What's the Difference between TDS and TCS?

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What's the Difference between TDS and TCS?

When it comes to financial planning, income tax is considered to be one of the most important aspects. As a taxpayer, you must keep an eye on your different sources of income, all the investments you’ve made and strategically plan to purchase a life insurance policy, term plan, or any other investments which can help you to save tax. 

For the government, income tax isn’t the only tax source. It also collects indirect taxes from all the eligible taxpayers. TDS, TCS and GST are levied on goods, services and transactions so that the government can collect these indirect taxes from the taxpayers. As far as income tax is concerned, the payments are made by the individuals who earn the money. In contrast, payment of indirect taxes is the responsibility of the seller. There are two forms of indirect taxes which may get confused with each other at times, namely TDS and TCS. Let us learn more about them.

What is Tax Deducted at Source (TDS)?

The full form of TDS is ‘Tax Deducted at Source’. By source, we mean the source of income. In other words, TDS is a method by which the tax is collected at the source of income. As per the Income Tax Act, 1961, it is obligatory for the taxpayer or the tax deductor to deduct a certain amount of tax before he goes on to make a payment to the payee or deductee. Thereafter, the deducted amount of tax is remitted to the Government of India. TDS applies to various sources of income, such as an individual’s salary, interest, rent, professional charges, commission and the like.

What are the advantages of TDS?

TDS comes with several advantages. It helps the government to ensure a regular flow of revenue. Since this indirect tax is deducted at the source, it assists in preventing tax evasion in the country. Since TDS is deducted periodically, the individual’s burden of lump sum payment of tax is reduced to a great extent.

What are the disadvantages of TDS?

TDS also comes with disadvantages. In case the TDS deductor does not succeed in deducting TDS or fails to deposit the TDS he has deducted to the government, the deductee might face challenges while he files for ITR. There can be times when an individual’s TDS is deducted despite the fact that his total income does not fall under the taxable bracket.

Understanding TDS through an Example

To understand how TDS works, let’s take an example. Suppose, a company provides a salary of Rs. 62,000 to one of its employees. On salary income, the applicable TDS rate is 10 percent of the salary. Thus, the company has to deduct TDS from the salary of its employee and then deposit it with the Government of India.

• Begin with the gross salary amount i.e., Rs. 62,000.
• Determine the TDS rate applicable on salary income i.e., 10 percent.
• Now, you must calculate the TDS amount which is done through multiplying the gross salary by the TDS rate: TDS = Rs. 62,000 * 10% = Rs. 6,200.
• Therefore, a total of Rs. 6,200 would get deducted from the gross salary as TDS amount.
• The company has to pay the net salary of Rs 55,800 (Rs. 62,000 - Rs. 6,200)  to the employee.
• Afterwards, the company must deposit this deducted amount or the TDS amount to the Government of India.

What is Tax Collected at Source (TCS)?

The full form of TCS is ‘Tax Collected at Source’. This tax is supposed to be paid by the seller that collects it from the buyer during the period of sale. The collection of TCS is done according to the provisions of Section 206C of Income Tax Act, 1961. The nature of goods and the payment method are the two deciding factors for the rate of TCS. 

What are the advantages of TCS?

TDS helps the government to ensure a steady collection of the taxes. It aids in tracking all the high value transactions around the country which helps the government to curb the circulation of black money in the Indian economy.

What are the disadvantages of TCS?

Since the amount of TCS is recovered from the buyer by the seller, the buyer has to pay for the goods at an increased cost. The seller has to maintain detailed records of all the buyers that he collects TCS from, before he deposits it to the Government of India. In addition to this, he has to file tax returns for the same which can be a complicated process at times.

Understanding TCS through an Example

To understand how TCS works, let’s take an example. Suppose, a company sells its customer goods which are worth Rs. 1,00,000. Now, the applicable TCS rate is 1 percent of the sale of these goods. Therefore, the company must collect TCS from the customer during the sale of these goods and then deposit it with the government in the required time.

• Begin with the sale amount i.e., Rs. 1,00,000.
• Now, you must determine the TCS rate which is applicable on the sale of goods i.e., 1 percent.
• Next step is the calculation of amount of TCS which is done by multiplying the sale amount by the TCS rate: TCS = Rs. 1,00,000 * 1% = Rs. 1,000.
• The amount which the company must collect from the customer in the form of TCS amount is Rs. 1,000.
• Now, the company has to receive the remaining payment of Rs. 99,000 from the customer.
• Thereafter, the company must deposit the TCS amount of Rs. 1,000 with the Government of India.

What are the Difference Between TDS and TCS?

To know the differences between TDS and TCS, let’s take a look at this tabular comparison:

Conclusion

Both individuals and businesses must understand the difference between the two indirect taxes namely, TCS and TDS. TCS and TDS are similar in the sense that they’re both mechanisms of tax collection. But when it comes to their applicability, responsibility and the method by which they are imposed, they differ to a great extent. On one hand, TDS gets deducted by the payer before he makes payments to the payee. On the other hand, TCS gets collected by the seller from the buyer during the period of sale. Both TDS and TCS play important roles in the Indian economy by assisting the government in collecting revenue and helping in prevention of evasion of taxes. TCS and TDS help to prevent black money from being circulated in our country. It is the responsibility of all the individuals and businesses to stay up-to-date with all the changes in the Income Tax Act, 1961. This will ensure compliance and help to avoid any fines or penalties. For further assistance, connect with Registrationwala. Our team leaders have up-to-date information regarding taxes.

Frequently Asked Questions (FAQs)

Q1. In case an individual fails to deposit or collect tax, what will happen?

A. Failure to deposit or collect tax can result in legal consequences, such as fine, penalty and even imprisonment which can be between 3 to 7 years. The fine can go as high as Rs. 1,00,000. All the individuals and companies must adhere to the Income Tax’s rules and regulations.

Q2. In case the TDS is already deducted, can the TCS be collected?

A. No, you cannot collect TCS in a case wherein the buyer has the liability of paying TDS. This is mentioned in the Section 206 C (1H) of the Income Tax Act. Also, you must determine if the buyer deducts TDS at the time he makes the final payment.

Q3. What is meant by TDS on Salary?

A. TDS on Salary refers to the tax which is deducted by the company’s employer at the time of depositing salary to the account of an employee.

Q4. What are the methods for the payment of TDS and TCS?

A. Tax-paying individuals as well as the corporate firms can easily pay for TDS and TCS by visiting the official portal of the Income Tax Department. As an alternate option, they can make the payment online for which they must download Challan 281 form and submit it to an authorized bank.

Q5. How much time does TDS refund take to reflect in an individual’s bank account?

A. Generally, a TDS refund takes approx. 3-6 months to reflect in the bank account of an individual. The time limit of TDS refund also depends on whether the individual has completed his e-verification. 

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