Direct Tax Laws & International Taxation · Deduction, Collection and Recovery of Tax

TDS and TCS Framework under the Income-tax Act, 2025

Updated 5 October 2026 · Fact-checked

TDS is tax the payer deducts from certain payments before paying the payee. TCS is tax a seller collects from the buyer on specified sales. Section 390 sets the scheme. To solve a question, test the nature of payment, payer, payee, threshold, time of deduction, rate, PAN and deposit date.

Understand TDS and TCS Framework under Income-tax Act, 2025

Tax at source is a pay-as-you-earn system. The government does not wait for the tax year to end. It makes the person who pays (or sells) collect the tax first and pay it to the government. This brings in revenue early and makes evasion harder.

TDS (tax deducted at source) works on the payer. When you pay a specified sum such as salary, interest, rent, professional fees or contract payments, you deduct tax and pay only the net amount. The payee later claims credit for this tax against his own tax liability.

TCS (tax collected at source) works on the seller or receiver of money. When you sell specified goods or provide specified services, you collect tax over and above the price from the buyer. The buyer gets credit for it.

Section 390 is the entry point. It states that the specified persons must deduct or collect tax at the rates and on the payments set out in the Act's rate tables, and that the amount must be paid to the government. The rate tables name the payment, the person who must deduct or collect, the threshold, and the rate. Rates, thresholds and exact conditions are examined as given in the Finance Act, 2026 position, so always use what the question states or the latest rate table.

Treat every question as a chain: Is this payment covered? Who is the deductor? Is the threshold crossed? When did the duty arise? What is the rate? Was tax deposited on time? If you follow this chain, even unfamiliar cases become routine. Failure at any link leads to the consequences: interest, a disallowance of the expense, a penalty, or treating the person as an assessee in default.

Key rules to remember

Time of deduction (general rule): Deduct at the EARLIER of: credit to the payee's account (or suspense account) OR actual payment; Applies to most payments to residents, but the specific rate-table entry can fix a different time, so check the entry. Salary is different: deduct when salary is paid. Always check whether the question says 'credited' or 'paid'.
Time of collection (TCS): Collect at the time of receipt of the amount or debit to the buyer's account, as the rate table provides; Check the nature of the specific item. Read the wording of the transaction in the question.
Net payment to payee: Net payment = Gross amount − TDS; TDS is a deduction from the payment. TCS is an addition: Buyer pays price + TCS.
Deposit due date (general rule): For TDS and TCS alike: by 7th of the month following the month in which tax was actually deducted or collected; for tax deducted or collected in March, by 30th April; The due date follows the month of actual deduction or collection, not the month in which the tax was first deductible. Where a government deductor pays the tax without a challan (by book adjustment), it deposits on the same day. Some specific TDS entries carry a 30-day deadline instead of the 7th-of-next-month rule. These are tax deducted on rent by specified individuals or HUFs, and on transfer of certain immovable property (and similar specified entries). For these, the tax is deposited within 30 days from the end of the month of deduction. The 30-day deadline is a feature of those specific entries only. TCS follows the 7th / 30 April rule. Confirm the deadline for the entry against the Rules for the year.
Interest on late deduction: 1% per month or part of month × tax, from date it was deductible to date of deduction; Part of a month counts as a full month. This interest is not an allowable expense.
Interest on late deposit: 1.5% per month or part of month × tax, from date of deduction to date of deposit; Part of a month counts as a full month. This interest is not an allowable expense.
Higher rate on no PAN: Where the payee has not furnished PAN, deduct at the highest of: (a) the rate specified in the relevant provision, (b) the rate in force, or (c) 20%; This is the general rule. A few specific entries have a different floor, and TCS has its own higher-rate rule. Any such lower floor (such as 5%) applies only to those specific entries, not generally, so check the rate table for the entry. Use the question's stated rate if provided. Do not apply this where the question confirms PAN is furnished.

How to solve TDS and TCS Framework under Income-tax Act, 2025 questions

Use this sequence for any TDS or TCS question. Write each step as a short heading in your answer so the examiner sees the provision, facts and conclusion.

1Identify the nature of the payment or sale (salary, interest, rent, fees, contract, specified goods) and match it with the rate table entry.
2Identify the payer or seller and check whether he is a person obliged to deduct or collect. Check for exceptions such as individuals or HUFs not under tax audit in certain cases.
3Check the payee: resident or non-resident, and whether PAN is furnished. Non-resident payments follow a separate framework.
4Test the threshold. The duty arises only if the single payment or aggregate in the year crosses the limit specified for that entry.
5Fix the time of deduction: earlier of credit or payment. Mark the date on a timeline.
6Apply the rate. Use the question's rate or the table rate. Use the higher rate if PAN is missing, and the lower rate if a valid lower deduction certificate is produced.
7Compute TDS on the correct base (usually the gross amount excluding GST if shown separately in the invoice and the question says so). Compute the net payment.
8State the deposit date and compute interest or consequences for any delay or default, then conclude.

Quickest way: Five-line timeline method

When to use it: Use this for case-scenario MCQs and for long scenario questions where several dates and amounts are given.

Underline the payment type and the word 'credited' or 'paid'.
Draw a line with three dates: credit date, payment date, deposit date.
Mark the earlier of credit and payment as the deduction date.
Compute TDS = base × rate and note the deposit due date (7th of next month, or 30 April for March).
Count months for interest: deduction late = 1% per month or part; deposit late = 1.5% per month or part.

