Tax Collected at Source (TCS) – Rates, Payment, and Exemption

Indian Income Tax Act has provisions for tax collection at source or TCS. In these provisions, certain persons are required to collect a specified percentage of tax from their buyers on exceptional transactions. Most of these transactions are trading or business in nature. It does not affect the common man. Read on to know more about the following:

• What is Tax Collected at source
• Who can collect TCS
• When is TCS collected
• TCS rates for specific goods
• Applicability of higher TCS rate
• Classification of Buyer and Seller for TCS
• TCS Calculation 
• TCS Payments and Returns
• TCS Certificate
• TCS Exemptions
• TCS Provisions for E-commerces sales
• TCS Provisions in foreign remittance transactions
• Submission of Form 24G
• Interest chargeable for non-remittance
• Penalties applicable for incorrect filing
• TDS vs TCS

Latest Updates

Tax collection at source (TCS) for foreign remittances under LRS was raised from 5% to 20% in Budget 2023. Except for education and medical reasons, this will extend to international travel, sending money abroad, and other remittances. This new rule will take force on 1st July 2023.

What is Tax Collected at Source (TCS)?

Tax collected at source (TCS) is the tax collected by the seller from the buyer on sale so that it can be deposited with the tax authorities. Section 206C of the Income-tax Act governs the goods on which the seller has to collect tax from the buyers. Such persons must have the Tax Collection Account Number to be able to collect TCS.

Example: If a box of chocolates costs Rs.100, the buyer pays Rs.20 which is the tax collected at the point of sale. The funds are then transferred to a certain approved branch of a bank that has been authorised to accept payments. The seller is only responsible for collecting this tax from the customer and is not liable for paying it himself or herself. The tax is intended to be collected while selling items, conducting transactions, receiving a payment in cash from the buyer, or issuing a cheque or draft, whichever method is paid first.

Section 206C of the Income Tax Act of 1961 has this provision.

Who Can Collect TCS?

There are specific goods on which TCS is collected, on which the seller will collect tax from the buyer in addition to the value of the goods/services. A buyer is a person who obtains specific goods in any sale or right to receive goods by tender, auction etc. 

When should TCS be Collected?

The seller must collect TCS at the earlier of the following two dates:

• When debiting the money payable by the buyer to their account in the books of accounts.
• Upon receipt of such money from the buyer in any mode such as cash issue of a cheque or draft.

In the case of the motor vehicle sale, the TCS is collected upon receipt of money or consideration for the motor vehicle from the buyer.

TCS Rates for Specific Goods

Taxes are paid only when the goods are utilised for trading purposes, and not when utilised for manufacturing, processing or producing things. The tax payable is collected by the seller at the point of sale. The rate of TCS is different for goods specified under different categories :

When will the Higher TCS Rate Apply?

Note that as per Section 206CCA, tax at a higher rate (other than rates in the above table) will be collected from the buyer if such buyer has-

• Not filed ITR for the last two financial years before the relevant financial year in which TCS had to be collected.
• The time limit to file ITR has expired.
• The total of TCS and TDS was more than Rs.50,000 in each of these two financial years.

Such a higher TCS rate will be the highest of the following two rates-

• Two times the TCS rate mentioned in the Income Tax Act ( in the above table)
• 5% TCS

In special cases given under Section 206C(IG), 5% TCS applies where the authorised dealer arranges remittance out of India of Rs.7 lakh or more in a financial year from a buyer of foreign currency remitting under Liberalized Remittance Scheme (LRS), not being the overseas tour program package. If Aadhaar or PAN is unavailable, then TCS is 10%. Such TCS is collected while debiting the buyer’s account or on receipt of money.

Classification of Seller for TCS

There are some specific people or organisations who have been classified as sellers for tax collected at the source. No other seller of goods can collect tax at source from the buyers apart from the following list:

• Central Government
• State Government
• Local Authority
• Statutory Corporation or Authority
• Company registered under the Companies Act
• Partnership firms
• Co-operative Society
• Any person or HUF who is subjected to an audit of accounts under the Income-tax Act for a particular financial year

Classification of Buyers for TCS

A buyer is a person who obtains goods of a specified nature in any sale or right to receive any such goods, by way of auction, tender or any other mode. However, the below buyers are exempted from the collection of tax at the source. In other words, TCS need not be collected from the following persons.

• Public sector companies
• Central Government
• State Government
• Embassy of High Commission
• Consulate and other Trade Representation of a Foreign Nation
• Clubs such as sports clubs and social clubs
• Where resident buyer utilises such purchase for the purposes of manufacturing, processing or producing articles or things or for the purposes of generation of power (not for trading) and gives this declaration in writing in duplicate.

Example of TCS calculation

If a buyer purchases a car from a showroom that is valued at Rs.11 lakh then an amount of Rs.11,000 is the TCS deposited by the showroom. So, the total amount to be collected from the buyer is Rs.11,11,000 (11,00,000+ 11,000).

The customer was issued an invoice for Rs. 12,000, on which 1% TCS was charged and collected at Rs.120. So, the total payable by the customer is Rs.12,120 (12,000+120).

TCS Payments & Returns

• All sums collected by an office of the Government should be deposited on the same day of collection.
• The seller deposits the TCS amount in Challan 281 within 7 days from the last day of the month in which the tax was collected (monthly).
• If the tax collector responsible for collecting the tax and depositing the same with the government does not collect the tax or, after collecting, doesn’t pay it to the government as per the above due dates, then he will be liable to pay interest on 1% per month or part of the month.
• Every tax collector must submit a quarterly TCS return, Form 27EQ, for the tax collected in a particular quarter. The interest on delay in payment of TCS to the government should be paid before filing the return.

