Section 396 of the Income-tax Act, 2025 — Tax Deducted is Income Received (Gross-Up of TDS & TCS)

In plain language

What Section 396 actually says

Section 396 of the Income-tax Act, 2025 lays down a simple but powerful rule: the tax deducted (TDS) or collected (TCS) from your income is itself treated as income you have received. In plain words, when a payer deducts tax before paying you, the law says you have still "received" that deducted amount — you just received it in the form of a tax credit sitting with the government instead of cash in your bank.

The section states that the following sums are deemed to be income received for the purpose of computing an assessee's income:

• Sums deducted under the TDS/TCS Chapter (Chapter XIX of the 2025 Act, sections 392 to 402); and
• Income-tax paid outside India by way of deduction, in respect of which you are allowed a foreign tax credit against your Indian tax liability.

This is the direct successor to Section 198 of the old Income-tax Act, 1961 — the wording has been modernised but the principle is identical.

Why this rule exists — the "grossing up" logic

Imagine a bank pays you ₹90,000 interest after deducting ₹10,000 TDS. If the law did not exist, you might argue your income is only ₹90,000 (what actually hit your account). Section 396 stops that. It says your income is the full ₹1,00,000 (gross amount), because the ₹10,000 TDS is deemed to be income you received. You then claim the ₹10,000 as a credit against your final tax. This protects the tax base while ensuring you are not taxed twice on the same money.

Who it applies to

• Every assessee whose income has suffered TDS or TCS — salaried employees, freelancers, contractors, interest earners, commission agents, landlords receiving rent, sellers of goods, buyers paying TCS, and NRIs.
• Taxpayers claiming foreign tax credit where tax was deducted abroad on their overseas income.

Key exceptions — what is NOT grossed up

Section 396 carves out two situations where the deducted tax is not added back to your income:

• Tax under section 392(2)(a) — this covers tax on non-monetary perquisites that an employer chooses to bear on the employee's behalf (the successor to the old section 192(1A)). Since the employee never had a claim to that amount as cash, it is not treated as the employee's income received.
• Tax deducted under section 393(3) — this covers TDS on cash withdrawals from banks/post offices (the successor to the old section 194N). Because the withdrawal itself is not "income", the tax deducted on it is not grossed up as income.

How it interacts with related sections

• Section 393 (TDS/TCS rates and mechanics) — sets out what is deducted; Section 396 then decides how that deducted amount is treated for computing income.
• Credit for TDS/TCS provisions — you gross up under 396 and take credit separately, so the deducted tax reduces your final payable tax.
• Section 395 (lower/nil deduction certificates) — where a certificate reduces deduction, the grossed-up amount is correspondingly smaller.
• Foreign tax credit rules — the second limb of Section 396 ensures overseas withholding is also grossed up so that FTC is computed on the correct gross figure.

Practical implications for taxpayers

• Always report the gross income in your Income Tax Return, not the net amount credited to you. This is the single most common ITR mismatch with Form 26AS / AIS.
• Your Form 26AS and Annual Information Statement (AIS) show gross income and TDS separately — that structure exists precisely because of Section 396.
• You then claim the TDS/TCS as a credit, so you are never taxed twice.
• TCS credit (for example, TCS on a car purchase or foreign remittance) is also treated consistently — you claim it against your tax liability.