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Tax Collected at Source (TCS) on the sale of goods was introduced under Section 206C(1H) of the Income Tax Act through the Finance Act 2020. It required certain sellers to collect a small percentage of tax from buyers once their annual purchases crossed a prescribed limit. The intent was simple: widen the reporting net and improve traceability of high-value business transactions.
Ever since the provision came into force, the most common questions businesses have asked are: When is TCS applicable? Does it apply on all sales? What exactly is the ₹50 lakh threshold? And how do you calculate the amount correctly? These questions drive most search traffic today, and understanding them is essential for business owners, accountants, and finance teams.
It’s also important to note the major update in Budget 2025:
TCS on sale of goods under Section 206C(1H) has been removed starting FY 2025–26.
This makes it even more important to clearly understand how the rule worked until FY 2024–25, what changes from April 2025, and how businesses should manage the transition.
In this article, we’ll break down everything you need to know — applicability conditions, turnover limits, the ₹50 lakh rule, TCS rates, calculation examples, exclusions, compliance requirements, and the latest 2025 amendments — all explained in a simple, practical way.
TCS on the sale of goods means Tax Collected at Source according to Section 206C(1H) of the Income Tax Act. This article laid down through the Finance Act 2020 and came into force since 1 October 2020, this provision obliged selected sellers to take from the buyers a small percentage of the tax once their purchases exceeded a certain limit. The regulation remained in force until its repeal from the financial year 2025–26 onwards.
According to this provision, a seller had to collect TCS from the amount paid by a buyer exceeding ₹50 lakh in a financial year if the seller's turnover in the previous year was more than ₹10 crore. Therefore, TCS on the sale of goods was a targeted compliance requirement, only high-value transactions and large businesses were concerned.
The responsibility lay entirely with the seller. Businesses with turnover above ₹10 crore were expected to collect TCS when they received payment from the buyer, deposit it with the government, and report it in their quarterly TCS return. Smaller businesses were not covered under this rule.
Section 206C(1H) applied strictly to the sale of goods, not services. It also excluded specific categories such as exports, imports, government purchases, and goods that were already taxed under other subsections (for example, motor vehicles under 206C(1F)). In simple terms, if a buyer’s annual purchases crossed ₹50 lakh and the seller met the turnover criteria, TCS became applicable on the excess amount.
While both are tax-at-source mechanisms, they operate differently.
Another important rule was that if the buyer deducted TDS under Section 194Q, the seller did not have to collect TCS — TDS took priority.
TCS as per Section 206C(1H) was not meant to be extended to all kinds of business or sales. It was applicable only if certain conditions were satisfied by the seller and the buyer. Knowing these conditions was very important as most of the misunderstandings about TCS had their origin in the question of whether a transaction was covered by this provision at all.
The first condition was seller-focused. TCS was to be charged only if the seller’s total turnover in the last financial year was more than ₹10 crore. So, small and mid-sized business enterprises with a turnover of less than this limit were completely free from the TCS provisions of this section.
The turnover for this purpose was the revenue from all business activities of the seller and not just the goods covered by Section 206C(1H). After the seller crossed the ₹10 crore threshold, he was required to keep track of the receipts from each buyer and collect TCS whenever it was due.
It is also the reason for this rule that questions like "tcs turnover limit", "10 crore tcs rule" and "tcs on sale of goods turnover limit" are very common - many businesses wanted to find out if the rule was applicable to them.
The second provision considered the buyer's yearly purchase volume. TCS was required only in a situation where the total purchases of a buyer from a single seller crossed ₹50 lakh in a financial year.
TCS was not levied on the whole amount but only on that part which was above ₹50 lakh.
Thus, if a buyer had purchased goods worth ₹60 lakh, TCS was collected only on ₹10 lakh. This provision was a source of confusion very often because companies could not ascertain if the threshold was to be applied to invoices, payments, or GST-inclusive values. The law has now made it clear that TCS is a provision that gets activated upon the receipt of the value exceeding the ₹50 lakh limit.
