TDS vs TCS Understanding the Difference between TDS and TCS

Tax is a necessary yet complicated subject to comprehend. As a responsible citizen, tax planning is not only mandatory but also an important aspect of financial planning for you. Every year, you begin to evaluate your income, gather important receipts, check your investments and your tax-saver plan like term insurance plans to calculate tax payable. While doing so, you might have come across terms like TDS or TCS, which you may have struggled to understand.

The Government of India collects both direct and indirect taxes. While direct taxes apply to the income that individuals and corporate earn, indirect taxes are imposed on sale of goods and services. Tax deposition needs to be done by the assesses directly in the former, while the seller collects and deposit taxes in the latter case. Since both apply to the income source, they are confused with each other. Read on to find out the difference between TDS and TCS here:

Defining TDS and TCS

The major difference between TDS and TCS lies in their definitions.

What is TDS?

TDS is short form of tax deducted at source. It is the amount that companies and individuals deduct on payments made by them when the payments exceed a certain limit. These payments can be in the form of interest, rent, salaries, commission, professional fees etc. TDS rates are determined by factors such as income, age, and so on. The main goal of implementing this in the taxation system is to have control over tax evaders. For example, the provisions of section 194Q mandate individuals or companies to deduct TDS if the transaction value for legal fees, rent, royalty, etc., exceeds ₹50 lakhs.

The most common example of this is a salary slip. You can find the tax deducted from source, i.e., salary on it.

How Does TDS Work?

Assume you have rented the commercial space to company XYZ Ltd. In this case, the annual rent that you have set is ₹4.80 lakhs (₹40,000 monthly). Since the rent amount exceeds the threshold limit of ₹2.40 lakhs, XYZ Ltd., before transferring rent to your account, is required to deduct the TDS at the rate of 10%. It means the monthly payment you will receive in rent is ₹36,000.

When filing your income tax return (ITR), you should report your gross rent income as ₹4.8 lakhs. Then you can deduct ₹48,000, the annual TDS amount, from rental income to reduce your taxable income.

What is TCS?

TCS or tax collected at source is the amount of tax collected by the seller during the purchase of an item. Following that, the deducted amount is deposited with the tax authorities. As per the tax laws, tax collected at source is applicable only to specific items such as scrap, timber, alcohol, tendu leaves, etc. For instance, when you buy timber from a trader and they collect a specific percentage of tax from you, it is called TCS.

The provisions of the TCS are outlined in section 206C of the Income Tax Act. The section also states that if a person does not have a Tax Collection Account Number, he is not authorised to charge TCS.

In both cases, there are different people depositing these indirect taxes. While TDS is to be paid by the person making a payment, TCS is to be collected and paid by the person selling products on which it is applicable.

How Does TCS Work?

Assume you need a certain quantity of wood. You go to a wood trader named Mr Amit and buy wood worth ₹50,000. However, when you ask for the bill, Amit hands you a receipt for ₹52,500. In this case, the additional ₹2,500 is charged as TCS.

With respect to the above transaction, you can claim a credit for the TCS of ₹2,500 from your total tax liability.

Tax Rate for TDS and TCS

Now that you have understood the basic difference, let’s delve deeper into the TDS and TCS rates levied by the government. Note that these rates vary depending on the type of payment being made or product being sold. Here’s a table describing the same:

Tax Deducted at Source (TDS) - (Payment which are falling under Income Tax Chapter XVII) – Sample cases of payment type and TDS thereon enumerated below:

Tax Collected at Source (TCS)

TCS does not apply to any goods which are used for processing, manufacturing, or production. However, if you use it for trading, TCS is necessary. The table below shows the TCS rate for various goods.

Depositing TDS/TCS and Penalty

Proof of tax payment can be called for anytime. For example, it can be required while buying life insurance online. So, deduction and collection of tax at source should be a part of your tax priorities if it applies to you.

TDS should be deposited every month, typically by the 7th day of the following month in which the tax is deducted. If you fail to deduct or deposit the tax, you have to pay a penalty of 1% per month or 1.5% per month, respectively.

TCS must be paid by the 7th day of the following month in which tax is collected, failure of which can lead to a penalty of 1% on the amount of tax.

According to Section 201(1A), if the person/company responsible for deducting TDS is charged with a 1.5% interest penalty for the period beginning with the date the deduction was actually due and ending with the date on which it is deducted. A similar rate is levied for the late TDS payment.

Also, Section 271H requires the person responsible for filing returns to pay a minimum penalty of ₹10,000 and a maximum penalty of ₹1 lakh in the case of a late or incorrect TDS/TCS file.

As you can see, TDS and TCS are different in every aspect. Whether you belong to the category of tax collector or deductor, make sure you abide by the rules to prevent any unfortunate consequences.

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The income tax is levied on all earning individuals who fall under a taxable income bracket. The income tax is paid to the Government of India and is charged annually. However, there are several tax deductions and exemptions that you can claim to lower your tax liability. The Income Tax Calculator helps you ascertain your tax output for a financial year based on your taxable income. This can help you plan well and save tax using the tax-saving deductions and exemptions, if possible.