Many property sellers have to pay 3.5 times more TDS and TCS due to issues with Income Tax TDS, TCS rules; Five such I-T rules need overhaul
The Income-tax Act, 2025 (New Act) represents a significant transformation from the Income-tax Act, 1961 (Old Act), primarily by streamlining the language to eliminate unnecessary provisos and explanations, thereby enhancing the clarity and accessibility of substantive law. However, the accompanying Income-tax Rules continue to impose procedural complexities and challenges for numerous taxpayers.
Taxpayers frequently encounter various burdensome Income-tax Rules. Issues such as denial of TDS credit due to defaults by deductors and Non-Resident Indians (NRIs) facing double taxation from overlapping TDS and TCS on property sales contribute to financial stress and compliance difficulties.
In some instances, taxpayers may end up paying nearly 3.5 times their actual tax liability, often experiencing lengthy delays for refunds. Procedural setbacks, antiquated reporting requirements, and unwarranted certification responsibilities exacerbate these issues. If not aligned with the objectives of the New Act, these Rules may negate the intended benefits of reform.
Below are five pivotal issues concerning the income tax rules along with suggestions for improvement.
1. Credit of TDS/TCS – Conflict between Income Tax Act and Income Tax Rule
Issue: Section 401 of the New 2025 Act (formerly Section 205 of the Old 1961 Act) stipulates that once tax is deducted at source, it cannot be collected again from the deductee. Additionally, Section 391 (previously Section 191 of the Old Act) mandates that the assessee is required to pay tax only to the extent that TDS has not been deducted. However, Rule 37BA permits TDS credit only when the deducted tax has been actually deposited with the Government, leading to:
- Deductees being denied credit for taxes that have been deducted if the deductor fails to deposit or misreports.
- Refunds being delayed or denied, and demands being raised against taxpayers, even as the law requires recovery solely from deductors.
Suggestion: Introduce a new Rule (corresponding to Rule 37BA) that allows credit based on evidence provided by the deductee (e.g., payslip, Form 16/16A) where the deductor fails to deposit or disclose TDS. This adjustment will harmonize the Rules with Sections 391 and 401, thus safeguarding genuine taxpayers.
2. Overlap of TDS and TCS for NRIs Selling Property
Issue: Section 393(2) of the New 2025 Act (previously Section 195 of the Old Act) mandates TDS on payments made to non-residents, while Section 394 (formerly Section 206C(1G) of the Old Act) imposes TCS on foreign remittances. NRIs may encounter both TDS and TCS liabilities regarding property sale transactions, contingent on the method of payment:
| Situation | Description | TDS (12.5%) | TCS (20%) | Total (TDS + TCS) |
|---|---|---|---|---|
| 1 | Purchaser deducts TDS on gross sale and deposits balance into NRO account. | ₹12,50,000 | ₹15,50,000 | ₹28,00,000 |
| 2 | Purchaser pays sale consideration directly in foreign currency; exempt from TCS if TDS deducted. | ₹12,50,000 | ₹0 | ₹12,50,000 |
Illustration (Residential property sold in FY 2025–26)
| Particulars | Situation-1 (Amount in Rs ) | Situation-2 (Amount in Rs ) | |
| Sale consideration | A | 1,00,00,000 | 1,00,00,000 |
| Cost of Acquisition | B | 50,00,000 | 50,00,000 |
| LTCG | C [(A (-) B] | 50,00,000 | 50,00,000 |
| Tax Rate# | D | 12.5% | 12.5% |
| Tax payable# | E ( C*12,5%) | 6,25,000 | 6,25,000 |
| TDS rate# | F | 12.5% on ₹1,00,00,000 | 12,5% on ₹1,00,00,000 |
| TDS# | G (A*12.5%) | 12,50,000 | 12,50,000 |
| Amount considered for TCS | H [A(-)(G+10L)] | 77,50,000 | 0 |
| TCS Rate # | I | 20% | 0 |
| TCS # | J | 15,50,000 | 0 |
| Aggregate of TDS & TCS# | K ( G+J) | 28,00,000 | 12,50,000 |
| Excess TDS+ TDS# | L [ K (-) E)] | 21,75,000 | 6,25,000 |
#Cess and surcharge not considered to simplify the example
This table highlights the anomaly:
- In Situation 1, excess collection (TDS + TCS) is almost 3.5 times the actual liability.
- In Situation 2, it is double the actual liability.
- In both cases, NRIs have to wait for refunds after filing ITR, resulting in unnecessary blockage of substantial funds.
Suggestion: Purchasers may apply to the Assessing Officer for lower/no TDS certificates under Sections 395(1)(a) and 395(2)(a) of the New Act (as per Section 195(2) of the Old Act). NRIs may also seek lower TCS certificates under Section 395(3) of the New Act (previously Section 206C(9) of the Old Act). Nevertheless, these procedures add to compliance costs and complexities. Therefore, the Central Government, leveraging its authority under Section 400(1) of the New Act, should:
- Clarify that in situations where TDS has been deducted, no TCS should be collected.
- Alternatively, insert a new sub-section in Section 394, similar to sub-section (5), explicitly exempting such transactions from TCS.
3. Reforms in TDS/TCS Rules
Issue: Rule 30 (TDS) and Rule 37CA (TCS) currently allow substantial delays (up to 7 days or longer in specific cases) for depositing deducted/collected taxes into the Government account. The interval between deduction/collection and deposit fosters defaults in remittance and reporting errors, leading to interest liabilities even for a one-day delay.
Suggestion: Mandate same-day or next-day deposits of TDS/TCS through online systems and enforce a uniform timeline across all sections. This will reduce defaults and guarantee timely credits to deductees.
4. Quarterly TDS/TCS Statements vs. Challan-cum-Statement
Issue: Deductors/collectors are obligated to file quarterly TDS/TCS statements. Delays incur penalties of ₹200 per day. In contrast, certain sections (194-IA, 194-IB, 194M, 194S of the Old Act, 1961) require Challan-cum-Statement forms (26QB/26QC/26QD/26QE). The requirement for quarterly filing induces compliance burdens, reporting errors, and delayed credits to deductees.
Suggestion: Transition to a Challan-cum-statement system uniformly, incorporating a multiple-entry option to facilitate immediate reporting, ensure timely credit, and reduce compliance costs.
5. Relief under Section 398 of the New Income Tax Act, 2025
Issue: Section 398(1) of the New Act (previously Section 201 of the Old Act) designates a deductor as an assessee-in-default if tax deducted is not deposited with the Government. Section 398(2) offers relief if the payee has filed an Income Tax Return (ITR), disclosed income, and paid tax, conditional upon submitting a Chartered Accountant’s (CA) certificate. In today’s digital landscape, where ITRs are readily available to the Department, mandating a CA’s certificate imposes undue compliance burdens and costs.
Suggestion: Establish rules that accept the ITR filed by the payee, with system-based verification, as sufficient compliance. CA certification should only be essential in exceptional scenarios, such as when income remains undisclosed.
The author – O. P. Yadav, is a Tax Evangelist at Prosperr.io and Former Principal Commissioner of the Income-Tax Department.