Common mistakes in TDS and TCS Framework under Income-tax Act, 2025

Deducting tax only when payment is made, even though the amount was credited earlier.
Students link TDS with cash payment, as is the case in salary.
Fix: For non-salary payments, use the earlier of credit or payment. Credit to a suspense or provision account also counts.
Mixing up TDS and TCS: adding TDS to the price or deducting TCS from it.
Both are called 'at source' and appear in the same table.
Fix: TDS reduces the payment. TCS increases the amount the buyer pays. The payer deducts; the seller collects.
Charging interest of 1.5% on late deduction and 1% on late deposit.
The two rates are easy to swap.
Fix: Remember the order: Deduction late = 1% (smaller), Deposit late = 1.5% (larger). Count part of a month as a full month.
Ignoring thresholds and deducting tax on every small payment.
Students recall rates but forget the exemption limits in each entry.
Fix: Before computing, check whether the single or aggregate payment crosses the threshold. If it does not, no deduction arises (unless the question states otherwise).
Forgetting the higher rate when PAN is not furnished or the lower rate when a certificate is held.
Facts about PAN and certificates are buried in the scenario.
Fix: Scan every scenario for 'PAN', 'certificate' and 'lower deduction' before applying a rate.
Quoting section numbers or rates from the old 1961 Act, or using 'assessment year'.
Old notes are still in circulation.
Fix: Use the Income-tax Act, 2025 and 'tax year'. If you are unsure of a section number, name the provision in words and give the rule.

Worked examples

Example 1

M/s Alpha Ltd. (a company) credits ₹8,00,000 to a contractor's account on 20 February for work done. It pays the amount on 10 April. Assume the payment is above the threshold, the contractor furnished PAN, and the applicable rate is 1%. Alpha deducted the tax on 10 April, when it made the payment, and deposited it on 25 April. Examine the TDS position and compute the interest.

Show the solution

Nature: contract payment to a resident. The payer is a company, so it must deduct.
Time of deduction: earlier of credit (20 February) and payment (10 April) = 20 February. Tax was deductible on 20 February.
TDS = ₹8,00,000 × 1% = ₹8,000.
Tax was actually deducted on 10 April, so the deduction was late.
Interest on late deduction runs from 20 February to 10 April = 1 month 21 days, counted as 2 months (part of month counted). Interest at 1% per month = ₹8,000 × 1% × 2 = ₹160.
Deposit due date follows the month in which tax was actually deducted. Tax was deducted on 10 April, so the due date is 7 May. Deposit on 25 April is on time, so there is no interest on late deposit.
The ₹160 interest on late deduction is not an allowable expense.
Conclusion: Alpha defaulted in the time of deduction, though the deposit was prompt.

Answer: TDS is ₹8,000. Tax was deducted late, on 10 April instead of 20 February. Interest on late deduction is ₹160 (2 months), and it is not deductible as an expense. No interest on late deposit arises, because the deposit on 25 April was made before the 7 May due date for April deduction.

Example 2

Beta Ltd. credits professional fees of ₹5,00,000 to a chartered engineer (resident, PAN furnished) on 10 June. It pays him on 10 August after deducting TDS at 10% (assume threshold crossed). It deposits the tax on 5 September. Compute the interest payable by Beta and explain the consequence.

Show the solution

TDS = ₹5,00,000 × 10% = ₹50,000.
Tax was deductible on 10 June (credit date), but was deducted on 10 August. Delay = 2 months exactly = 2 months.
Interest on late deduction = ₹50,000 × 1% × 2 = ₹1,000.
Tax was deducted on 10 August. Due date for deposit is 7 September. The deposit on 5 September is on time, so no interest on late deposit.
Therefore total interest = ₹1,000. The interest is not an allowable expense, and the late deduction can also invite further consequences under the Act.
Net payment actually made to the payee = ₹5,00,000 − ₹50,000 = ₹4,50,000.

Answer: Interest payable is ₹1,000 only (late deduction). Late deposit interest is nil because the deposit was made before 7 September.

Exam tips

Write a one-line provision statement first: 'Section 390 requires the specified person to deduct tax at source on this payment'. Then facts, then conclusion. This is the form examiners reward.
In MCQs, check dates first. Most wrong answers come from using payment date instead of credit date.
Always count 'month or part of month'. Write the number of months explicitly in your working.
Do not quote rates or thresholds from memory if the question gives them. Use the figures stated in the question, and state your assumptions when they are not given.
Link TDS to its consequences: interest, penalty, disallowance of expense and assessee-in-default. Many questions ask for these in the second part.

Practice questions from Deduction, Collection and Recovery of Tax

TDS and TCS Framework under Income-tax Act, 2025 in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

TDS and TCS Framework under Income-tax Act, 2025: frequently asked questions

What is the difference between TDS and TCS?

TDS is deducted by the payer from a payment made to the payee, so the payee receives less. TCS is collected by the seller from the buyer on specified sales, so the buyer pays more. In both cases the tax is deposited with the government and the other party claims credit.

What does section 390 of the Income-tax Act, 2025 deal with?

It sets the scheme for deduction or collection of tax at source. It names the persons who must deduct or collect and the payments covered, and it works along with the rate tables. Use it as the starting provision in your answer and then apply the specific entry.

When must tax be deducted on a payment to a resident?

For most non-salary payments, at the earlier of credit to the payee's account or actual payment. Salary is deducted when it is paid. The duty arises only if the threshold for that payment is crossed.

What happens if TDS is not deducted or not deposited?

Interest is payable for late deduction and late deposit. Where tax is not deducted, or is deducted but not deposited within the time the Act allows, 30% of the related expense is disallowed in computing business income. The disallowed part is allowed in the tax year in which the tax is deposited. A penalty can also be levied, and the person can be treated as an assessee in default.