Employees can claim TCS credit against TDS deduction on salary
Introduction
The Union Budget 2024 introduced a noteworthy amendment to India’s tax framework, specifically aimed at providing relief to salaried individuals who incur Tax Collected at Source (TCS) on certain high-value transactions. Previously, when taxpayers paid TCS on expenses like overseas travel, foreign remittances, or luxury purchases, they had to wait until filing their Income Tax Returns (ITR) to claim a refund or credit. This often meant that a large amount of cash, sometimes amounting to 20% of the transaction value, would remain tied up until the ITR was processed, leading to cash flow issues and financial strain.
The new proposal offers a solution: allowing salaried employees to offset the TCS they have paid against the Tax Deducted at Source (TDS) on their salary. Once implemented, this change will allow taxpayers to reduce their TDS liabilities based on the TCS paid throughout the financial year, resulting in increased monthly take-home pay and immediate cash flow benefits. This initiative aligns with the government’s goals to simplify tax compliance and improve cash flow management for salaried individuals, making the tax system more efficient and taxpayer-friendly.
Understanding TDS and TCS
– Tax Deducted at Source (TDS): This tax is deducted from an individual’s salary or other forms of income by the employer or the income provider. The amount deducted is based on the employee’s annual income and the applicable tax slabs under the chosen tax regime.
– Tax Collected at Source (TCS): This tax is collected on specific transactions, typically luxury or high-value transactions like foreign remittances under the Liberalised Remittance Scheme (LRS), overseas tour packages, and certain luxury purchases. TCS is collected by the service provider (such as a travel agency or bank) at the point of sale or transaction.
This means a salaried person paying TCS on a transaction essentially pays double tax until they receive a refund or offset at the end of the financial year, adding an unnecessary strain on their finances.
TCS Rates on Specified Transactions
To understand the financial impact, let’s examine the TCS rates applicable to some common high-value transactions:
| Nature of Payment | Section | Threshold | TCS Rate |
| Sale of motor vehicle/luxury goods (from Jan 2025) | 206C (1F) | Above Rs. 10,00,000 | 1% |
| Remittance under LRS for education (Sec 80E loan) | 206C (1G) | Above Rs. 7,00,000 | 0.50% |
| Overseas tour package (under LRS) | 206C (1G) | Up to Rs. 7,00,000 | 5% |
| Overseas tour package (above Rs. 7,00,000) | 206C (1G) | No threshold | 20% |
| Other remittances under LRS | 206C (1G) | No threshold | 20% |
For high TCS rates, such as 20% on overseas tour packages above Rs. 7 lakh, this provision would offer substantial relief by allowing salaried taxpayers to offset the amount paid in TCS directly from their TDS deductions on their monthly salary, without having to wait for a year or more to claim it.
Proposed Amendment: Credit of TCS Against TDS on Salary
The proposed amendment aims to address the issue of double taxation by allowing taxpayers to declare TCS paid on specific transactions and offset it against their TDS deduction on salary. Here’s how this change would work once it takes effect on October 1, 2024:
1. Employee Declaration of TCS Paid: An employee who has paid TCS on qualifying transactions (like booking an overseas tour or making a foreign remittance) will need to provide these details to their employer. This information includes the amount paid as TCS and the nature of the transaction.
2. Employer’s Role in TDS Adjustment: Based on the declared TCS details, the employer will reduce the TDS liability on the employee’s monthly salary. This adjusted TDS will account for the TCS already paid, ensuring the employee’s salary deductions are lower, thereby boosting their monthly cash flow.
3. Immediate Relief: By offsetting TCS payments against TDS, the amendment eliminates the need for employees to wait until filing their ITR to claim a refund. Employees can realize the tax benefits in real-time, leading to increased cash flow and immediate financial relief.
Example for Better Understanding
Let’s consider a hypothetical example to illustrate the impact of this amendment on an employee’s monthly income and tax liabilities.
– Scenario: Mr. Ramesh, a salaried individual, books an overseas tour package worth Rs. 10 lakh in April 2024. Under Section 206C (1G), TCS at 20% (Rs. 2 lakh) is collected by the travel agency at the time of purchase.
– Current Framework: Under the old system, Mr. Ramesh would need to wait until the end of the financial year to file his ITR, claim the Rs. 2 lakh TCS as a refund, and then wait further for the refund to be processed, which could take months. During this time, Rs. 2 lakh of Mr. Ramesh’s income would remain blocked.
– New Framework (Budget 2024 Amendment): From October 1, 2024, Mr. Ramesh can declare this Rs. 2 lakh TCS to his employer. The employer will factor in the TCS paid, reduce the TDS deducted from Mr. Ramesh’s monthly salary, and adjust it against the TCS credit, giving him a higher take-home pay each month.
Impact: Instead of waiting for months to claim the TCS refund, Mr. Ramesh can enjoy an immediate increase in cash flow and avoid excess tax deductions from his salary.
Benefits of the New TCS Credit Mechanism
1. Increased Monthly Cash Flow: By allowing salaried individuals to offset TCS against TDS, the amendment provides a significant increase in monthly take-home pay for those who would otherwise see substantial TDS deductions on their salary.
2. Immediate Financial Relief: Taxpayers benefit from immediate relief on the funds withheld as TCS, eliminating the need to wait for the ITR filing and refund processing cycles.
3. Simplified Tax Compliance: The provision reduces the administrative burden on employees by removing the requirement to claim TCS refunds separately, streamlining the tax compliance process.
4. Alignment with Government’s Goals: The proposal reflects the government’s broader goal of “ease of living” and “ease of doing business” by making tax compliance easier and cash flows smoother for salaried taxpayers.
Conclusion
The Budget 2024 proposal allowing credit of TCS against TDS on salary is a transformative reform for salaried individuals who often face the burden of double taxation on high-value transactions. By enabling employees to claim immediate credit for TCS against their TDS liability, the amendment not only improves monthly cash flow but also simplifies the tax process. This shift from a year-long wait for refunds to real-time credit reflects a significant advancement towards a taxpayer-friendly system.
When the proposal is implemented on October 1, 2024, salaried taxpayers will benefit from increased take-home pay and relief from the administrative complexities of ITR filings and refund claims. This change is more than a financial relief; it signifies a step toward a more efficient, simplified, and equitable tax system in India. By addressing the immediate cash flow needs of taxpayers, the government has taken a progressive step in making tax compliance a smoother experience for salaried individuals across the country.
