Compliance Alert: TDS and TCS Rates for FY 2025-26

TDS

Compliance Alert: TDS and TCS Rates for FY 2025-26

TDS

Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) continue to serve as essential mechanisms for ensuring tax compliance and revenue collection at the transaction stage. With the commencement of Financial Year 2025-26, understanding the updated TDS and TCS rates is critical for individuals, businesses, and foreign entities to ensure timely and accurate tax planning.

TDS Rates for Residents – FY 2025-26

TDS is deducted based on the nature of payment, applicable threshold, and the recipient’s status. Here are key sections to note:

1. Salary & Provident Fund

  • Section 192: Salary – Tax deducted as per income slab rates.

  • Section 192A: Withdrawal from EPF (above ₹50,000) – 10%.

2. Interest Income

  • Section 194A:

    • ₹50,000 for non-senior citizens – 10%.

    • ₹1,00,000 for senior citizens – 10%.

3. Dividends and Securities

  • Sections 193 & 194: Dividend/Interest from securities – 10% (above ₹10,000).

4. Winnings and Lotteries

  • Section 194B: Lottery/crossword winnings (above ₹10,000) – 30%.

  • Section 194BA: Online game winnings – 30%.

  • Section 194BB: Horse race winnings (above ₹10,000) – 30%.

5. Contractor & Professional Payments

  • Section 194C:

    • Individual/HUF contractors – 1%.

    • Others – 2%.

  • Section 194J:

    • Professional fees – 10%.

    • Technical services/call centers – 2%.

6. Rental Income

Section 194I:

  • Rent on plant/machinery – 2%.

  • Other rents – 10%.

7. Other Key Sections

  • Section 194Q: Purchase of goods exceeding ₹50 lakh – 0.1%.

  • Section 194R: Business perquisites – 10%.

  • Section 194S: Virtual Digital Asset transactions – 1%.

  • Section 194T: (New from April 1, 2025) – Payments to partners – 10%.

  • Section 194N: Cash withdrawals – 2% to 5% (based on return filing status).

TDS Rates for Non-Residents – FY 2025-26

Non-resident individuals and entities are subject to higher and fixed TDS rates across various payment categories:

1. Salary & Winnings

  • Section 192: Salary – As per slab.

  • Sections 194B, 194BA, 194BB: Lottery/game/horse race winnings – 30%.

2. Investment Income

Section 195:

  • Capital gains – 12.5% or 20%.

  • Dividend – 10% or 20%.

  • Interest on loans – 20%.

  • Royalty & Technical Fees – 20%.

3. Infrastructure-related Interest

  • Section 194LB: Interest from infrastructure debt funds – 5%.

  • Section 194LC:

    • Foreign currency loans – 5%.

    • Listed bonds in IFSC – 4%.

    • Others – 9%.

4. Other Key Provisions

  • Section 196D: Income from securities (FIIs) – 20%.

  • Section 194T: Partner’s remuneration/interest – 10%.

TCS Rates – FY 2025-26

TCS is applicable when the seller collects tax from the buyer at the point of sale for specific goods or services. Here’s a summary:

1. Common Goods

  • Alcoholic liquor: 1%

  • Timber, tendu leaves: 2%–5%

  • Scrap: 1%

  • Coal, lignite, iron ore: 1%

2. High-Value Transactions

  • Motor vehicles (above ₹10 lakh): 1%

  • Sale of goods exceeding ₹50 lakh (Sec 206C(1H)) – Not applicable where TDS already applies.

3. Overseas Transactions (Section 206C(1G))

  • Foreign remittance (general): 20%

  • Education/medical remittance: 5%

  • Overseas tour package:

    • Up to ₹10 lakh – 5%

    • Above ₹10 lakh – 20%

Key Updates for FY 2025-26

  • Introduction of Section 194T: 10% TDS on partner-related payments by the firm.

  • Revisions to Section 194N: Enhanced compliance based on prior ITR filings.

  • Clarifications under Section 195: Refined TDS rates based on income types for non-residents.

Staying updated on the applicable TDS and TCS rates helps taxpayers—residents and non-residents alike—comply with statutory obligations and avoid interest or penalties. The above summary provides a practical reference to navigate tax withholding and collection for FY 2025-26.