Even if both monetary thresholds were met, TCS applied only to the sale of goods, not services. This distinction was important for businesses offering mixed supply (goods + services), where only the goods component was considered for TCS calculation.
There were also several categories where TCS did not apply, including:
Additionally, if the buyer deducted TDS under Section 194Q, TCS was not applicable—TDS always took precedence.
The TCS rate under Section 206C(1H) was relatively simple to understand. After the buyers’ total purchases in a year exceeded ₹50 lakh, the sellers had to collect TCS at 0.1% of the amount that was above ₹50 lakh. This rate was applicable when the buyer had given a valid PAN or Aadhaar and the payment was made towards the sale of goods.
In the case when the buyer did not furnish PAN or Aadhaar, the TCS rate was raised significantly up to 1%, in accordance with the Income Tax Act provisions which are applicable to non-compliant buyers at a higher rate. The reason behind such a large number of searches for the phrases “tcs rate on sale of goods” and “rate of tcs on sale of goods” is that many businesses failed to recognize this difference.
Another very important clarification was that GST should not be considered while determining whether the limit of ₹50 lakh has been crossed. The limit was for goods only, not for the tax component. However, when TCS was to be levied, the amount on which it was being collected was the total amount that had been received, which may have included GST—this was because the law required TCS to be collected at the time of “receipt” and not on the taxable value alone.
Practically, it implied:
This twofold regulation was the source of confusion among accountants and business owners.
Although the rule itself was simple, most confusion around TCS came from its calculation — especially when buyers crossed the ₹50 lakh annual threshold through multiple transactions. The law required TCS to be collected only on the amount exceeding ₹50 lakh, and this applied on a per-buyer, per-year basis. Here’s how the calculation works in real scenarios.
Suppose a buyer purchases goods worth ₹70 lakh from a seller during the financial year.
The first ₹50 lakh is exempt under Section 206C(1H). TCS applies only to the excess ₹20 lakh.
At the standard TCS rate of 0.1%, the amount to be collected becomes:
TCS = ₹20,00,000 × 0.1% = ₹2,000
This example reflects the most searched scenario — tcs above 50 lakhs with example — and shows that the rate applies only on the incremental amount.
Many businesses hit the threshold gradually. Consider this situation:
Here, TCS applies only on the ₹5 lakh that exceeds the annual ₹50 lakh threshold — not on the full second invoice.
TCS at 0.1% becomes:
TCS = ₹5,00,000 × 0.1% = ₹500
This example highlights why companies needed ongoing tracking, not just invoice-based calculations.
If the buyer failed to provide a PAN or Aadhaar, the TCS rate increased dramatically to 1%, as per higher-rate provisions under income tax rules.
Using the same figures as Example 1:
Amount above threshold = ₹20 lakh
Rate applicable = 1%
TCS collected = ₹20,00,000 × 1% = ₹20,000
The turnover and threshold logic remained the same — only the rate changed because the buyer was considered non-compliant.
Even in cases where a seller had a turnover of ₹10 crore or more and a buyer crossed the ₹50 lakh mark, TCS under Section 206C(1H) was not applicable to every transaction. There were quite a few exclusions in the provision, and most of the confusion around this rule resulted from the fact that people didn’t know in which cases TCS was not required.
The first significant exclusion was export transactions. No TCS under this section was due on any sale of goods outside India—whether by direct export or deemed export. Correspondingly, there were never any covers for imports since TCS is a collection instrument from a domestic buyer.
The other crucial restriction was that Section 206C(1H) referred to goods only and not services. Those businesses which were in mixed supply (goods + services) were required to apply TCS only on the goods component of the transaction.
Some goods were specifically excluded because they were already accounted for under the existing TCS provisions. These were:
Sales to specific entities were also exempt. The law excluded the Central and State Governments, local authorities, embassies, and other notified bodies from the definition of “buyer.” As a result, TCS was not required on sales to these categories, regardless of transaction size.
