Section 394 of the Income-tax Act, 2025 — Collection of Tax at Source (TCS)

In plain language

What Section 394 is all about

Section 394 of the Income-tax Act, 2025 is the single, consolidated provision that governs Tax Collection at Source (TCS). It takes over the entire job that Section 206C of the old Income-tax Act, 1961 used to do — including its sub-sections 206C(1), (1C), (1F) and (1G). From 1 April 2026 (Tax Year 2026-27), every TCS challan, return and certificate should refer to Section 394 rather than 206C.

TCS is the mirror-image of TDS. In TDS the payer deducts tax; in TCS the seller/collector adds a small percentage of tax on top of the sale price, collects it from the buyer, and deposits it with the Government. The buyer later claims that amount as a credit (like advance tax) when filing their return.

Who must collect TCS under Section 394

• Sellers — of specified goods such as alcoholic liquor, tendu leaves, timber, other forest produce, scrap, and minerals (coal, lignite, iron ore); plus motor vehicles, notified luxury goods and overseas tour packages.
• Authorised Dealers (banks) — on foreign remittances made under the RBI's Liberalised Remittance Scheme (LRS).
• Licensors / lessors — who grant a licence or lease over parking lots, toll plazas, mines and quarries.

The definition of "seller" broadly covers Central/State Government, companies, firms, co-operative societies and any individual/HUF whose accounts were subject to tax audit in the preceding year.

When the tax is collected

TCS must be collected at the earlier of two events:

• when the amount is debited to the buyer's account in the seller's books, or
• when the amount is actually received from the buyer (cash, cheque, draft or any mode).

Key thresholds and conditions

• Motor vehicles / notified goods: TCS applies only where the sale consideration exceeds ₹10 lakh per transaction.
• Notified luxury goods (watches, handbags, art, yachts, etc.): TCS on a single item priced above ₹10 lakh.
• LRS foreign remittances: TCS applies only on the amount exceeding ₹10 lakh in a financial year; remittances funded by an education loan from a notified financial institution are exempt (Nil).
• Specified goods like liquor, scrap, minerals and forest produce have no threshold — TCS applies from the first rupee.

Exemptions and no double collection

• Manufacturing/processing declaration [Section 394(2)]: A resident buyer who buys specified goods for manufacturing, processing or generating power (not for re-trading) can furnish a written declaration and escape TCS on those goods. The collector must forward a copy to the tax authority by the 7th of the next month.
• No TCS if TDS already applies: Broadly, where the buyer has already deducted tax at source on the same amount, TCS is not collected again — this prevents double taxation on the same transaction.
• Overseas tour packages: Anti-double-collection rules ensure that if TCS was already collected on an LRS leg, it is not charged twice.

No PAN, higher rate

If the buyer or remitter does not furnish PAN (or Aadhaar), TCS is collected at a higher rate under Section 397 — generally the higher of twice the normal rate or 5% (and up to 20% for certain LRS cases). Always give your PAN to the collector.

Consequences of non-compliance

• Failure to collect: interest at 1% per month on the amount not collected.
• Collected but not deposited: interest at 1.5% per month until deposited, plus possible penalty and prosecution.
• The collector must also file quarterly TCS returns and issue a TCS certificate (Form 27D) to the buyer.

Important caveat on rates: the Finance Act, 2026 rationalised several TCS rates from 1 April 2026 (for example, harmonising many goods to 2% and moving overseas tour packages and LRS education/medical to a flat 2%). A few published charts still show the original 2025 figures (liquor/scrap 1%, tendu leaves 5%). Because rate notifications can change, verify the exact rate for your transaction against the latest CBDT notification before deducting.