Difference Between TDS and TCS with Example

Taxes aren’t just about filing returns once a year. They are an important part of every financial transaction, big or small. Among the many tax mechanisms in India, TDS and TCS are unknown to some taxpayers. These terms are associated with collecting tax upfront and serve different purposes.

So, what is the difference between TDS and TCS? Well, we will explore all this in detail here. Starting from what are TDS and TCS to their difference, let us understand everything.

What is TCS? 

TCS is known as the Tax Collected at Source. It is a tax that the seller collects from the buyer during the sale of certain goods and then remits to the government. The Income Tax Act of 1961 contains all the TCS regulations. Section 206C of the Income Tax Act lists the goods on which TCS must be collected.

As per the TCS, the following is the division of the buyers and sellers.

Sellers As Per TCS

• Central Government

• State Government

• Local Authority

• Statutory Corporation or Authority

• Companies registered under the Companies Act

• Partnership Firms

• Co-operative Societies

• Individuals or HUF undergoing an audit under the Income Tax Act.

Buyers As Per TCS

The buyer is one who gets the products by the means of selling. There are certain people or categories which is not considered as the buyer under the TCS. 

Buyers exempt for TCS are:

• Public Sector Companies

• Central and State Government

• Embassies and High Commissions

• Consulates and Trade Representatives of Foreign Nations

• Sports Clubs and Social Clubs

• Buyers using goods for manufacturing or processing (not for trading) with a written declaration.

The main aim of the TCS is to help the government track high-value transactions to collect taxes early and avoid evasion. 

Key Features of TCS

Before we explore the TCS vs TDS concept, it is important to understand the key features of both. So, let us start with the key features of the TCS here.

• Collection at Source: The most defining feature of TCS is that the seller collects the tax from the buyer at the point of sale, rather than the buyer paying it directly to the government later. This shifts the responsibility of initial tax collection to the seller.

• Specific Goods Coverage: TCS doesn't apply to all transactions. It's specifically defined for certain goods like timber, scrap, minerals, alcoholic beverages, and motor vehicles above a certain value. This targeted approach allows the government to monitor particular sectors or types of transactions.

• Credit for Buyers: Buyers who pay TCS can claim credit for the TCS amount when they file their income tax returns. This prevents double taxation and ensures fairness in the overall tax system. The TCS paid acts as a pre-payment of their income tax liability.

• Seller's Responsibility: Sellers are legally obligated to collect, deposit, and report the TCS to the government within specified timelines. Failure to comply can result in penalties. They must also provide TCS certificates to the buyers.

• Revenue Tracking: TCS serves as a mechanism for the government to track high-value transactions and get an early revenue stream. It prevents tax evasion by bringing transactions into the formal tax system that might otherwise go unreported.

TCS Rate Chart for FY 2024-25 

Understanding TCS alone is insufficient; you must also know the applicable tax rates and the products they relate to. The table below provides these details for FY 2024-25.

Application of TCS 

Let us understand the application of TCS with the help of an example:

Mr Sharma runs a timber business and sells timber to Mr Verma. The total value of the timber sold is ?60,00,000, and the applicable TCS rate for timber is 2.5%.

In this case, the transaction will be valued at ?61,50,000, including the TCS rate. To understand this better, here is a quick calculation for you:

TCS Amount = Value of Timber Sold × TCS Rate = ?60,00,000 × 0.025 = ?1,50,000

Total Amount Paid = Value of Timber Sold + TCS Amount

Total Amount Paid = ?60,00,000 + ?1,50,000 = ?61,50,000

So, this will be the amount that Mr Verma will pay. 

Now, upon paying, the process will be like below:

• Mr Sharma collects ?1,50,000 as TCS from Mr Verma at the time of sale.

• Mr Sharma is responsible for depositing this ?1,50,000 with the government within the prescribed time frame.

• After depositing the TCS amount, Mr Sharma issues a TCS certificate to Mr Verma as proof of tax collected.

• When filing his income tax return (ITR), Mr Verma can claim credit for the ?1,50,000 TCS paid.

This means that Mr Verma can reduce his overall tax liability by the amount of TCS collected. Through this overall process, tax authorities can deter tax evasion as TCS creates records of high-value transactions. This will, in turn, encourage individuals/businesses to file income tax returns to claim TCS against their tax liabilities.

Compliance and  Filing Requirements for TCS

The TCS collected by the government offices must diligently be deposited on the same day as it is collected. Other sellers/collectors must deposit TCS amounts using Challan 281 during the dates specified in the table below

Following the deposits, sellers must file quarterly TCS returns using Form 27EQ. These returns must reflect all taxes collected during the quarter. Thereafter, the sellers are required to issue a TCS certificate to the buyers using Form 27D.

The due dates for TCS payments, submissions of Form 27EQ, and issuance of Form 27D are specified in the table below:

What is TDS? 

