Direct and Indirect Taxation · Tax Deducted at Source and Tax Collected at Source

Introduction to TDS and TCS Framework under Income-tax Act 2025

Updated 10 October 2026 · Fact-checked

TDS is tax a payer deducts from specified payments and deposits with the government. TCS is tax a seller collects from the buyer on specified sales. Under section 390 of the Income-tax Act, 2025, both are collected during the tax year, and the recipient claims credit for them against final tax.

Understand Introduction to TDS and TCS Framework

Normally you pay tax after you earn income. The government does not like to wait for the whole year. It also wants to catch income that might otherwise go unreported. So the Act collects tax at the point where money moves. This is the idea behind tax deducted at source (TDS) and tax collected at source (TCS).

Under TDS, the person who pays (the deductor) cuts tax from the payment and deposits it with the government. The person who receives the money (the deductee) gets the net amount. Salary, professional fees and interest are common examples. Under TCS, the person who sells specified goods or provides specified services (the collector) adds tax to the price. The buyer pays the extra amount and the seller deposits it.

Section 390 of the Income-tax Act, 2025 is the opening provision of this scheme. It says that tax is to be deducted or collected at source, and also paid in advance, during the tax year, as the Act provides. The tax is on income of that same tax year. The tax year is the 12 months from 1 April to 31 March in which the income is earned. The Income-tax Act, 2025 uses this term in place of the old previous year and assessment year pair. Do not write "assessment year" in answers.

TDS and TCS are not extra taxes. They are advance payments of the deductee's or buyer's own tax. The person whose tax was deducted or collected gets credit for it when computing final tax. If the credit is more than the tax due, the excess is refunded. If it is less, the person pays the balance. That is why the deductor and collector are only agents. They hold the government's money and must deposit it.

The main objectives are: collect revenue evenly through the year, widen the tax base, leave a trail of transactions, and reduce evasion. The details (who deducts, on what, at what rate, and when to deposit) sit in the later sections and tables of the chapter. This topic gives you the framework that those details fit into.

Key rules to remember

Net payment after TDS: Net amount paid to deductee = Gross payment − TDS; The deductor deposits the TDS. The deductee's income is still the gross amount, not the net.
Amount payable to collector under TCS: Amount paid by buyer = Sale value + TCS; TCS is computed on the amount the Act specifies, usually the sale consideration received. Check the stated base in the question.
Final tax position: Balance tax payable (or refund) = Total tax liability − (TDS + TCS + advance tax + other prepaid tax); A negative result is a refund. All three are advance payments of the same tax year's tax.
Core distinction: TDS: payer deducts from payment | TCS: seller collects from buyer; TDS is on the payer side of a payment. TCS is on the seller side of a sale.
Scheme of section 390: Tax deducted or collected at source and advance tax are paid during the tax year, on income of that tax year; The rates and conditions come from the Act's provisions and the Finance Act in force, not from section 390 itself.

How to solve Introduction to TDS and TCS Framework questions

Use this method for any theory or numerical question on the introduction to TDS and TCS.

1Identify the nature of the transaction. Is money being paid out (TDS) or is a sale being made (TCS)?
2Name the parties. Label them deductor and deductee, or collector and buyer. Always say who deposits the tax.
3State the legal basis: section 390 of the Income-tax Act, 2025, with the tax year in which the deduction or collection falls.
4Apply the rate and threshold given in the question. If none is given, state your assumption clearly. Do not guess rates from memory.
5Compute the tax and the net amount paid or the total amount charged. Show the working in a short statement.
6Show the deposit by the deductor or collector and the credit claimed by the other party in final tax.
7Finish with the effect: net tax payable or refund after setting off TDS, TCS and advance tax.

Quickest way: Three-line TDS or TCS classification

When to use it: Use it for MCQs and for short theory parts where you must decide quickly whether a case is TDS, TCS or advance tax.

Ask who is paying whom. If the payer cuts tax from what it pays, it is TDS.
If the seller adds tax to the price and collects it from the buyer, it is TCS.
If the taxpayer pays on his own in instalments during the year, it is advance tax, not TDS or TCS.
In all three cases the money is a prepayment of the same person's tax and is set off against the final liability.

