Union Budget 2025 has hogged the headlines for the tax giveaways it has proposed for the middle class to boost consumption and reinvigorate economic growth. Turns out the budget has more to offer on the personal finance front than meets the eye. This blog post will discuss the budget proposals that seek to rationalize Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) and simplify the tax compliance process for small businesses and taxpayers. The changes can also potentially increase taxpayers’ income, the perfect cherry on the cake. Read on to learn everything you need to know about the TDS and TCS changes in Budget 2025.
What is the rationale for introducing new norms for TDS and TCS in the budget?
The budget document states that the tax reforms in TDS and TCS align with the tax department’s commitment to “trust first, scrutinize later.” The reforms are meant to rationalize TDS/TCS to ease difficulties, encourage voluntary compliance, reduce compliance burden, and facilitate ease of doing business. Understanding TDS and TCS in perspective is essential to learn about the changes proposed in the Budget.
Understanding TDS and TCS
Taxes, let’s face it, are complicated. Compliance with income tax rules does not end with filing your IT returns every year. For transactions above a certain threshold, the individual or entity that pays you must deduct tax before the payment is made to you. A good example is your monthly pay cheque, wherein your employer deducts taxes before your salary is credited. For some others, like paying rent to your landlord, you must cut taxes if the rent paid in a year is above a certain threshold. TDS also applies to the interest income you earn from banks, financial institutions, or companies.
TDS, or tax deducted at source, is a tax collection mechanism that collects revenue at the very source of income. TDS, a form of indirect tax, is based on “pay as you earn” and “collect as it is being earned.” TDS can mean different things to the parties involved. For the government, TDS ensures a regular revenue source, advances tax collection, prevents tax evasion, and widens the tax base. For the taxpayer, it is a simple way of paying taxes wherein he can claim a refund of the TDS withheld while filing income tax returns. The Central Board for Direct Taxes (CBDT), a statutory body, oversees the collection of TDS.
TCS, or Tax Collected at Source, also an indirect tax, works differently. TCS kicks in at the time of the sale of specified goods. It is payable by the seller but paid by the buyer. The seller, in turn, deposits the amount collected from the buyer with the tax authorities. Different TCS rates apply to sales of various categories of goods as specified under Section 206 C of the Income Tax Act. For example, if the price of a car is ₹11 lakh, the TCS payable @1% is ₹11,000. The seller of the vehicle collects this amount from the buyer and deposits it with the tax authorities.
The above examples might sound simple enough, but navigating the Income Tax Act 1961 to understand when to deduct TDS and TCS can be a nightmare, given the clumsily worded clauses and sub-clauses that often frustrate compliant taxpayers. The proposals in the Union Budget 2025 are meant to simplify many of these provisions to make compliance with tax laws easy for taxpayers and small businesses.
Important TDS changes in Budget 2025
| TDS Proposal | Present Threshold | Proposed Threshold |
| Raise exemption limit for TDS on dividend income from stocks and mutual funds | ₹5,000 | ₹10,000 |
| Annual threshold for TDS on rent | ₹2.40 lakh a year | ₹6 lakh a year |
| Threshold for TDS on compensation for land acquisition | ₹2.5 lakh | ₹5 lakh |
| Reduction of applicable TDS rate on insurance commissions | 5% (₹15,000) | 2% (₹20,000) |
| TDS exemption limit for interest income earned by senior citizens on FDs, etc | ₹50,000 | ₹1 lakh |
| TDS exemption limit for interest earned by those below 60 | ₹40,000 | ₹50,000 |
| TDS on fee from professional or technical services | ₹30,000 | ₹50,000 |
| TDS on interest income from bonds, debentures | Nil | ₹10,000 |
| TDS threshold on income from lottery, horse racing, crossword puzzle | ₹10,000 in a year | ₹10,000 for each transaction |
To encourage voluntary tax compliance, the budget also proposed extending the time limit for filing updated returns for any assessment year to four years from the current two years.
Highlights of TCS changes in Budget 2025
| TCS Proposal | Present | Proposed |
| Exemption limit for foreign remittances under LRS | ₹7 lakh | ₹10 lakh |
| TCS on remittances made for education purposes funded by a loan from specified financial institutions | 0.5% after ₹7 lakh | Nil |
| TCS on timber or any other forest produce (excluding tendu leaves) | 2.5% | 2% |
| Delay in payment of TCS | Considered an offence | Decriminalized up to the due date of filing statement |
You can refer to the entire budget document for more clarity on TDS and TCS proposals.
Deregulation is the name of the game
Viewed from a global standpoint, the baby steps initiated in India’s Union Budget 2025 are similar to the deregulation juggernaut shaking up the US bureaucracy under Donald Trump and the reforms in Argentina kickstarted by President Javier Milei. The methods adopted by each may vary based on country-specific situations, but the battle against red tape seeks to boost economic growth by facilitating the ease of doing business. The rationalization of TDS and TCS proposed in Budget 2025 has to be understood against this backdrop.
Truth be told, India is no stranger to reforms that have transformed its economy. The economic reforms initiated in India in the early 1990s opened the country’s economy to foreign investments, ended the license raj, and integrated India into the global economy. The poster child of these reforms was India’s information technology industry, which started delivering IT outsourcing services to multinationals based in distant locations at a fraction of the cost. Overall, the reforms accelerated India’s growth rate, increased foreign exchange reserves, and reduced poverty.
The taxation reform initiated by the government is the next step forward, making it easier for taxpayers to comply with tax provisions by eliminating redundancies and inefficiencies in the Indian taxation system. Furthermore, the finance minister said the New Income Tax Bill will be presented in Parliament in February 2025 in an attempt to present tax laws in clear, direct language, making them easier for taxpayers and tax administrators alike. Over to you, FM.
