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Income Tax Basics: Understanding the Difference Between TDS and TCS

  •  3 min read
  • 0•
  • 03 Oct 2024
Income Tax Basics: Understanding the Difference Between TDS and TCS

While presenting the Union Budget 2024, Finance Minister Nirmala Sitharaman announced the formation of a group to review the Income Tax Act 1961 to make it clearer and more understandable.

This blog aims to simplify two essential concepts of income tax: tax deducted at source (TDS) and tax collected at source (TCS). Individuals often mix these up and use them interchangeably, which isn’t correct. Read on to learn the key differences between TDS and TCS.

TDS and TCS are essential taxes levied by the Government of India and form a vital cog in the wheel of tax collection. Simply put, they are methods through which the government collects taxes from the income of businesses and individuals.

The table captures TDS and TCS differences on various parameters:

Parameters TDS TCS
Meaning
TDS involves income payer deducting tax from payment and paying it to the government on the payee's behalf
It’s a system where seller of goods collects tax from buyer and remits it to the government
Transactions covered
Applicable for a wide range of payments, including salaries, interest, professional fees, brokerage, commissions, and rent, among others
Applicable for a limited number of goods and services such as minerals, precious metals, and e-commerce transactions, among others
Deduction time
When payment is made or due date, whichever is earlier
At the time of sale
Person responsible
Individual or company which makes payment
Individual or business selling goods and service

Now that you know the differences between TDS and TCS, let’s see their rates applicable. TDS rates for some types of payments are as follows:

Payment made TDS rates
Salaries
As per the individuals tax slab
Rental charges more than ₹ 2.4 lakhs for machinery, land, plant, building, etc
10% for land and building and 2% for plant and machinery
Purchase of immovable property of more than ₹ 50 lakhs
1%
Prize money of more than ₹ 10,000 for horse race, crossword, etc
30%
Goods TCS rates
Tendu leaves
5%
Motor vehicles costing more than ₹ 10 lakhs
1%
Metals
1%
Forest produce barring timber and tendu leaves
2.5%

TDS and TCS are imposed to:

  • Thwart tax evasion
  • Streamline the tax collection process

In TDS, as the income payer remits tax to the government on the payee's behalf, it results in upfront tax payments. This ensures that the government promptly receives its revenues. On the other hand, in the case of TCS as the seller of goods and services collects tax from the buyer and transfers it to the government, it simplifies tax collection by reducing the number of taxpayers who are obligated to file returns.

Wrapping it up

While TDS and TCS are ways for the government to collect taxes, the difference primarily lies in the tax collection mechanism. Whether you are running a business or are an individual, it is crucial to know the differences between TDS and TCS and stay updated about their recent regulations to avoid penalties.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.

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