Section 394, Income-tax Act 2025: Collection of tax at source

What is TCS, and how is it different from TDS?

TCS is tax the seller collects from you, on top of the price, and pays to the government against your PAN. TDS works the other way: the person paying you (an employer, a bank, a client) holds back a slice of what they owe you. TCS adds to what you owe the seller. A car dealer bills you the price plus 1% TCS; a bank remitting your money abroad debits the transfer plus 20% TCS. Both TDS and TCS are prepayments of your income tax, and both land in the same place: your Form 26AS and Annual Information Statement (AIS).

The word "collected" is the giveaway. The seller is only a collection agent; the tax is yours, sitting to your credit. When you file your return, TCS is subtracted from your total tax like advance tax, and any excess comes back as a refund. So a student's parent who remits ₹20 lakh for fees and has little taxable income does not lose the TCS; they claim all of it back, though only after filing. That lag is the real cost: your money is parked with the government for the better part of a year.

What changed when Section 206C became Section 394?

Two things at once: the section number and, from the same date, some of the rates. Section 206C of the 1961 Act ran TCS through a spread of sub-sections: 206C(1) for goods like scrap and liquor, 206C(1C) for leases of parking lots and mines, 206C(1F) for motor vehicles, and 206C(1G) for foreign remittances and tour packages. Section 394 of the 2025 Act gathers all of them into one section built around a table, the same design the Act used for TDS in Section 393 next door. Alongside the renumbering, the Finance Act 2026 reset several TCS rates to a flat 2% from 1 April 2026, the very day Section 394 takes effect, so the figures under Section 394 are not the ones that applied in the year before.

Two provisions did not make the journey, and their removal is good news. The 0.1% TCS on the sale of goods above ₹50 lakh (the old Section 206C(1H)) was withdrawn from 1 April 2025 because it overlapped with the buyer's TDS under Section 194Q, so most trade sales no longer carry TCS at all. The higher TCS rate for people who had not filed returns (the old Section 206CCA) was withdrawn from the same date, so a collector no longer screens your filing history before charging you.

There is a timing point. Section 394 governs from 1 April 2026, the start of Tax Year 2026-27, which is the year you are transacting in now, so the rates in the table below are the ones that apply to your current transactions. They differ from the Section 206C figures that ran up to 31 March 2026: the Finance Act 2026 brought the education and medical LRS rate, the overseas tour package and tendu leaves down to 2%, and lifted scrap, minerals and liquor from 1% to 2%, all from 1 April 2026. For a transaction dated in FY 2025-26 or earlier, use the Section 206C rate that applied in that year instead.

Successor confirmed as Section 394, "Collection of tax at source", against the Section 394 text on incometaxindia.gov.in and published copies of the enacted Act.

Who collects TCS from you, and when?

Whoever is on the selling side of a listed transaction. The trigger is the moment of payment: the collector adds TCS when you pay, or when your account is debited, whichever comes first.

The collectors you are most likely to meet:

• Your bank or authorised dealer, when you remit money abroad under the LRS: a foreign trip, an overseas investment, a gift to relatives abroad, or maintenance of a family member studying overseas.
• A travel company, when you buy an overseas tour package, whether or not the money leaves under the LRS.
• A car dealer, or a seller of notified luxury goods (high-value watches, handbags, art, yachts and the like), when the price crosses ₹10 lakh.
• Businesses that sell scrap, minerals, timber, forest produce, tendu leaves or alcoholic liquor, and lessors of parking lots, toll plazas, mines and quarries. These rows target trade buyers, not ordinary consumers.

The goods rows (scrap, minerals, liquor and the rest) do not apply where the buyer uses the goods for personal consumption; that part is a business-to-business levy. The remittance, tour-package and vehicle rows reach individuals directly.

The Section 394 TCS rate table

Every rate in one place. Thresholds are per financial year and, for the LRS, aggregate across all your remittances through authorised dealers.