TDS stands for Tax Deducted at Source. It is used to collect taxes at the point where income is generated. It involves the payer deducting the tax while making payment to the receiver and then sharing this tax to the government. This system applies to various types of income, including salaries, interest on fixed deposits, rent, and professional fees. 

Key Features of TDS

Knowing the difference between TCS and TDS is important to understanding each. Here, let us explore some of the key features of TDS based on its applicability:

• Collection at the Source of Income: TDS is a mechanism where tax is collected directly at the point where income is generated. This ensures that the government receives tax revenue upfront on various income streams, such as salaries, rent, interest, and commissions. This process helps in tracking and managing tax liabilities effectively.

• Withholding Tax Obligation: TDS acts as a withholding tax, where the payer (deductor) is responsible for deducting tax before making payments to the payee (deductee). The deductor then remits this deducted amount to the government. The deductor is responsible for deducting TDS irrespective of the mode of payment.

• Threshold-Based Applicability: TDS is applicable only when payments exceed a specified threshold limit. This threshold varies based on the nature of the payment and the relevant section of the Income Tax Act. For instance, different limits apply to interest income, rent payments, and professional fees.

• Credit for Deductee: The payee (deductee) can claim credit for the TDS amount when filing their income tax return. The deductee can furnish a TDS certificate (Form 16A) or Form 26AS when filing income tax returns to get credit for the deducted tax. The TDS amount appears in Form 26AS, which can be used to reconcile the tax credit.

• Prevention of Tax Evasion and Transparency: TDS aids in preventing tax evasion by ensuring that tax is collected at the source of income generation. This helps the government monitor financial transactions and reduce the chances of individuals or businesses hiding income. TDS ensures transparency between the Government and the citizens of the country who are paying taxes.

TDS Rates for the FY 2023-24 and FY 2024-25

Now, TDS is applied to various payments. This ensures that income tax is collected in small instalments throughout the year. Some of the common sources of income on which TDS is applied are as follows:

Please note these are just a  few of the many sections under which TDS is deducted.

Application of TDS

ABC Company hires Mr Joshi, a consultant, and pays him ?75,000 as a professional fee on August 15, 2025. Now, here are the details of the TDS to know:

• Section: 194J

• Payment Amount: ?75,000

• Threshold: ?30,000 (exceeded)

• TDS Rate: 10%

• TDS Amount: ?75,000 * 10% = ?7,500

ABC Company must deduct ?7,500 as TDS and pay ?67,500 to Mr Joshi. The company must file TDS returns (Form 26Q) quarterly, providing details of the payment and TDS deducted. Also, the company needs to issue a TDS certificate (Form 16A) to Mr Joshi.

Filing Requirements for TDS

Entities with a valid TAN and within the income tax slab must file TDS returns quarterly. Accurate details, including TAN, TDS amount, payment type, and deductee PAN are essential. 

Key steps involve collecting documents, selecting the correct form (e.g., Form 24Q, 26Q), using the TDS Return Preparation Utility (RPU), validating the return with the File Validation Utility (FVU), generating the .fvu file, and submitting it via the Income Tax Department's e-filing portal. 

Timely filing prevents penalties. Different forms are used to file TDS returns, depending on the nature of payments. These are:

TDS must be deposited by the 7th of the subsequent month as below

Difference Between TDS and TCS

Now that you know all the basic details of TDS and TCS, let us quickly explore the difference between these two. Here's a table to give you an overview of the difference between TDS and TCS. 

Conclusion

Taxes are tricky, but understanding TDS and TCS differences helps keep things in check. In fact, the TDS vs TCS boils down to one major distinction who deducts and when. While TDS gets cut straight from the earnings before they land in the recipient's hands, TCS is collected by the seller from the buyer at the point of the transaction.

Both systems serve the same bigger picture keeping tax collection structured and reducing tax evasion. However, businesses and individuals need to keep track of these deductions to avoid paying more than necessary and claim back any excess while filing returns. 

Mastering the TCS vs TDS equation helps manage tax obligations and plan finances without last-minute surprises.

FAQs 

Q. What is the main difference between TDS and TCS?

The main difference between TCS and TDS is their application. TDS is deducted by the payer when the payment is made to the receiver. The seller collects TCS from the buyer. In the end, both are remitted to the government.

Q. What happens in the case of delayed TDS/TCS payments or filings?

If there is a delay in filing the TDS or TCS, there will be a penalty. At times, you would need to pay the delay fees as well. Interest can be charged on the amount as well, and in certain cases, it can lead to legal proceedings.

Q. As an individual, when will TDS impact me?

TDS will impact you when you get income like salary, interest, rent, or dividend. The payer will deduct the TDS before paying you. 

Q. Are there any exemptions from TDS or TCS?

Yes, there are certain exemptions from TDS and TCS. For example, certain low-value payments or transactions with specified entities may be exempt from TDS. Also, TCS may not apply if the buyer declares that the goods are used for manufacturing or processing and not for trading purposes.