When it comes to income tax, the total income of an assessed for the previous year is taxable in the assessment year. There are certain provisions in this act, through which one can recover tax on their income in the prior-year itself. The means of doing so are TCS and TDS, as well as the payment of advance tax. If you are unable to tell the difference between TCS and TDS, you are not alone. While TCS is an income, TDS is an expense.

What is TCS tax and TDS tax?

TCS refers to ‘tax collection at source’ while TDS stands for ‘tax deduction at source.’ While these are not taxes, they are an obligation that is deducted at the time of payment, or received more and deposited to the Income Tax Department. So that you can be helped in comparing and contrasting these taxes in detail, keep reading to find out the key differences between TDS and TCS.

Definition of TDS

The TDS full form is ‘tax deducted at source,’ and as the name suggests, it is an indirect way of receiving one’s tax, wherein the collection of revenue is directly at the recipient’s income. TDS works on the principle of ‘pay as you earn’ as well as ‘collecting when it is earned’, because of which the collection of tax is brought forward. As per the Income Tax Act of 1961, any payment on certain expenses that fall under the ambit of TDS is to be settled after the deduction of a designated percentage.

To put it simply, at the time of making payment, the payer reserved a certain portion of the amount which is to be deposited with the government. In this manner, income tax through TDS is charged in advance, rather than on a later date, with the recipient getting the net amount. Some examples for which TDS is applied are casual income, one’s salary, interest on securities, payment of fees, payment of brokerage or commission, and so on.

Definition of TCS

On the sale of specific items in India, a tax is collected by the company or at prescribed rates from the buyer or payer of the specified category of items. This is referred to as tax collected at source or TCS. The seller then transfers the tax collected from the purchaser to the government and issues a TCS certificate, for which the buyer of such goods will get credit. These items include the sale of tendu leaves, scrap, parking lot, jewelry, liquor, toll plaza, bullion, and more. The TCS calculation rate applied varies for different items.

TDS vs TCS: Differences

How does TCS different from TDS? Here are all essential differences.

Meaning:

Tax deducted at source is the amount that is deducted from the recipient’s income in the form of tax. Alternatively, TCS refers to the amount that has been amassed by the company or seller as tax.

Nature:

TDS is essentially an expense while TCS is income.

Imposition:

TDS is imported when one’s specified expenses cross the prescribed limit. TCS calculation, on the other hand, is imposed upon the sale of specified items.

Person Responsible:

TDS is deducted by the buyer or payer, while TCS is collected by the seller or the payee.

Occurrence:

TDS is credited to the account of the payee or during payment, whichever is earlier. Although, in the case of life insurance premiums and the payment of salary, it should be deducted at the time of the payment itself. TCS is debited from the account of the buyer or during receipt, whichever is earlier. When the sale of jewelry or bullion takes place, however, TCS should be collected when the consideration is received in cash.

Understanding the difference between TDS and TCS

Through the help of an example, let’s understand how TDS is different from TCS. Assume A works at a particular company and her employer deducts tax, at applicable rates, on her salary every month before making the final payment. The amount that is subtracted from A’s total salary is termed as TDS or ‘tax deducted at source’.

Alternatively, B is a trader who trades in timber. B sellers some of his goods to C. On the sale of his goods, B collects a tax of 5% when making his sale. This amount is collected as tax by B from his customer C. This tax is known as TCS or ‘tax collected at source.’

Consequences of not depositing TCS or TDS

If an individual fails to either collect or deposit tax, she or he will have to face a variety of legal consequences. This includes a penalty equal to the tax that has either not been collected or deducted. Additionally, the individual will also be imprisoned for anywhere between three or seven years, along with a fine that will be applied.

Interest might also be levied if one fails to deposit either TCS or TDS. The interest needs to be paid on the monthly tax amount which will become eligible for deductions. For every month from the date, tax is eligible for deductions, interest is calculated, until the date it is finally deducted at 1% or paid off at 1.5%. For TCS calculation, the rate of interest levied remains stable at 1%.

The Bottom Line

It is crucial that one fulfill their tax obligations in a timely fashion. By investing in select financial instruments like life insurance, one can reduce their own tax burden. For this reason, it’s important to invest in instruments that can not only financial security, and reduce one’s future risk, but also provide a slew of tax benefits.