TCS Certificate

• When a tax collector files his quarterly TCS return,  Form 27EQ, he has to provide a TCS certificate to the purchaser of the goods.
• Form 27D is the certificate issued for TCS returns filed. This certificate contains the following details:
  • Name of the Seller and Buyer
  • TAN of the seller i.e. who is filing the TCS return quarterly
  • PAN of both seller and buyer
  • Total tax collected by the seller
  • Date of collection
  • The rate of Tax applied
• This certificate has to be issued within 15 days from the date of filing TCS quarterly returns. All the TCS due dates are summarised in the below table:

In case you are still confused about filing TCS returns, feel free to consult the tax experts at ClearTax.

TCS Exemptions

Tax collection at the source is exempted in the following cases:

• When the eligible goods are used for personal consumption
• The purchaser buys the goods for manufacturing, processing or production and not for the purpose of trading those goods.

TCS Provision under GST for E-commerce Sales

• Any dealer or trader selling goods online on the e-commerce platform would get the payment from the online platform after deducting an amount tax @ 1 % under the IGST Act. (0.5% in CGST & 0.5% in SGST)
• The tax would have to be deposited to the government by the 10th of the next month.
• All the dealers/traders are required to get registered under GST compulsorily.
• These provisions are effective from 1 October 2018. Example: Mr Raj (seller) is a trader who sells clothes online on Flipkart (e-commerce operator). He receives an order for Rs.10,000, inclusive of commission. Flipkart would thus deduct tax for Rs.100 (1% of Rs.10,000).

TCS Provision in Foreign Remittance Transactions

When people move money abroad for remittances, travel expenditures, asset purchases, shopping, and investments, they are subject to a tax known as TCS, or Tax Collected at Source. Such transfers are made possible under the LRS (Liberalised Remittance Scheme). The TCS rate for the majority of remittances (apart from those for medical and educational expenses) increased from 5% to 20% in the 2023 Union Budget. This modification aims to increase tax income and promote domestic spending. While education and medical remittances remain at 5% for sums over 7 lakhs, the new 20% TCS rate will be in force as of 1 October 2023. When submitting income tax returns, taxpayers can claim TCS deductions as refunds or credits, which can be used to reduce their tax obligations. Effectively handling tax liabilities in cross-border transactions requires a thorough understanding of TCS.

Example: For instance, you decide to remit  5 Lakhs for US stock market investments. TCS on the remitted amount would be 1,00,000. Say, your total tax liability for the financial year or advance tax dues stand at 3,00,000. You can use the TCS amount to lower your outstanding tax liabilities. Thus, your new tax liability would now be 2,00,000.

Submission of Form 24G

In the case of an office of the Government, where tax has been paid to the credit of the Central Government without the production of a challan associated with the deposit of the tax in a bank, below are the changes to the rules, Form 24G has to be submitted:

Rules where TDS is Deposited without Challan (changes to Rule 30)

• If TDS has been deposited without a challan, the person to whom TDS has been reported for depositing to the government – such a person has to submit a statement in Form 24G to the agency authorised by the Principal Director of income tax (systems). [Rule 30(4)]
• Such Form 24G must be submitted and issued within 15 days from the end of the relevant month. For the month of March, the form should be submitted by 30th April 2019
• Form 24G must be submitted (a) electronically under digital signature (b) electronically along with verification in Form 27A (c) or verified through an electronic process as prescribed
• A person referred to in bullet 1 shall inform the Book Identification number generated to each of the deductors for whom the sum deducted has been deposited.
• The Principal Director General of Income Tax (Systems) shall specify the procedure for furnishing and verification of statement Form 24G.

Rules where TCS Under Section 206C is Deposited without Challan (changes to Rule 37CA)

• If TCS has been deposited without a challan, the person to whom the collector has reported the TCS for depositing to the government – such a person will submit Form 24G to the agency authorised by the Principal Director of income tax (systems).
• Such Form 24G must be submitted within 15 days from the end of the relevant month.
• If Form 24G pertains to March, it must be submitted on or before 30 April.
• Form 24G must be issued:
  • Electronically under digital signature
  • Electronically along with verification in Form 27A or
  • Verified through an electronic process as prescribed
• A person referred to in bullet 1 shall inform the Book Identification number generated to each of the deductors for whom the sum deducted has been deposited.
• The Principal Director General of Income Tax (Systems) shall specify the procedure for furnishing and verification of statement Form 24G.

Interest Chargeable on Non-remittances of TCS to Government

If a tax collector fails to collect the tax or neglects to remit it to the government within the specified due dates, they will be subject to an interest charge of 1% per month or part thereof.

Penalty for Incorrect Filing of the TCS Return

According to Section 271H, a penalty may be imposed if the tax collector submits an erroneous TCS return. A minimum penalty of Rs.10,000 and a maximum penalty of Rs. 1,00,000 may be levied.

Differences between TCS and TDS

The differences between TCS and TDS are given below:

• TDS stands for Tax Deducted at Source, which refers to the tax withheld from various payments made by a company to an employee. TDS deductions are governed by the Income Tax Act of 1961. On the other hand, TCS, or Tax Collected at Source, is collected by the seller from the buyer at the time of sale of certain specified goods.
• TCS applies to the sale of specific items such as scrap, wood, tendu leaves, minerals, etc., whereas TDS is deducted from various sources, including wages, interest, dividends, leases, professional fees, brokerage, commission, etc.
• TDS is deducted when payments reach a certain threshold, whereas TCS is applied regardless of the payment amount. TCS is collected at a fixed rate depending on the type of product being sold.