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Difference between TDS and TCS

Mar 20, 2020 | 2 months ago | Read Time: 4 minutes | By iKnowledge Team
Difference between TDS and TCS

The Government of India collects both direct and indirect taxes to generate revenue for the country. While direct taxes apply to the income that individuals and corporate earn, indirect taxes are imposed on the sale of goods and services. Tax deposition needs to be done by the assessees directly in the former, while the sellers collect and deposit taxes in the latter case.

Tax deducted at source (TDS) and tax collected at source (TCS)are two such taxes levied on individuals that are often confused with each other.

Both of these are levied at the point of the origin of income.

Difference between TDS and TCS

The Government of India collects both direct and indirect taxes to generate revenue for the country. While direct taxes apply to the income that individuals and corporate earn, indirect taxes are imposed on the sale of goods and services. Tax deposition needs to be done by the assessees directly in the former, while the sellers collect and deposit taxes in the latter case.

Tax deducted at source (TDS) and tax collected at source (TCS)are two such taxes levied on individuals that are often confused with each other.

Both of these are levied at the point of the origin of income.

Difference between TDS and TCS

TDS vs TCS
Parameters TDS TCS
Definition Tax deducted on payments made by companies and individuals if the payment exceeds a threshold. Tax collected by a seller when selling goods to a buyer
What does it apply to? TDS deductions are made on payments including salary, rent, brokerage, professional fees, commission, interest etc. TCS deductions are made on the sale of goods such as scrap, timber, mineral wood, tendu leaves etc
When does it apply? On payments above a specified limit On the sale of certain goods (barring those used for manufacturing or production)
Who does it apply to? A person making a specified payment over and above a certain limit can deduct TDS according to the Income Tax Act 1961 A person selling specific goods can collect TCS according to the Income Tax Act, 1961

 

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Let us better understand the difference between TDS and TCS with examples. Suppose Mr. A works with a certain company. His employer deducts tax on his salary every month at applicable rates before making the final payment. This amount subtracted from his total salary is termed as tax deducted at source or TDS.

On the other hand, Mr. B is a timber trader who sells some of his timber to Mr. C. On selling his goods, Mr. B collects a 5% tax when making the sale. This amount collected as tax by Mr. B from his customer Mr. C is termed as tax collected at source or TCS.

Now that we know the difference between TDS and TCS, let us take a look at the rates for both, TDS and TCS. The rates for TDS differ as per the different types of payments made, while the rates for TCS differ as per the different types of goods sold.

Here is an illustration for better understanding:

Type of payment TDS rate
Salary As per applicable income tax slab
Lottery, crossword puzzle or horse race winnings above ₹10,000 30%
Single payment worth ₹30,000 or aggregate payment of ₹1 lakh to a contractor 1% for individual or HUF, 2% for others
Lottery ticket sale commission or brokerage charges above ₹15,000 5%
Rent above ₹2,40,000 paid for land, building, plant or machinery 10% for land and building, 2% for plant and machinery
Purchase of immovable property above ₹50 lakhs 1%
 Types of goods TCS rate
Alcohol or liquor 1%
Timber wood under a leased forest 2.5%
Tendu leaves 5%
Forest produce excluding tendu leaves and timber 2.5%
Scrap 1%
Metals including lignite, coal, iron ore 1%
Purchase of motor vehicle above ₹10 lakh 1%
Mine, quarry, parking lot, toll plaza 2%

Additionally, anyone operating the e-commerce space needs to collect tax on the net transaction value from the supplier providing goods to them. This rule is applicable since October 1, 2018.  Tax collected at source applies at the rate of 1%.

Failure to deposit TDS or TCS with the government

If an individual fails to deposit or collect tax, he or she would have to face certain legal consequences. This includes a penalty equal to tax not collected or deducted. The individual may also be imprisoned for 3 to 7 years along with a fine as applicable.

An interest may also be levied, in the event of failure to deposit TDS or TCS. The interest needs to be paid on the monthly tax amount which was eligible for deductions. The interest is calculated for every month from the date tax was eligible for deductions to the date it is finally deducted (1%) or paid (1.5%) to the government in the case of tax deducted at source. For TCS, the rate of interest remains at 1%.

Conclusion

Thus, it is important that one fulfills their tax obligations in a timely manner. The tax burden for individuals can be reduced by investments in select financial instruments like life insurance. It is important to invest in plans that can not only provide financial security, reduce future risk but also provide tax benefits. For instance, the term plan from Aegon Life can provide tax benefits on the premiums paid towards the policy, while also ensuring financial protection for your loved ones.

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