TDS & TCS Rate Changes Under the New Income Tax Regime: What's Different in 2026
- shubhamtulsian05
- 6 days ago
- 4 min read
Recent Union Budgets have progressively rationalised India's TDS and TCS framework — reducing rates on several categories, raising thresholds to ease compliance burden on small transactions, and merging overlapping provisions that previously created confusion about which section applied to a given payment. Businesses still applying pre-rationalisation rates risk both compliance errors and unnecessary cash flow lock-up. Here is the complete, updated picture for 2026.
Why TDS/TCS Rationalisation Was Needed
Before recent reforms, India had an unusually large number of TDS sections — over 30 — many with overlapping applicability, inconsistent thresholds, and rates that hadn't been reviewed for years despite changing economic conditions. This created genuine compliance confusion, particularly for small businesses trying to determine which of several potentially applicable sections governed a specific payment.
Key TDS Rate Reductions
Section 194DA (Life Insurance Payouts): TDS rate on the taxable portion of life insurance maturity proceeds was rationalised to 2% (reduced from the earlier 5%), reflecting the government's intent to ease the burden on policyholders while still ensuring tax compliance on the taxable component.
Section 194H (Commission/Brokerage): Rate maintained at 2% (rationalised down from the historical 5% in earlier reforms), aligning it closer to similar service-based TDS categories.
Section 194-IB (Rent by Individuals/HUF): Rate maintained at 2% for individual/HUF tenants paying rent above the threshold who are not subject to tax audit — simplified to align with the broader rent TDS framework.
Section 194G (Lottery Commission): Rationalised to 2%, down from the earlier 5%, easing the burden on small lottery and prize distribution agents.
Threshold Increases — Reducing Compliance Burden on Small Transactions
Section 194-I (Rent): Threshold for TDS on rent raised to ₹6,00,000 per annum (from ₹2,40,000), meaning small landlords with modest rental income are now outside the TDS net for most tenants.
Section 194J (Professional/Technical Fees): Threshold remains at ₹50,000 — though there has been continued advocacy for raising it given inflation since the threshold was last set, this remains a watch area for future Budgets.
Section 206C(1H) — TCS on Sale of Goods: Following the Section 194Q vs 206C(1H) overlap rationalisation, sellers are no longer required to collect TCS on transactions where the buyer has already deducted TDS under Section 194Q — eliminating dual compliance on the same transaction.
TCS on Foreign Remittances Under LRS — Major Changes
This has been one of the most significant areas of TCS reform, given its direct impact on individuals sending money abroad for education, travel, and investment:
Education loan-funded remittances: TCS reduced to NIL for remittances for education purposes financed through a loan from a specified financial institution — recognising that education loan-funded transfers don't represent discretionary spending requiring revenue tracking at the same intensity.
Education/medical treatment (self-funded): TCS rate of 5% applies for amounts exceeding ₹7 lakh in a financial year (no TCS below this threshold) — for self-funded education and medical treatment remittances.
Other LRS remittances (investments, gifts, etc.): 20% TCS rate applies on amounts exceeding ₹7 lakh per year for remittances not covered under education/medical — a rate that remains a significant cash flow consideration for those making large discretionary foreign remittances.
Overseas tour packages: 5% TCS on the first ₹7 lakh and 20% beyond that threshold for overseas tour package payments.
Important point on TCS credit: TCS collected is not a final tax — it is available as credit against your total tax liability when filing your ITR, or can be claimed as refund if your final liability is lower. Many taxpayers mistakenly treat TCS as a final cost rather than an advance tax credit.
Section 194Q vs Section 206C(1H) — The Overlap Resolution
Both these provisions covered purchase/sale of goods above ₹50 lakh — creating confusion about which party (buyer deducting TDS under 194Q, or seller collecting TCS under 206C(1H)) should comply when both thresholds were met. The clarified position: if the buyer is liable to deduct TDS under Section 194Q, the seller is NOT required to collect TCS under Section 206C(1H) for the same transaction — eliminating duplicate compliance and the resulting confusion over who should act.
Lower/Nil TDS Certificate — Section 197
For taxpayers whose actual tax liability is lower than the TDS rate would suggest (common for businesses with losses, or those with substantial brought-forward deductions), applying for a Lower or Nil TDS Deduction Certificate under Section 197 remains an important cash flow tool — avoiding the need to wait for a refund after over-deduction. The online application process through TRACES has been streamlined, with faster processing timelines in recent years.
Practical Compliance Checklist for 2026
Audit your TDS matrix: Review every payment category your business makes and confirm you're applying the current rate and threshold — not legacy figures from prior years.
Reconcile 194Q vs 206C(1H): Ensure you're not duplicating TDS/TCS compliance on the same purchase/sale transaction.
Review LRS remittance TCS planning: For high-net-worth individuals making regular foreign remittances, structure timing and categorisation (education loan vs self-funded, etc.) to optimise TCS cash flow impact.
Consider Section 197 certificates: For businesses with consistent refund positions due to TDS over-deduction, apply for lower/nil deduction certificates to improve working capital.
How PGT & Associates Can Help
PGT & Associates provides comprehensive TDS/TCS compliance reviews, ensuring businesses apply current rates and thresholds correctly, assists with Section 197 lower deduction certificate applications, and advises high-net-worth individuals on LRS remittance planning to optimise TCS impact. Contact us at +91-87994-99189.
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