24 Feb 2025
Partner: Himanshu Sinha, Counsel: Rohit Kumar S, Associate: Anjani Kumar
The Union Budget 2025-26 introduces significant changes to tax deduction at source (TDS) and tax collection at source (TCS) provisions, aiming to streamline compliance and administrative procedures. These amendments focus on revising thresholds, eliminating redundant provisions, and enhancing tax administration efficiency for both individuals and businesses. These measures reflect the government’s commitment to fostering a more efficient and taxpayer-friendly system.
The provisions of TDS and TCS have various thresholds of the amount of payment or amount of income beyond which tax is required to be deducted or collected. The proposed changes to the thresholds of TDS and TCS provisions of the Income Tax Act, 1961 (ITA) are tabulated below. These will be effective from 1 April 2025.
| Section | Nature of payment | Current threshold | Proposed threshold |
| 193 | Interest on securities | Nil | INR 10,000 |
| 194 | Dividend for an individual shareholder | INR 5,000 | INR 10,000 |
| 194A | Interest other than interest on securities | When payer is bank, cooperative society and post office:
| When payer is bank, cooperative society and post office:
|
| 194B | Winnings from lottery, crossword puzzle, etc. | Aggregate of amounts exceeding INR 10,000 during the financial year | INR 10,000 in respect of a single transaction |
| 194BB | Winnings from horse race | ||
| 194D | Insurance commission | INR 15,000 | INR 20,000 |
| 194G | Income by way of commission, prize, etc., on lottery tickets | INR 15,000 | INR 20,000 |
| 194H | Commission or brokerage | INR 15,000 | INR 20,000 |
| 194-I | Rent | INR 2,40,000 during the financial year | INR 50,000 per month or part of a month |
| 194J | Fee for professional or technical services | INR 30,000 | INR 50,000 |
| 194K | Income in respect of units of a mutual fund or specified company or undertaking | INR 5,000 | INR 10,000 |
| 194LA | Income by way of enhanced compensation | INR 2,50,000 | INR 5,00,000 |
| 206C(1G) | TCS on remittance under the liberalised remittance scheme and for overseas tour programme package | INR 7,00,000 | INR 10,00,000 |
| 206C(1G) | TCS on remittance of any sum out of loan from specified financial institution for education | INR 7,00,000 | TCS not applicable |
While the Finance Bill, 2025 has increased the thresholds, the increase is very marginal for most of the sections and may not benefit a larger population. The increase in TDS thresholds for payment of rent is, however, meaningful.
The removal of TCS on remittance of any sum out of loan from specified financial institution for education is a welcome move as it eases the cash flow issues on remittances.
Section 194LBC of the ITA mandates that when a securitisation trust pays income to a resident investor for an investment in the trust, the person responsible for making the payment must deduct income tax at a rate of 25% for individuals and Hindu Undivided Families (HUF) and 30% for other entities. It is proposed to reduce the TDS rate under Section 194LBC from 25% and 30% to 10%, considering that the sector is now well-organised and regulated. This amendment will come into effect from 1 April 2025. This is a welcome amendment, as the earlier rates were very high.
Section 206C(IH) of the ITA requires a seller to collect TCS at a rate of 0.1% from the buyer on the sale of goods if the total consideration received exceeds INR 50 lakh in a financial year, subject to certain conditions. Similarly, Section 194Q of the ITA mandates that a buyer must deduct TDS at a rate of 0.1% when making payments to a resident seller for the purchase of goods exceeding INR 50 lakh in a financial year.
While Section 206C(1H) imposes TCS on sellers, Section 194Q requires TDS from buyers for the same transaction. The law currently states that TCS under Section 206C(1H) does not apply if the buyer is liable to deduct TDS under any other provision of the ITA. However, sellers have raised concerns about the difficulty in verifying whether buyers have fulfilled their TDS obligations under Section 194Q, often leading to both TDS and TCS being applied to the same transaction.
To enhance the ease of doing business and reduce compliance burdens, it is proposed that the provisions of Section 206C(1H) will no longer be applicable from 1 April 2025.
This amendment is also useful for certain share sale transactions where TCS was being collected by sellers on the sale of shares of unlisted companies in certain specific situations (for example, on the sale of shares by a seller to a buyer where the buyer does not do TDS under section 194Q due to tax treaty benefits or any other reason). Going forward, there will be no requirement to collect TCS on the sale of such unlisted shares.
Sections 206AB and 206CCA of the ITA mandate tax deduction and collection, respectively, at a higher rate if the deductee is a non-filer of income tax returns.
Various stakeholders have raised concerns regarding the challenges faced by deductors and collectors in verifying the tax return filing status of deductees and collectees at the time of deduction or collection. The lack of a streamlined verification process has led to the unintended application of higher tax rates, resulting in blocked capital and an increased compliance burden for businesses.
To address these issues and simplify compliance, Sections 206AB and 206CCA are proposed to be omitted from the ITA. Set to take effect on 1 April 2025, these changes aim to ease procedural complexities and ensure a more business-friendly tax system.
Section 276BB of the ITA prescribes prosecution for failure to remit TCS to the central government. Under the existing provision, if a person fails to deposit the TCS as required under Section 206C, they are liable for rigorous imprisonment of not less than three months, which may extend up to seven years, along with a fine.
To provide relief and reduce the risk of prosecution in cases of delayed payment, it is proposed to amend Section 276BB to state that prosecution will not be initiated if the TCS is deposited with the central government on or before the due date for filing the quarterly statement, as specified under the proviso to Section 206C(3) of the ITA. This amendment will come into effect from 1 April 2025.
The proposed amendments introduce crucial reforms aimed at simplifying tax compliance. By increasing threshold limits for TDS, the government seeks to reduce the compliance burden, enhance cash flow for taxpayers, and minimise reliance on refunds. This move aligns tax provisions with economic realities, ensuring a more efficient and predictable tax framework.
By simplifying compliance, reducing financial burdens, and leveraging technology for tax administration, the government aims to encourage voluntary compliance and economic growth.
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