By Vikram Mehta | Updated March 2026
What Is Tax Collected at Source (TCS)?
Tax Collected at Source (TCS) is a mechanism under Section 206C of the Income Tax Act, 1961 that requires a seller to collect tax from the buyer at the time of sale of specified goods or provision of certain services. Unlike Tax Deducted at Source (TDS), where the payer deducts tax before making a payment, TCS works in reverse — the seller adds the tax to the invoice amount and remits it to the government on behalf of the buyer.
For foreign companies operating in India or purchasing goods from Indian sellers, TCS directly impacts cash flow. If your Indian subsidiary or vendor collects TCS on a transaction, that amount is not lost — it appears as a tax credit in Form 26AS and can be claimed against your income tax liability or refunded. However, the upfront cash outflow and compliance obligations make TCS a provision that foreign investors must understand before entering Indian supply chains.
TCS was originally limited to a handful of goods like alcoholic liquor, timber, and minerals. Over the past decade, Parliament has expanded it dramatically — covering motor vehicles, overseas remittances under the Liberalised Remittance Scheme (LRS), and (until March 2025) the sale of goods exceeding INR 50 lakh. The Union Budgets of 2025 and 2026 have significantly rationalized TCS, removing several provisions and reducing rates.
Legal Basis
The core statutory framework for TCS:
- Section 206C(1) of the Income Tax Act, 1961 — The foundational provision requiring sellers of specified goods (alcoholic liquor, timber, tendu leaves, scrap, minerals) to collect TCS at prescribed rates.
- Section 206C(1C) — TCS on leasing or licensing of parking lots, toll plazas, and mines or quarries at 2%.
- Section 206C(1F) — TCS at 1% on sale of motor vehicles exceeding INR 10 lakh, expanded in 2025 to cover luxury goods (watches, handbags, art pieces, sportswear, home theatre systems).
- Section 206C(1G) — TCS on foreign remittances under LRS and overseas tour packages. Inserted by the Finance Act, 2020, with rates amended by the Finance Acts of 2023, 2025, and 2026.
- Section 206C(1H) — TCS at 0.1% on sale of goods exceeding INR 50 lakh (for sellers with turnover above INR 10 crore). Removed with effect from April 1, 2025 by the Finance Act, 2025.
- Section 206CCA — Higher TCS rates for buyers who had not filed income tax returns. Removed with effect from April 1, 2025.
TCS vs TDS: What Is the Difference?
Foreign investors frequently confuse TCS with TDS. The two mechanisms operate on opposite sides of a transaction:
| Parameter | TCS (Tax Collected at Source) | TDS (Tax Deducted at Source) |
|---|---|---|
| Who pays | Buyer pays the tax (seller collects it) | Payer deducts tax before making payment |
| Governing section | Section 206C | Sections 192–196D |
| Applied on | Sale of specified goods, LRS remittances, tour packages | Salary, interest, rent, professional fees, contract payments |
| Invoice impact | Increases the invoice amount (buyer pays more) | Reduces the payment received (payee gets less) |
| Return form | Form 27EQ (quarterly) | Form 24Q/26Q/27Q (quarterly) |
| Certificate | Form 27D (issued to buyer) | Form 16/16A (issued to deductee) |
| Deposit deadline | 7 days from end of collection month | 7 days from end of deduction month |
When both TCS under Section 206C(1H) and TDS under Section 194Q applied to the same goods transaction, Section 194Q (TDS by buyer) took precedence. This overlap was one reason the government removed Section 206C(1H) from April 2025.
TCS Rate Table for FY 2025-26 (AY 2026-27)
The following table reflects the current TCS rates applicable from April 1, 2025, incorporating changes from the Finance Act, 2025:
| Section | Nature of Transaction | TCS Rate | Threshold |
|---|---|---|---|
| 206C(1) | Alcoholic liquor for human consumption | 1% | No threshold |
| 206C(1) | Tendu leaves | 5% | No threshold |
| 206C(1) | Timber and other forest produce (excl. tendu) | 2% | No threshold |
| 206C(1) | Scrap | 1% | No threshold |
| 206C(1) | Minerals (coal, lignite, iron ore) | 1% | No threshold |
| 206C(1C) | Parking lots, toll plazas, mining/quarrying leases | 2% | No threshold |
| 206C(1F) | Motor vehicles and luxury goods | 1% | Sale value exceeds INR 10 lakh |
| 206C(1G) | LRS — Education/medical (self-funded) | 5% | Above INR 10 lakh per FY |
| 206C(1G) | LRS — Education (loan-funded via Sec 80E) | Nil | Fully exempt |
| 206C(1G) | LRS — Other purposes (investment, gifts, property) | 20% | Above INR 10 lakh per FY |
| 206C(1G) | Overseas tour packages | 5% | Above INR 10 lakh per FY |
| 206C(1H) | Sale of goods (removed) | N/A | Removed from April 1, 2025 |
Budget 2026 Changes (Effective April 1, 2026)
The Union Budget 2026 further rationalizes TCS on LRS remittances. From April 1, 2026, the TCS rate on education and medical remittances drops from 5% to 2%. The TCS rate on overseas tour packages is reduced to a flat 2% without any minimum threshold. The INR 10 lakh exemption threshold for education and medical remittances remains unchanged. These changes reduce the upfront cash burden substantially — for example, sending INR 25 lakh for a child's overseas education will attract TCS of INR 30,000 (2% of INR 15 lakh above threshold) instead of the current INR 75,000 (5% of INR 15 lakh).