For personalized assistance on withholding tax obligations or cross-border transactions, consult a professional tax advisor or reach out to Certicom Group of Chartered Accountants.

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New TDS Correction Rules: Limited Time for Amendments

TDS Correction

New TDS Correction Rules: Limited Time for Amendments

TDS Correction

The Finance Act (No. 2), 2024, has introduced a key revision that imposes a strict time limit on filing TDS correction statements. Previously, there was no deadline, allowing frequent and sometimes questionable modifications. This move aims to enhance compliance and reduce potential misuse of the system.

While deadlines existed for submitting TDS & TCS returns, correction statements had no such restriction, leading to recurring changes by deductors—whether voluntarily or due to inquiries. This caused complications for deductees, often resulting in discrepancies in their tax records. To rectify this, the Finance Act (No. 2), 2024, has amended Sections 200(3) and 206C(3B) of the Income-tax Act. The new rule mandates that correction statements must be submitted within six years from the financial year in which the original statement was filed.

Final Deadline: Submit Corrections by March 31, 2025!

For correction statements concerning Financial Years 2007-08 to 2018-19, the submission deadline is March 31, 2025. This ensures that all corrections are made within a reasonable period, preventing undue manipulation. However, while this amendment brings more structure, it does not entirely eliminate loopholes that certain deductors could still exploit.

TDS Correction

Existing System Flaws: A Persistent Issue

Certain deductors have historically taken advantage of the system using the following method:

  • The deductor submits the initial TDS return, and the deductee claims the corresponding TDS credit in their Income Tax Return (ITR).

  • The deductee receives a tax refund based on this credit.

  • The deductor then files a correction statement, reallocating the TDS credit to a different deductee.

Why This Matters

Once a tax refund is issued, there is no mechanism to verify whether the corresponding TDS credit remains in Form 26AS. If the deductor subsequently deletes or reallocates the TDS credit, the tax department lacks an automated alert system to notify the deductee. As a result, many deductees unknowingly become liable for additional taxes on amounts they thought were already settled. Since tax authorities do not perform automatic checks on such changes, these issues often emerge much later—leading to tax notices, interest charges, penalties, and unnecessary litigation.

A Smarter Approach: Locking TDS Credits

While the six-year limit is an improvement, a more secure solution would involve a TDS credit lock system integrated into the ITR filing process. Here’s how it could work:

  • When filing ITR, deductees should be required to confirm or reject TDS credits reflected in Form 26AS.

  • Once confirmed, the credit should be locked, preventing alterations by the deductor.

  • If corrections are necessary, they should only be permitted with deductee approval via an automated request linked to their PAN.

  • Manual intervention by tax officers should be eliminated to prevent unnecessary delays, excessive paperwork, and unofficial processing charges.

A similar correction system is already in place for Form 26QB and 26QC, where modifications related to PAN, transaction dates, and amounts require approval from the affected party. Implementing this system for TDS credits would significantly reduce opportunities for fraud and disputes.

The introduction of a deadline for TDS correction statements is a welcome move toward better compliance and fraud prevention. However, a deductee-controlled TDS credit lock mechanism would further fortify the process, ensuring that once tax credits are claimed, they remain intact and undisputed. With these additional safeguards, the tax system could become more transparent, efficient, and fair for all taxpayers.

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Review of TDS/TCS Amendments in Budget 2025

Budget 2025

Review of TDS/TCS Amendments in Budget 2025

Budget 2025

Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) provisions are integral to the tax system, ensuring tax collection at the source of income. However, the complexity of multiple sections, varying threshold limits, and diverse tax rates often leads to compliance challenges for both deductors/collectors and deductees/collectees.