Rates cross-checked against the Section 394 text on incometaxindia.gov.in as amended by the Finance Act 2026: from 1 April 2026 the education and medical LRS rate, the overseas tour package and tendu leaves moved to 2%, and scrap, minerals and liquor rose to 2%. The ₹10 lakh LRS threshold and the nil rate on loan-funded education carry over from the April 2025 revisions.†

TCS on money sent abroad: the ₹10 lakh line and the 20% rate

The first ₹10 lakh you remit under the LRS in a financial year carries no TCS at all. Cross that line and TCS applies only to the amount above it, not the whole remittance. The ₹10 lakh is an aggregate: every LRS transfer you make through any authorised dealer in the year counts towards it, so four ₹3 lakh transfers trip the threshold on the fourth.

The rate then depends on why you are sending the money. For ordinary purposes (an overseas investment, buying foreign shares, a gift, maintenance of relatives abroad), it is 20% of the excess. For education or medical treatment it is a lower 2% of the excess. And if the education is funded by a loan from a recognised financial institution, TCS is nil, at any amount. That single distinction can be worth lakhs: on ₹30 lakh of foreign fees, self-funding costs ₹40,000 of TCS (2% of the ₹20 lakh above ₹10 lakh) while a sanctioned education loan costs nothing.

Because the ₹10 lakh resets every 1 April, timing matters. A ₹16 lakh remittance split as ₹10 lakh in March and ₹6 lakh in April sits inside two separate annual limits and pays no TCS at all, against ₹1,20,000 if the whole ₹16 lakh goes in one financial year.

Overseas tour packages: why TCS starts from the first rupee

A tour package has no free base. Unlike an LRS transfer, where the first ₹10 lakh escapes TCS, an overseas tour programme package is taxed at a flat 2% from the very first rupee. Buy a ₹4 lakh Europe package and you pay ₹8,000 of TCS, even though ₹4 lakh is nowhere near ₹10 lakh.

This catches people who assume the ₹10 lakh cushion covers holidays too. It does not: a package is taxed from the first rupee. The rate is now a flat 2%, so on the same ₹12 lakh spend a package attracts ₹24,000, while a general-purpose LRS transfer attracts ₹40,000 (20% of the ₹2 lakh above the ₹10 lakh free base). The figure sets the two side by side. Once the spend runs past about ₹11 lakh, the flat 2% on a package works out lower than 20% on the LRS excess, even though the package has no free base.

An overseas tour programme package means a package that bundles at least travel with one of accommodation, sightseeing or similar, for a trip outside India. If you book your flights and hotels separately and pay each provider directly under the LRS, the ₹10 lakh free base is back in play. That helps on a trip under ₹10 lakh, where a package pays 2% and the self-arranged route pays nothing. On a bigger trip the 20% on the LRS excess can overtake the flat 2%, so self-arranging no longer automatically saves.

TCS on cars and luxury goods above ₹10 lakh

A motor vehicle priced above ₹10 lakh carries 1% TCS on the full sale value, not just the part above ₹10 lakh. So a ₹15 lakh car attracts ₹15,000, added to your invoice; a ₹9.9 lakh car attracts nothing. The threshold is on the vehicle's sale consideration, and the dealer collects it whether you pay cash, take a loan or trade in an old car.

From 22 April 2025 the same 1%, above the same ₹10 lakh, was extended to a notified list of luxury goods: wristwatches, handbags and purses, high-end footwear, art and antiques, yachts and helicopters, home-theatre systems and a few others. Buy a ₹12 lakh watch and the jeweller now collects ₹12,000 of TCS, exactly as a car dealer would.

Two practical notes. The 1% is charged on the value the seller actually bills, so a car's on-road price (accessories and add-ons folded into the sale) can push a vehicle listed just under ₹10 lakh over the line. And because it is 1% of the whole value once you cross ₹10 lakh, the jump from a ₹9.99 lakh car to a ₹10.01 lakh car adds a little over ₹10,000 of TCS to the bill: a genuine cliff worth knowing at the negotiating table.

The luxury-goods extension of Section 206C(1F) applies from 22 April 2025; the notified list is set by CBDT and can grow.†

How to calculate the TCS on your transaction

Four steps for any of the personal transactions:

• Identify the row: an LRS remittance, a tour package, or a vehicle or luxury good. The mechanics differ, so this decides everything that follows.
• For an LRS remittance, add up every LRS transfer you have made this financial year. TCS applies only to the aggregate above ₹10 lakh, at 20% (or 2% for education or medical, nil for loan-funded education).
• For a tour package, apply a flat 2% to the whole price, with no free base. For a vehicle or luxury good above ₹10 lakh, apply 1% to the full value.
• The collector adds this figure to your bill and deposits it against your PAN. Note it down: you will claim it back against your tax when you file.

