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

Understand Tax Deduction and Collection at Source (TDS/TCS)

Key rules to remember

Modes of payment of tax

Tax is payable by: (a) deduction or collection at source; (b) advance payment; (c) payment under section 392(2)(a)

Section 390(1). It applies irrespective of when assessment is made (section 390(2)).

Credit of tax deducted or collected

Tax paid to the Central Government = payment of tax on behalf of the person whose income it was deducted from (or from whom it was collected)

Section 390(5). Credit rules and the tax year of credit are made by the Board (section 390(6)).

Lower or nil deduction certificate

Payee applies; the Assessing Officer, if satisfied that total income justifies it, issues a certificate; the payer deducts at that rate, or nil, until it is valid

Section 395(1). Under section 395(6), the application may also be filed before the prescribed authority, who may issue the certificate or reject the application after electronic verification. The AO may cancel a certificate after reasonable opportunity (section 395(5)).

Lower collection certificate

Buyer, licensee or lessee applies for collection at a lower rate; the collector collects at the certificate rate until it is valid

Section 395(3). It covers a lower rate only, not nil.

Payment to a non-resident, part not chargeable

Payer applies; AO determines the proportion chargeable; tax is deducted only on that proportion

Section 395(2), for payments in section 393(2) Table Sl. No. 17.

Failure to furnish PAN: deduction

Tax is deducted at the highest of: rate in the provision; rate or rates in force; 5% where section 393(1) Table Sl. No. 8(ii) or 8(v) applies, or 20% in any other case

Section 397(2)(b)(i). Not applicable to certain non-residents (not companies) for specified payments (section 397(2)(c)).

Failure to furnish PAN: collection

Tax is collected at the higher of twice the specified rate or 5%, not exceeding 20%

Section 397(2)(b)(ii). It does not apply to a non-resident without a permanent establishment in India (section 397(2)(d)).

Rent cap on higher deduction

Higher-rate deduction on rent under Table Sl. No. 2(i) ≤ rent payable for the last month of the tax year or tenancy

Section 397(2)(e).

Correction statement time limit

Within two years from the end of the tax year in which the statement was required to be delivered

Section 397(3)(f).

Certificate of deduction or collection

Deductor or collector issues a certificate showing amount of tax, rate and other prescribed particulars, within the prescribed period

Section 395(4)(a). An employer paying tax under section 392(2)(a) gives a certificate under section 395(4)(b).

How to solve Tax Deduction and Collection at Source (TDS/TCS) questions

1. 1Identify the nature of the payment or receipt and whether it is a deduction case (payer) or a collection case (seller). Check the payee's residential status.
2. 2Find the applicable item in the section 393 or 394 table and check its threshold. Apply tax only if the threshold is crossed, as the rule states.
3. 3Check PAN. If the payee has not furnished a valid PAN, apply the higher rates of section 397(2).
4. 4Check for a certificate under section 395 for lower or nil deduction (or lower collection). If one is valid, use its rate.
5. 5Compute the tax on the correct base and state the rate used.
6. 6Check the deductor's duties: TAN where required, deposit within the prescribed time, statement filing, and certificate to the deductee.
7. 7State the consequence: the deductee gets credit under section 390(5). For defaults, link to the default provisions.
8. 8Write a clear conclusion with the amount of tax, who pays it and what is reported.

Quickest way: Four-question scan for TDS/TCS problems

Common mistakes in Tax Deduction and Collection at Source (TDS/TCS)

• Treating TDS and TCS as the same thing.

  Both are called tax at source and both give credit.

  Fix: Remember the direction: TDS is taken out of a payment you make. TCS is added on to a price you receive.

• Ignoring the no-PAN rule and deducting at the normal rate.

  Students focus on the rate table only.

  Fix: Always check PAN. Under section 397(2)(b) apply the higher of the specified rate, the rate in force, or 5% or 20% as stated.

• Applying a section 395 certificate without checking validity or the PAN condition.

  The certificate rate looks like a final answer.

  Fix: The payer follows the certificate till its validity. No certificate is granted if the application lacks a valid PAN (section 397(2)(f)(ii)).

• Believing the buyer's failure to collect tax ends the liability.

  If nothing was collected, students assume nothing is due.

  Fix: A person who fails to collect under section 394 must still pay the tax to the Central Government (section 397(3)(h)).

• Using Income-tax Act, 1961 section numbers such as 192 or 194C.

  Older notes still circulate.

  Fix: For June 2027 use the Income-tax Act, 2025: section 390 for the framework, section 393 for deduction, section 394 for collection, section 395 for certificates and section 397 for compliance.

• Applying the TAN requirement to every deductor.

  The rule is remembered as universal.

  Fix: Section 397(1)(c) lists exceptions, for example deduction on certain rent, and a resident individual or HUF deducting tax on consideration for immovable property under Table Sl. No. 17. These exceptions apply from 1 October 2026.

Worked examples