A final and very critical exclusion involved the interaction with TDS under Section 194Q. If the buyer was liable to deduct TDS on the purchase of goods, then the seller was not required to collect TCS. TDS took clear priority over TCS, avoiding duplication and ensuring that only one form of tax withholding applied.
In summary, TCS under Section 206C(1H) applied only when all the core conditions aligned—seller eligibility, buyer threshold, and transaction type. The moment a transaction fell into any of the exclusions outlined above, TCS was not applicable.
One of the most important clarifications issued after the introduction of Section 206C(1H) was how it interacts with Section 194Q, the TDS provision on the purchase of goods introduced in July 2021. Many businesses faced uncertainty about whether both TDS and TCS applied, or which party was responsible for compliance.
The rule is actually straightforward:
If the buyer is required to deduct TDS under Section 194Q, then the seller does not collect TCS under Section 206C(1H).
In other words:
194Q overrides 206C(1H).
This “priority rule” ensures that only one tax-at-source mechanism applies to a single transaction. It also shifts the compliance burden based on who is eligible—TDS is buyer-driven, while TCS is seller-driven.
This simplified chart highlights the exact difference and the priority rule:
Among major changes that have been brought by the Budget 2025, the government made the announcement about a complete removal of TCS on the sale of goods under Section 206C(1H) from the next financial year. In other words, the provision, which had been operating since October 2020, is not applicable from 1 April 2025 anymore.
The decision to remove the TCS from the sale of goods was a response to the widespread critique of the TCS rule being an administrative burden by businesses and tax experts. They pointed out that in order to comply with TCS under Section 206C(1H), they had to constantly trace the buyers at different levels, carry out reconciliations of receipts, and keep an eye out for the ₹50 lakh limit; hence it was difficult for sellers as well as accountants—especially in industries of a large turnover.
The main reason for the government to take away this provision is that the compliance load was too high compared to the revenue generated. There were many businesses in which the activity of monitoring whether a buyer had crossed the ₹50 lakh limit and the act of collecting the TCS at the rate of 0.1% caused more problems in the workflow than the actual collection of the tax. The government has decided that the TCS rule has outlived its useful life with the advent of other reporting modes such as the TDS under Section 194Q and the data made more transparent through GST.
By removing the section, Budget 2025 aims to:
There are several immediate advantages of the elimination of TCS under Section 206C(1H):
Companies should know the difference between two timeframes:
The provisions of Section 206C(1H) remain in force. If there are any sellers who are exempt from collecting TCS, then they must do so during FY 2024–25.
There is a complete removal of TCS on sale of goods, and no collection is needed for FY 2025–26 onwards. Workflows that are already in place in ERP, accounting software, and billing systems should be changed to reflect this alteration.
For many companies, this transition will simplify year-end processes, reduce monitoring requirements, and eliminate the need to deal with minor ledger differences caused by timing of receipts.
TCS on the sale of goods under Section 206C(1H) was a fairly complex compliance requirement for businesses and accountants. While the provision caused more administrative work than anticipated, it also led companies to enhance their record-keeping and reporting accuracy during the period it was applicable.
From the abolition of this section from FY 2025–26, the business community is relieved from the necessity to charge TCS on the sale of goods. However, knowing the functioning of the rule is still vital for the past filings, audits, and closing obligations till 31 March 2025.
No. TCS on sale of goods under Section 206C(1H) has been removed from 1 April 2025 (FY 2025–26 onward).
Businesses no longer need to collect TCS on receipts above ₹50 lakh.
TCS was applicable only up to 31 March 2025.
The government withdrew the provision to:
The rule created high operational load but contributed little incremental tax revenue, making it suitable for removal.
Because TCS under Section 206C(1H) was applicable for:
Businesses still need clarity for:
For historical reference:
This is no longer charged after FY 2024–25.
No. It applied only when:
These conditions are no longer relevant for FY 2025–26 onward.
Prior to removal:
This interaction no longer matters going forward but remains relevant for past assessments.
Yes. From 1 April 2025, businesses should:
Yes. Sellers must:
After that, no further TCS on sale of goods applies.
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