TCS on Foreign Remittances Under LRS — Section 206C(1G)
This is the TCS provision most relevant to foreign investors, NRIs, and Indian residents sending money abroad. Section 206C(1G) requires authorized dealer banks and tour operators to collect TCS when processing outward remittances under the Liberalised Remittance Scheme.
How the INR 10 Lakh Threshold Works
The threshold of INR 10 lakh is calculated cumulatively across all remittance types during a financial year. If an individual remits INR 4 lakh for education, INR 3 lakh for medical treatment, and INR 4 lakh for an overseas tour package, the total is INR 11 lakh — and TCS applies on the INR 1 lakh excess at the applicable rate for that category.
Key Exemption: NRIs and Foreign Companies
TCS under Section 206C(1G) applies only to remittances by Indian residents under LRS. Non-Resident Indians (NRIs) are not subject to LRS and therefore not liable for this TCS. Foreign companies remitting funds from India through their branch office or liaison office follow different FEMA repatriation rules, not LRS.
TCS on Sale of Goods — Section 206C(1H) (Historical)
From October 1, 2020 through March 31, 2025, Section 206C(1H) required sellers with annual turnover exceeding INR 10 crore to collect TCS at 0.1% on sale of goods to any single buyer where the aggregate value exceeded INR 50 lakh in a financial year. This affected foreign companies buying from large Indian suppliers — the 0.1% TCS was added to invoices and had to be tracked for credit claims.
The Finance Act, 2025 removed this provision entirely from April 1, 2025, because the compliance burden outweighed revenue collection and it overlapped with Section 194Q (TDS by buyer on purchase of goods). Foreign companies purchasing from Indian vendors no longer face this TCS from FY 2025-26 onward.
Collection, Deposit, and Filing Timeline
TCS follows a strict compliance calendar:
| Obligation | Deadline | Penalty for Non-Compliance |
|---|---|---|
| Deposit TCS with government | Within 7 days from end of the month of collection | Interest at 1% per month (or part thereof) |
| File Form 27EQ (Q1: Apr-Jun) | July 15 | Late fee: INR 200/day (capped at TCS amount) |
| File Form 27EQ (Q2: Jul-Sep) | October 15 | Late fee: INR 200/day (capped at TCS amount) |
| File Form 27EQ (Q3: Oct-Dec) | January 15 | Late fee: INR 200/day (capped at TCS amount) |
| File Form 27EQ (Q4: Jan-Mar) | May 15 | Late fee: INR 200/day (capped at TCS amount) |
| Issue Form 27D certificate to buyer | Within 15 days of Form 27EQ due date | Penalty: INR 10,000 to INR 1,00,000 |
The Finance Act, 2025 introduced an important relief: prosecution under Section 276BB (imprisonment of 3 months to 7 years for failure to deposit TCS) will not be initiated if the TCS is deposited by the due date for filing the quarterly Form 27EQ return.
TCS Credit Mechanism
TCS is not a final tax — it is an advance tax credit. The buyer who bears the TCS can claim credit through the following process:
- Form 26AS: The TCS collected appears in the buyer's PAN-linked Form 26AS (Annual Tax Statement) once the seller files Form 27EQ.
- Adjust against tax liability: When filing the income tax return, the buyer claims TCS credit against the total tax payable — exactly like TDS credit.
- Refund if excess: If TCS collected exceeds the buyer's tax liability, the excess is refunded by the Income Tax Department.
- Salary adjustment (from October 2024): Salaried employees can request their employer to adjust TCS credits against TDS on salary under Section 192, avoiding the wait until ITR filing for recovery.
How TCS Affects Foreign Companies in India
Foreign companies encounter TCS in several specific scenarios:
Purchasing Goods from Indian Sellers
Until March 2025, if your Indian subsidiary or branch office purchased goods worth more than INR 50 lakh from a large Indian seller (turnover above INR 10 crore), TCS at 0.1% was added to invoices under Section 206C(1H). This has been removed from April 2025, simplifying procurement.
