What Is TCS Tax?

The Indian Income Tax Act contains several provisions aimed at ensuring efficient tax compliance, one of which is Tax Collected at Source (TCS). This provision requires certain sellers to collect tax at a prescribed rate from the buyer at the point of sale for specific goods or services.

In this article, taxpayers will understand what is the TCS tax, how it works, the rates for different types of goods, applicability, and more. 

What Is Tax Collected at Source?

What TCS means in tax is the amount levied by the seller on the invoice for specific goods sold and paid by the customer directly at the time of purchase. This amount is submitted to the government as part of the seller’s tax obligations. This provision is covered under Section 206C of the Income Tax Act, 1961. Government collection of taxes at the moment of revenue generation and improved compliance are the main goals of the TCS framework.

This is one of the most significant tax measures that aims to broaden the tax base, reduce tax evasion, and improve compliance by monitoring high-value transactions at the point of sale. It serves as a preventive precaution, requiring entities involved in major or specialised purchases to stay within the tax system. 

The government also improves liquidity in tax inflows and facilitates auditing and monitoring by collecting the tax at the source. Hence, tax collected at the source is considered one of the key pillars of India’s tax collection system. This is especially true for cash-intensive industries or those with under-reported revenue.

How Does TCS Work?

TCS can be described as a system where the seller takes a small percentage of tax from the purchaser in addition to the amount of sale price. This tax is further deposited with the government. 

Let’s understand with an example: Suppose a seller sells scrap amounting to ₹1,00,000, and the rate of TCS, which is applicable on this sale, is 1%, then the seller will charge TCS of ₹1,000 from the purchaser. The payment by the buyer would be a total of ₹1,01,000. Then, the seller would have to pay ₹1,000 to the government and should file TCS returns. 

Type of Good and Rate of TCS

The percentage of tax collected at source isn’t fixed; it changes based on the type of goods being sold. Each category has its own applicable rate. The Income Tax Department provides a detailed list of goods along with their respective TCS rates. Some most common examples are provided in the following table:

TCS Applicability

To understand when and how TCS applies, it is important to know who qualifies as a seller or buyer under these provisions. Here’s a breakdown of the entities involved:

Classification of Sellers for TCS

Under the Income Tax Act, only specific categories of sellers are authorised to collect Tax Collected at Source (TCS). These sellers are legally responsible for collecting tax from buyers at the time of the transaction. The law clearly defines who these collectors can be, ensuring that TCS is only gathered by eligible vendors. Below is a list of entities permitted to collect TCS:

• Central or State Governments
• Local authorities
• Statutory corporations or government authorities
• Companies, firms, and cooperative societies
• Any individual or Hindu Undivided Family (HUF) whose accounts are required to be audited under the Income Tax Act for a specific financial year.

Classification of Buyers for TCS

A buyer is any person or entity that, in the course of purchasing goods, pays or acquires the right to receive goods, whether in a sale or by auction, tender, etc. Most buyers pay TCS to the seller, but certain entities do not pay TCS, including:

• Central and State Governments
• Embassies and High Commissions
• Consulates and other trade representations of foreign nations
• Public sector enterprises
• Sports clubs and registered social clubs
• Buyers who purchase goods exclusively for manufacturing, processing, or power generation, not for trading.

Buyers who have an aggregate total income that is below the taxable limit can claim the TCS amount as a refund when they file their income tax return.

Goods Covered Under TCS

A list of several goods covered under tax collected at source is mentioned below:

• Alcoholic liquor for human consumption
• Forest produce, including timber, Tendu leaves, and others
• Scrap
• Minerals, including coal, lignite, iron ore, and others
• Motor vehicle (above ₹10 lakh)
• Jewellery, bullion (in some cases)
• Overseas tour packages
• Remittance under LRS

Penalty of TCS

Earlier, if an individual failed to deposit the Tax Collected at Source (TCS) within the prescribed time, they were subject to severe consequences under the law. This included punishment in the form of imprisonment, which could range from three months to seven years, along with fines. However, under Budget 2025, this rule has been amended. Now, if the outstanding TCS is deposited within the specified period, no statutory action will be taken.

Similarly, under the previous law, individuals who had not submitted their Income Tax Returns (ITR) were liable to have TDS (Tax Deducted at Source) and TCS deducted at higher rates. This often placed an undue burden on common taxpayers and small business owners. In Budget 2025, it has been proposed to eliminate this provision altogether, thereby relieving non-filers from unnecessarily high tax deductions

Difference Between TDS and TCS

Even though both TDS and TCS are tools for tax collection at the source of income, they function differently.

• Tax Deducted at Source (TDS) is deducted by the payee (for example, employer) while making a payment, such as salary, rent, or professional charges. After deduction, the amount is deposited with the government on the payee’s behalf. The payer is accountable for it.
• Tax Collected at Source (TCS) is collected by the seller while selling specified goods or providing certain services. An additional amount is charged from the buyer as tax, over and above the sale price. This amount must be deposited with the government. It is the seller’s responsibility to collect the tax at the time of sale and deposit it within the specified time.

Here is a table to further demonstrate the difference between TDS and TCS:

Conclusion

High-value transaction businesses and individuals must understand what is TCS tax is and how it affects them. Though it might appear complicated in the beginning, tax collected at source is of critical importance in ensuring better tax collection and transparency. With the government broadening its horizon, compliance and awareness are even more necessary.