The worked examples below run the LRS, education and tour-package routes end to end.

How you claim TCS back: 26AS, AIS and Form 12BAA

TCS is not a cost, it is a credit sitting in your name. Within a few weeks of the collector depositing it, the amount appears in your Form 26AS and your AIS, tagged to your PAN. When you file your return, you list it like any other prepaid tax, and it reduces your final bill rupee for rupee. If your total tax is lower than the TCS collected, the difference is refunded.

Salaried taxpayers have a faster route than waiting for a refund. Under Form 12BAA (notified by the CBDT in October 2024†), you report the TCS collected from you to your employer, who then reduces the TDS on your salary by that amount. So a ₹1,20,000 TCS on a foreign remittance need not lock up your cash until the refund arrives; it can come straight off your monthly salary TDS instead. Salary TDS itself is governed by Section 392 of the 2025 Act.

TCS also counts towards your advance-tax obligation. If a large amount has already been collected from you during the year, your advance-tax instalments shrink accordingly, so you are not paying the same tax twice and then waiting to reclaim it.

Reconcile the TCS in your AIS against the collector's certificate (Form 27D) before filing. A missing entry means the collector has not deposited it, and you cannot claim credit for what is not reflected against your PAN.

Traps and edge cases

Where TCS surprises people:

• No PAN, higher rate. If you do not give the collector a valid PAN, TCS is charged at a higher rate (broadly twice the normal rate, subject to a floor), and it may not reflect correctly against you. Always quote your PAN.†
• The refund lag is real. Someone with little taxable income (a homemaker, a retiree, a student's parent) still has TCS collected and gets all of it back, but only after filing, so the money is out of reach for months. Plan the cash flow, or use the education-loan route where it fits.
• The ₹10 lakh is per person, per year, aggregate. It is not per remittance and not per bank. Splitting ₹16 lakh across two banks in the same year does not dodge TCS; splitting it across two financial years does.
• Tour package versus self-arranged. A packaged trip is taxed from the first rupee at a flat 2%; the same trip booked as separate flight and hotel payments under the LRS gets the ₹10 lakh free base, then 20% on anything above it. Under ₹10 lakh the self-arranged route wins outright (no TCS); on a large trip the flat-2% package is usually cheaper.
• Non-residents. An NRI remitting out of India is generally outside the LRS, which is a facility for residents, so these remittance rows usually do not apply; different rules govern an NRI's transfers.

Should you plan around TCS?

Yes on the levers that are legitimate, no on the ones that are not. TCS is fully recoverable, so the point of planning is cash flow and timing, not dodging a tax you would owe anyway.

The moves worth making:

• Fund foreign education with a sanctioned loan. On ₹30 lakh of fees, a loan from a recognised financial institution drops the TCS from ₹40,000 (2% on the ₹20 lakh above ₹10 lakh) to nil, and the loan interest is separately deductible under Section 129 (the old 80E). Two benefits from one decision.
• Straddle the financial year. A one-off ₹16 lakh remittance sent entirely before 31 March pays ₹1,20,000 of TCS; ₹10 lakh in March and ₹6 lakh in April, inside two annual limits, pays nothing.
• File Form 12BAA if you are salaried. It converts a locked-up TCS into a lower monthly salary TDS, so you keep the cash instead of lending it to the government until your refund.
• Mind the ₹10 lakh car line. If a vehicle sits at ₹10.2 lakh, the 1% on the whole value is ₹10,200; trimming an accessory to bring the billed value under ₹10 lakh removes the TCS entirely. It is a cliff, not a marginal rate.

What does not work is skipping your PAN to stay invisible, which only triggers a higher rate, or under-declaring a tour package, which the operator reports anyway. Because every rupee of TCS comes back at filing, aggressive avoidance buys a few months of cash flow at the cost of a higher rate or a notice. The income-tax calculator linked below shows how the TCS already collected from you nets against your final bill.

Worked examples

Section 394 FAQs