TCS Under Income-tax Act, 2025: Section 394 Guide
A practical TCS guide for sellers and collectors under the new income-tax law, with records for collection, deposit, returns, and customer reconciliation.
Tax collection at source — TCS — works differently from TDS. Here the obligation falls on the seller or service provider, who collects a specified percentage from the buyer at the point of sale and deposits it with the government. Section 394 of the Income-tax Act, 2025 consolidates TCS provisions under the new law, and any seller subject to TCS needs to review whether their billing, accounting, and return processes have been updated accordingly.
This guide is for Indian sellers, finance teams, and founders navigating TCS compliance under the 2025 Act. It is an educational readiness note, not a substitute for professional advice on specific transactions.
What Section 394 means for sellers
TCS is transaction-specific. It applies only where the category of goods or services and the transaction value cross the applicable threshold. Sellers should not collect TCS on transactions that do not meet both conditions — and should not miss it where both conditions are clearly met.
| Point | Practical meaning |
|---|---|
| 1 | TCS applies only where the collection rule fits the transaction. |
| 2 | Customer PAN, invoices, challans, and returns should reconcile. |
| 3 | TCS credits can affect customer AIS and return matching. |
Unlike TDS, where the payer is responsible for deduction, TCS places the burden on the person making the sale. This means the billing team, accounting system, and collections process must each be configured correctly before recurring transactions begin.
The customer-facing side of TCS
Every TCS collection has a downstream effect for the customer. The amount collected appears in the customer's AIS and, if reported correctly, can be claimed as a credit in their income tax return. This creates a reconciliation obligation on both sides: the seller must ensure the TAN, customer PAN, collection amount, and challan are all correctly reported in the TCS return. If any field is wrong, the customer loses the credit, and the seller faces correction work.
A monthly review process — checking transaction category, customer PAN, invoice narration, collection amount, challan, and TCS return — is the most practical way to prevent mismatch from accumulating.
Records a TCS-compliant seller must maintain
- Customer master with PAN and TCS category classification
- Invoices with TCS amount separately shown and narrated
- TCS challans with BSR code, challan serial number, date, and amount
- TCS return acknowledgements by quarter
- Correction notes where TAN, PAN, amount, or period was incorrect
Step-by-step compliance checklist
- Identify whether TCS compliance under the 2025 Act affects AY 2026-27 filing, Tax Year 2026-27 compliance, or both.
- Read the official source and map the rule to your income head, taxpayer type, and dates.
- Collect source records, computation notes, challans, statements, and declarations before filing or payment.
- Check whether the position changes the ITR form, schedule, tax payment, TDS/TCS, or disclosure route.
- Preserve the final return, acknowledgement, e-verification proof, and supporting working papers.
Official references
| Reference | Link |
|---|---|
| Income Tax Department - TDS compliance under 2025 Act | Open source |
| Income Tax Department - Income-tax Act, 2025 PDF | Open source |
| Income Tax Department - Forms under the 2025 Act | Open source |
Common mistakes in TCS compliance
- Collecting TCS without verifying whether the transaction category is actually covered under Section 394.
- Using old form references without confirming the current portal form under the 2025 Act.
- Mixing AY 2026-27 return records with Tax Year 2026-27 TCS records.
- Filing TCS returns without first reconciling challans, invoices, and customer PAN.
- Failing to preserve the official source used for deciding whether a transaction triggers TCS.
Frequently asked questions
Is this TCS under the new Act guidance a substitute for filing advice?
No. It is an educational readiness note. Use the official portal and get case-specific CA review where facts, amounts, residency, or notices are complex.
Should I rely only on prefilled data?
No. Prefill is useful, but the return position should be matched with Form 16, AIS, Form 26AS, bank records, books, broker reports, challans, and working papers.
What should I preserve after taking a position?
Keep the official reference, computation note, supporting documents, portal acknowledgement, challans, and any professional review note in one folder.
How MyeCA helps
MyeCA helps businesses review TCS applicability, organize collection records, validate challans, prepare return files, and decide when CA-led review is warranted. Confirm the year and act reference, read the official source, collect supporting records, and preserve all acknowledgements after filing.