Difference Between TDS and TCS

Last Updated: 22 Mar 2024

The government collects taxes in the form of income tax, direct taxes and indirect taxes. Direct taxes are paid to the government directly from the individual earning money. On the other hand, indirect taxes are the seller’s responsibility to deposit with the government.

Tax Deducted at Source (TDS), and Tax Collected at Source (TCS) are two examples of indirect taxes levied by the government. People might use these terms interchangeably. However, here’s the difference between TDS and TCS.

What is TDS?

Tax Deducted at Source or TDS is an indirect type of tax, where revenue collection is done directly at the point of the recipient’s income. TDS uses the notion of ‘pay as you earn’ and ‘collect when it is earned’.

According to the Income Tax Act, any payment under the ambit of TDS is to be paid after the deduction of a specific percentage. As per Section 194Q, a company or an individual must deduct tax at the source of the payment is over 50 lacs for the purchase of goods and services. This can include expenses like legal fees, technical services, rent etc.

In a TDS transaction, the company or the individual deducting TDS is called the deductor, while the person receiving the payment is called the deductee. With the TDS system in place, the tax on income gets charged in advance rather than in the future, with the recipient receiving tax deducted income directly.

What is TCS?

Tax Collected at Source, or TCS is the tax imposed on goods by the sellers that are collected from the buyers at the time of sale. This tax collected is then transferred from the seller to the government.

The items on which TCS can be levied are listed in Section 206C of the Income Tax Act, 1961. Some of these items include timber wood, liquor, minerals like lignite and coal, parking lots, toll plazas etc. The limit for TCS on the sale of goods is Rs. 50 lacs.

Example of TDS and TCS

Let’s understand the differences between the two with the help of an example:

Suppose, you are an employee at a company where your salary is Rs. 20,000. At the time of payment of your salary, the company will deduct a prescribed percentage from your salary in the form of TDS. Let’s say the TDS applicable is 5%. You will, hence, receive Rs. 19,000, and your tax deducted at the source will be Rs. 1000.

Now, suppose you want to purchase timber from a timber trader for Rs. 50,000. But you will pay him a total amount of Rs. 52,000 (50,000 + 5% of 50,000). The surplus Rs. 2,500 is the TCS you will pay to the timber trader. While filing your ITR, you can claim a credit of Rs. 2,500 for the total tax liability. This is known as TCS credit.

Difference Between TDS and TCS

Both TDS and TCS are levied at the point of origin of the payment. However, there are a few significant features that distinguish the two types of taxes:

• Meaning

  TDS is the tax deducted at the source itself by any individual or company making a payment if the amount exceeds a prescribed threshold. On the other hand, TCS is the tax collected by the seller from the buyer, at the time of the sale.

• Transactions Covered

  TDS covers expenses such as interest, salaries, brokerage, commission, rent etc. whereas TDS is applicable on the sale of items such as timber, minerals, liquor, toll plazas.

• Limits

  As per Section 194Q, TDS is applicable on the purchase of goods, given that the amount exceeds Rs. 50 lacs. As per Section 206C (1H), TCS is applicable on the sale of goods, given that the amount exceeds Rs. 50 lacs.

• Rates

  The tax deduction rate for TDS, i.e. for the purchase of goods and services, is 0.1% of the sum exceeding Rs. 50 lacs. The tax collection rate for TCS, i.e. for the sale of goods, is 0.1% of the sale sum exceeding Rs. 50 lacs.

• Time of Deduction/Collection

  While TDS is deducted when a payment is made, TCS is collected by the seller at the time of sale.

• Person Responsible

  TDS is deducted by the individual or the company making a payment, while TCS is collected by the individual or the company selling the goods.

• Due Dates

  The due date to deposit TDS is the 7th of every month. On the other hand, TCS is deposited within ten days from the end of the month to the credit of the government.

Failure to Deposit TDS or TCS with the Government

The deductor or the collector of the taxes will have to face legal consequences if they fail to pay TDS or TCS on time or to correctly file their TDS or TCS under Section 271H. They can also be fined a minimum of Rs. 10,000 and a maximum of Rs. 1,00,000 as a failure to deposit the taxes.

Moreover, Section 201(1A) of the Income Tax Act makes it mandatory to pay an interest of 1.5% per month in case of non-deduction of TDS or late TDS payments from the date on which tax was deductible. For TCS calculation, the rate of interest levied remains stable at 1%. Additionally, the individual may also be imprisoned for three to seven years.

It is vital for an individual or a company to fulfil their tax obligations on time. If TDS has been deducted from your salary, you can get it refunded, provided you file your returns on time. On the other hand, if you have collected TCS, you should make sure that the collected TCS is deposited with the correct authorities.

As an individual, you can also save taxes through life insurance, mutual funds and other tax-saving instruments.

Frequently Asked Questions

What happens when you fail to collect or deposit tax?

If an individual fails to collect or deposit tax, he can face various legal consequences, including a fine of up to Rs. 1,00,000 and 3-7 years imprisonment.

Is TCS refundable?

TCS can be refunded to the buyer of the goods at the time of payment of taxes computed as per the income tax act of the buyer. The Credit claimed by the buyer is also required to be disclosed in the income tax return.

Are TDS and TCS applicable on the same transaction?

No, TCS is not applicable if the buyer is liable not be applicable if the buyer is liable to deduct TDS on the same transaction.