The Union Budget 2025 has introduced significant amendments aimed at simplifying and rationalizing TDS/TCS provisions. These changes primarily focus on revising threshold limits and modifying tax rates to reduce compliance burdens and improve ease of doing business. Below are the key changes proposed:

1. Revision of TDS Threshold Limits

One of the major amendments includes increasing the threshold limits across various TDS provisions to alleviate the compliance burden and enhance liquidity for taxpayers. The revised section-wise threshold limits are as follows:

Budget 2025
SectionNature of IncomeExisting Threshold (Rs.)Proposed Threshold (Rs.)
193Interest on securitiesNil10,000/-
194AInterest other than securities50,000/- (Senior Citizens) 40,000/- (Others) 5,000/- (NBFC)1,00,000/- (Senior Citizens) 50,000/- (Others) 10,000/- (NBFC)
194Dividend5,000/-10,000/-
194KIncome from Mutual Funds5,000/-10,000/-
194BWinnings from lottery, crossword puzzles10,000/- (Aggregated annually)10,000/- (Single transaction)
194BBWinnings from horse races10,000/-10,000/-
194DInsurance Commission15,000/-20,000/-
194GCommission on lottery tickets15,000/-20,000/-
194HCommission/Brokerage15,000/-20,000/-
194IRent2,00,000/- (Annually)50,000/- (Monthly)
194JProfessional/Technical Fees30,000/-50,000/-
194LACompensation on land acquisition2,50,000/-5,00,000/-

 

These revisions will take effect from April 1, 2025. While the threshold increases are not significantly high except for rent (Section 194I) and interest (Section 194A for senior citizens), they are still expected to ease compliance for taxpayers. The revision in Section 194I specifically benefits commercial property rentals, with exemptions for individuals and HUFs under a certain turnover threshold.

2. Adjustment of TDS Rates

The Budget also proposes rationalizing certain TDS rates to enhance taxpayer compliance and ease of business. Notably, the changes include:

SectionNature of IncomeExisting TDS RateProposed TDS Rate
194LBCIncome from securitization trusts (Resident Investors)25% (Individual & HUF) 30% (Others)10% for all cases

This change will also take effect from April 1, 2025.

3. Amendments to TCS Provisions

a) Revisions in TCS on Forest Produce

The Budget proposes a more precise definition of “forest produce” by aligning it with the Indian Forest Act, 1927, and State Acts. Additionally, changes in TCS rates include:

SectionNature of IncomeExisting TCS RateProposed TCS Rate
206C(1)Timber (Forest Lease)2.5%2%
206C(1)Timber (Other than Forest Lease)2.5%2%
206C(1)Other Forest Produce (Non-Tendu Leaves)2.5%2%

 

b) Elimination of TCS on Certain Sales Transactions

Currently, Section 206C(1H) mandates sellers to collect TCS while Section 194Q requires buyers to deduct TDS. To reduce compliance challenges, Section 206C(1H) will be omitted from April 1, 2025. This resolves the common issue where both the buyer and seller deduct TDS/TCS on the same transaction.

4. Abolition of Higher TDS/TCS Rates for Non-Filers

Sections 206AB (TDS) and 206CCA (TCS) require higher tax rates for non-filers of income tax returns. Since verifying a deductee’s or collectee’s compliance status is cumbersome for taxpayers, these sections will be omitted from April 1, 2025.

5. Exemption from Prosecution for Delayed TCS Payments

Section 276BB currently allows for prosecution in cases of delayed TCS payments. The amendment ensures no prosecution if TCS is deposited before the due date for filing the quarterly statement under Section 206C(3). This aligns TCS provisions with similar relaxations already available for TDS.

6. Modification of TCS on Foreign Remittances Under LRS

The Budget also revises TCS applicability on remittances under the RBI’s Liberalized Remittance Scheme (LRS):

  • Education Remittances:

    • No TCS if funded by an education loan (Earlier: 0.5% TCS above Rs. 7 lakh)

    • If not funded by an education loan, the threshold increases from Rs. 7 lakh to Rs. 10 lakh, with the 5% TCS rate remaining unchanged.

  • Medical Remittances:

    • The TCS threshold has been increased from Rs. 7 lakh to Rs. 10 lakh.

The Budget 2025 proposes significant amendments to TDS/TCS provisions, aiming to reduce complexities and compliance burdens. Notable changes include higher threshold limits, rationalized tax rates, and simplified procedures for deductors and collectors. Unlike previous years, where different provisions took effect on different dates, all these changes will uniformly come into force from April 1, 2025. However, with the proposed new Income Tax Bill on the horizon, it remains to be seen how these provisions will be integrated into the new tax framework.

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