the time the amount is debited to the buyer's account, or at the time the amount is actually received - whichever is earlier.

Complete TCS Rate Table Under Section 394 (Tax Year 2026-27)

The following table lists all nine categories of transactions covered under Section 394(1) of the Income Tax Act 2025.

 Note: If the buyer/remitter does NOT furnish PAN, TCS is collected at a higher rate (up to 5%) as prescribed under Section 397.

Finance Act 2026 Rate Rationalisation - Key Changes

The Finance Act 2026 brought the most significant overhaul to TCS rates under Section 394 since the new Act came into force. The key changes, effective 1 April 2026, are:

When is TCS Not Required? – Exemptions Under Section 394

Section 394 provides specific exemptions to prevent double taxation and reduce unnecessary compliance burden:

Section 394(2): Declaration by Resident Buyer for Manufacturing/Processing

For sale of alcohol, tendu leaves, timber, scrap, coal, lignite and iron ore, TCS is not required to be collected if the buyer is a resident in India and furnishes a written declaration stating that the goods will be used for:

• Manufacturing or processing
• Production
• Generation of power

This declaration must be made in duplicate in the prescribed form and submitted to the person responsible for collecting TCS. This exemption ensures that industrial buyers - who use these materials as inputs - are not burdened with refundable TCS on a routine basis.

Section 394(4): TCS on LRS where Overseas Tour already collected

Where the seller has collected TCS on the sale of an overseas tour programme package, the authorised dealer (bank) is not required to collect TCS again on the same amount under the LRS route. This provision helps in preventing misinterpretation or double collection of TCS.

Section 394(5): TDS Already Deducted by Buyer

If the buyer is required to deduct TDS and has done so, then TCS need not be collected on the same transaction.

Timing of TCS Collection Under Section 394

Section 394(1)(c) prescribes that TCS must be collected at the earlier of:

• Debit entry in the books of the seller/lessor/ authorised representative, OR
• Actual receipt of the amount from the buyer 

How to Claim Credit for TCS Collected Under Section 394?

TCS collected under Section 394 is fully creditable against your income tax liability for the year. Here's how it works:

• The seller/dealer deposits the TCS with the government and issues a TCS certificate (Form 27D equivalent under the new Act).
• The TCS amount is reflected in your Annual Information Statement (AIS) and Form 26AS.
• When you file your Income Tax Return (ITR) for Tax Year 2026-27, this TCS is adjusted against your total tax payable.
• If TCS collected exceeds your tax liability, the excess becomes an income tax refund.

Penalties for Non-Compliance with Section 394

Failure to collect or deposit TCS under Section 394 carries serious consequences under the Income Tax Act 2025:

• Section 398: If TCS is not collected or not deposited, the seller/dealer is deemed to be assessee-in-default. If the payee, buyer, or licensee has furnished such income in his ITR, paid taxes, and furnished a certificate to this effect.
• Interest: Interest is chargeable at 1% per month for failure to collect, and 1.5% per month for failure to deposit after collection. Even part month is considered as full month for interest calculation.
• Section 477 (Prosecution): Failure to pay the collected tax can attract prosecution and penalties. Default exceeding Rs. 10 lakhs can lead to imprisonment.