Common mistakes in Introduction to TDS and TCS Framework

Treating TDS or TCS as a separate tax on the deductor or collector
The deductor or collector deposits the money, so students assume it is their tax.
Fix: Write that the tax belongs to the deductee or buyer. The deductor or collector only acts as an agent and deposits it.
Reversing TDS and TCS
Both words sound alike and both deal with source.
Fix: Remember: TDS cuts from a payment you make. TCS adds to a price you charge.
Writing "previous year" or "assessment year" in answers
The Income-tax Act, 1961 terms are still familiar from older notes.
Fix: Use "tax year" and name it, for example tax year 2026-27, since you answer under the Income-tax Act, 2025.
Taking the net amount received as the deductee's income
Students forget that TDS was cut from the gross payment.
Fix: Include the gross amount in income. Claim the TDS as credit afterwards.
Forgetting that the credit is claimed against final tax
Students stop after computing the deduction.
Fix: Always end by setting off TDS, TCS and advance tax against total tax liability to get payable or refundable tax.
Quoting rates or section numbers from memory when the question does not need them
Students want to look thorough.
Fix: In an introduction question, explain the scheme. Quote only a rate or section that you are sure of or that the question supplies.

Worked examples

Example 1

Mehta Textiles Pvt. Ltd. pays a professional fee of ₹5,00,000 to CA Anita Rao, a resident, during the tax year 2026-27. Assume tax is deductible at 10% for this illustration. Anita's total tax liability for the year is ₹1,20,000. She has paid advance tax of ₹40,000. Compute the TDS, the amount she receives, and the balance tax she must pay.

Show the solution

Identify the nature: a payment of fee, so the payer deducts tax. This is TDS. Mehta Textiles is the deductor and Anita is the deductee.
TDS = ₹5,00,000 × 10% = ₹50,000.
Net amount paid to Anita = ₹5,00,000 − ₹50,000 = ₹4,50,000.
Mehta Textiles deposits ₹50,000 with the government. Anita's income still includes the full ₹5,00,000.
Prepaid tax = TDS ₹50,000 + advance tax ₹40,000 = ₹90,000.
Balance tax payable = ₹1,20,000 − ₹90,000 = ₹30,000.

Answer: TDS is ₹50,000. Anita receives ₹4,50,000. She pays a balance tax of ₹30,000 after taking credit for TDS and advance tax.

Example 2

Distinguish TDS from TCS, and show with an example. Rathore Metals Ltd. sells goods worth ₹10,00,000 to Kiran Traders. Assume TCS of 1% applies on the sale for this illustration. Compute the amount Kiran Traders pays and the treatment of the tax.

Show the solution

TDS is tax deducted by the payer from a payment and deposited with the government. The payee receives the net amount.
TCS is tax collected by the seller from the buyer over and above the price. The seller deposits it.
In this case Rathore Metals sells, so it is the collector and Kiran Traders is the buyer. This is TCS.
TCS = ₹10,00,000 × 1% = ₹10,000.
Amount paid by Kiran Traders = ₹10,00,000 + ₹10,000 = ₹10,10,000.
Rathore Metals deposits ₹10,000 with the government during the tax year.
Kiran Traders claims credit for ₹10,000 against its own final tax for the same tax year, and gets a refund if its credits exceed its tax.

Answer: TDS reduces what the payee receives, while TCS increases what the buyer pays. Here Kiran Traders pays ₹10,10,000. The TCS of ₹10,000 is deposited by Rathore Metals and is credited to Kiran Traders against its tax.

Exam tips

In theory answers, open with the meaning and objective of the scheme, then cite section 390 of the Income-tax Act, 2025. Step marks go to a clear structure.
Always use the words deductor, deductee, collector and tax year. Never use assessment year.
In numerical questions, show gross, tax, net and the final set-off in separate lines. Examiners award marks line by line.
For MCQs, check first whether money is paid out (TDS) or a sale is made (TCS). Rule out advance tax if the taxpayer pays on his own.
Use only the rate given in the question. If the question gives none, state your assumption in one line.

Practice questions from Tax Deducted at Source and Tax Collected at Source

Introduction to TDS and TCS Framework in other exams

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

Introduction to TDS and TCS Framework: frequently asked questions

What is TDS under the Income-tax Act, 2025?

TDS is tax that a person making a specified payment deducts and deposits with the government on behalf of the person receiving it. The receiver is the deductee and gets credit for the tax in his final computation. Section 390 sets out the overall scheme of collection during the tax year.

What is the difference between TDS and TCS?

In TDS the payer deducts tax from what it pays, so the payee receives less. In TCS the seller collects tax from the buyer on top of the price, so the buyer pays more. In both cases the tax is a prepayment of the other party's own tax.

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

It is the opening provision on deduction or collection of tax at source and advance payment of tax. It says that such tax is paid during the tax year on income of that year. The rates and the detailed cases are in the other provisions of the chapter.

Who bears the TDS: the deductor or the deductee?

The deductee bears it. The deductor only deducts the amount and deposits it. The deductee claims it as credit against his tax liability and can get a refund if the credit is more than the tax.

Is TDS the same as advance tax?

No. TDS and TCS are collected by another person at the point of payment or sale. Advance tax is paid by the taxpayer himself in instalments during the tax year. Both are set off against the final tax liability.