Buying Luxury Goods or Motor Vehicles
If your company purchases a motor vehicle or luxury item exceeding INR 10 lakh in India (for example, a company car for a resident director), TCS at 1% is collected under Section 206C(1F). For a vehicle costing INR 15 lakh, TCS of INR 15,000 is added to the invoice.
Repatriating Profits or Making Overseas Payments
TCS under Section 206C(1G) does not apply to repatriation of dividends or profits by foreign companies. LRS applies only to individual residents. Corporate remittances follow FEMA current/capital account rules and are subject to withholding tax (TDS) under Sections 195/196D, not TCS.
Indian Employees Remitting Abroad
If your Indian subsidiary's employees remit funds abroad under LRS (for personal investments, education, or travel), the authorized dealer bank collects TCS from the employee. This does not directly affect the company, but it impacts employee cash flow and should be factored into compensation planning.
Common Mistakes
- Confusing TCS with a final tax and not claiming credit. TCS is an advance collection, not an additional tax. Foreign subsidiaries that fail to reconcile Form 26AS and claim TCS credit in their corporate tax return effectively overpay tax. Every TCS amount must be tracked and claimed.
- Assuming Section 206C(1H) still applies to goods purchases. Many accounting teams continue to accept 0.1% TCS on invoices from suppliers out of habit. Since April 1, 2025, sellers should not be collecting TCS on goods sales. If your vendor adds this charge, challenge it — it has no legal basis.
- Applying the INR 10 lakh LRS threshold per transaction instead of per financial year. The threshold is cumulative across all LRS remittance types during the year. Banks track this across transactions. An employee who remits INR 6 lakh for education in April and INR 5 lakh for travel in October triggers TCS on the INR 1 lakh excess, not on the individual amounts.
- Not distinguishing between LRS remittances and corporate remittances for TCS purposes. Indian subsidiaries sometimes worry about TCS on outward payments to their parent company. Section 206C(1G) covers only LRS (individual residents). Corporate payments abroad attract TDS under Section 195, not TCS — these are fundamentally different compliance obligations.
- Ignoring the quarterly Form 27EQ filing obligation when your company is the seller. If your Indian entity sells scrap, minerals, or any specified goods, it is the TCS collector and must file Form 27EQ quarterly and issue Form 27D certificates. Missing the July 15 / October 15 / January 15 / May 15 deadlines triggers INR 200/day late fees.
Practical Example
Meridian Components GmbH, a German automotive parts manufacturer, operates a wholly owned subsidiary in Pune — Meridian India Pvt Ltd. In FY 2025-26, the subsidiary encounters TCS in three scenarios:
Scenario 1 — Purchasing scrap metal: Meridian India buys industrial scrap worth INR 80 lakh from a domestic scrap dealer. The seller collects TCS at 1% under Section 206C(1) = INR 80,000. This appears in Meridian India's Form 26AS and is claimed as credit against its corporate tax liability of INR 45 lakh for the year.
Scenario 2 — Company vehicle purchase: The subsidiary purchases a Toyota Fortuner for INR 42 lakh for its Managing Director. The dealer collects TCS at 1% under Section 206C(1F) = INR 42,000. This is added to the invoice (total INR 42,42,000) and claimed as tax credit.
Scenario 3 — Employee LRS remittance: Rajesh, a senior engineer at Meridian India, remits INR 18 lakh to the UK for his daughter's university tuition (self-funded, no education loan). His bank collects TCS under Section 206C(1G) at 5% on the amount exceeding INR 10 lakh = 5% of INR 8 lakh = INR 40,000. Rajesh's total outflow is INR 18,40,000. He claims the INR 40,000 TCS credit when filing his personal income tax return. From April 2026, this same remittance would attract TCS at 2% (INR 16,000) — a saving of INR 24,000.
Total TCS impact on Meridian India's transactions: INR 1,22,000 in upfront cash, fully recoverable as tax credit. The company's finance team reconciles Form 26AS quarterly to ensure every rupee of TCS is captured and claimed.
Key Takeaways
- TCS under Section 206C requires sellers to collect tax from buyers on specified goods and transactions — it increases the buyer's invoice amount but is fully creditable against income tax liability
- The Finance Act, 2025 removed TCS on sale of goods (Section 206C(1H)) and higher rates for non-filers (Section 206CCA), significantly reducing compliance burden from April 1, 2025
- TCS on LRS remittances applies at 5% (education/medical) or 20% (other purposes) above a cumulative INR 10 lakh threshold per financial year — dropping to 2% for education/medical and tour packages from April 2026
- Foreign companies and NRIs are not subject to LRS-related TCS; corporate remittances abroad follow TDS rules under Section 195, not TCS
- TCS must be deposited within 7 days of month-end, with quarterly Form 27EQ returns due on July 15, October 15, January 15, and May 15
- Every TCS amount collected appears in the buyer's Form 26AS and must be reconciled and claimed — failure to do so results in effective tax overpayment
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