Chapter XIX - Collection and Recovery of Tax
Section 394
Section 394: tax collected at source (TCS) rate table
Section 394 lists the categories of sale or receipt on which the seller (or, for foreign remittances, the authorised dealer) must collect tax at source from the buyer. Several rates in this table were changed by the Finance Act, 2026, with effect from 1 April 2026 - this page reflects the rates as they stand after that amendment.
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Need advice on Section 394?
This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) Every person, as specified in column C of the Table below shall collect tax— (a) on receipts specified in column B; (b) at the rate as specified in column D; and (c) at the time of debiting of the amount payable by the buyer or licensee or lessee to the account of the buyer or licensee or lessee or at the time of receipt of such amount from the said buyer or licensee or lessee in cash or by way of a cheque or a draft or any other mode, whichever is earlier.
| Sl. No. | Nature of receipt | Person | Rate of Tax Collected at Source |
|---|---|---|---|
| 1 | Sale of alcoholic liquor for human consumption. | Seller. | 2% |
| 2 | Sale of tendu leaves. | Seller. | 2% |
| 3 | Sale of timber whether obtained under a forest lease or otherwise; or any other forest produce (not being timber or tendu leaves) obtained under a forest lease. | Seller. | 2% |
| 4 | Sale of scrap. | Seller. | 2% |
| 5 | Sale of minerals, being coal or lignite or iron ore. | Seller. | 2% |
| 6 | Sale consideration exceeding ten lakh rupees in case of— (a) motor vehicle; or (b) any other goods, as may be notified by the Central Government. | Seller. | 1% |
| 7 | Remittance under the Liberalised Remittance Scheme of an amount or aggregate of the amounts exceeding ten lakh rupees— | Authorised dealer. | (a) 2% for purposes of education or medical treatment; (b) 20% for purposes other than education or medical treatment. |
| 8 | Sale of “overseas tour programme package” including expenses for travel or hotel stay or boarding or lodging or any such similar or related expenditure. | Seller. | 2% |
| 9 | Use of parking lot or toll plaza or mine or quarry for the purpose of business, excluding mining and quarrying of mineral oil (including petroleum and natural gas). | Licensor or Lessor. | 2% |
(2) Irrespective of anything contained in sub-section (1) (Table: Sl. Nos. 1 to 5), the collection of tax shall not to be made in respect of receipts specified in sub-section (1) (Table: Sl. Nos. 1 to 5) in respect of the buyer, who is a resident in India, if he furnishes a written declaration in duplicate in such form and manner, as may be prescribed, to the person responsible for collecting tax, mentioning that such goods are to be utilised— (a) for the purposes of manufacturing, processing or producing articles or things or for generating power; and (b) not for trading purposes.
(3) Where no collection of tax is to be made under sub-section (2), the person responsible for collecting tax shall deliver or cause to be delivered, one copy of the declaration referred to in that sub-section, to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, on or before the seventh day of the month following the month of receipt of that declaration.
(4) The collection of tax shall not be made by the authorised dealer in respect of receipt specified in sub-section (1) (Table: Sl. No.7),— (a) on such amount on which tax has been collected by the seller in respect of receipt referred to in sub-section (1) (Table: Sl. No. 8); (b) if the amount being remitted out is a loan obtained from any financial institution as defined in section 129(3)(b), for the purpose of pursuing any education.
(5) The collection of tax shall not be made by the authorised dealer or seller, in respect of receipt specified in sub-section (1) (Table: Sl. Nos. 7 and 8), if the buyer is liable to deduct tax at source under any other provisions of this Act and he has deducted such tax.
(6) For the purposes of this section, “forest produce” shall have the same meaning as defined in any State Act for the time being in force, or in the Indian Forest Act, 1927 (16 of 1927).
Introduction
Section 394 sets out tax collection at source by reference to a table of covered receipts and persons responsible for collection. The timing and rate depend on the applicable table row and any statutory notes or exclusions.
The Act separately addresses specified goods, Liberalised Remittance Scheme remittances and overseas tour packages. A collector should identify the exact transaction and current amended row before quoting a rate.
Key takeaways
Receipt-specific TCS
The table specifies the collector, receipt type, rate and threshold for each covered transaction.
Exclusions matter
Subsections and notes identify cases where tax is not collected, including certain TDS-overlap situations.
Collector remittance
A person responsible for collection must pay collected tax to the Central Government under the Chapter’s compliance rules.
TCS rate table - Section 394(1)
Tax is collected on debiting the amount to the buyer's/licensee's/lessee's account, or on receipt of the amount (in cash, cheque, draft or other mode), whichever is earlier:
| Nature of receipt | Collected by | Rate |
|---|---|---|
| Sale of alcoholic liquor for human consumption | Seller | 2% (substituted for 1% by the Finance Act, 2026, w.e.f. 1 April 2026) |
| Sale of tendu leaves | Seller | 2% (substituted for 5% by the Finance Act, 2026, w.e.f. 1 April 2026) |
| Sale of timber (under a forest lease or otherwise), or other forest produce (not timber/tendu leaves) obtained under a forest lease | Seller | 2% |
| Sale of scrap | Seller | 2% (substituted for 1% by the Finance Act, 2026, w.e.f. 1 April 2026) |
| Sale of minerals - coal, lignite or iron ore | Seller | 2% (substituted for 1% by the Finance Act, 2026, w.e.f. 1 April 2026) |
| Sale consideration exceeding ₹10,00,000 for a motor vehicle, or other notified goods | Seller | 1% |
| Remittance under the Liberalised Remittance Scheme (LRS), for amount/aggregate exceeding ₹10,00,000 | Authorised dealer | 2% for education or medical treatment purposes (substituted for 5% by the Finance Act, 2026, w.e.f. 1 April 2026); 20% for other purposes |
| Sale of an "overseas tour programme package" (travel, hotel, boarding, lodging and similar expenses) | Seller | 2% (flat rate, substituted by the Finance Act, 2026, w.e.f. 1 April 2026; no ₹10 lakh threshold applies to Sl. No. 8) |
| Use of a parking lot, toll plaza, mine or quarry for business (excluding mining/quarrying of mineral oil, petroleum and natural gas) | Licensor or lessor | 2% |
LRS threshold and overseas tour package rate
The ₹10,00,000 threshold appears in Sl. No. 7 for remittances under the Liberalised Remittance Scheme. For remittances covered by that entry, the table specifies 2% for education or medical treatment and 20% for other purposes. Sl. No. 8 separately specifies a flat 2% on sale of an overseas tour programme package, with no ₹10,00,000 threshold. The Finance Act, 2026 replaced the former overseas tour package rates of 5% up to ₹10,00,000 and 20% above that amount, effective 1 April 2026.
No TCS on declared manufacturing/non-trading use (Sl. Nos. 1 to 5)
For the first five categories in the table (liquor, tendu leaves, timber and other covered forest produce, scrap, and specified minerals), TCS is not collected from a resident buyer who furnishes a written declaration, in duplicate and in prescribed form, that the goods will be used for manufacturing, processing or producing articles or things, or for generating power - and not for trading purposes.
Where no collection is made because of such a declaration, the collector must deliver a copy of the declaration to the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner on or before the seventh day of the month following the month of receipt of the declaration.
No TCS on certain LRS remittances and overseas tour payments
The authorised dealer does not collect TCS on an LRS remittance (Sl. No. 7) to the extent tax has already been collected by the seller on the related overseas tour package (Sl. No. 8), or where the remitted amount is a loan from a financial institution (as defined in Section 129(3)(b)) taken for pursuing education.
TCS under Sl. Nos. 7 and 8 is also not collected where the buyer is liable to deduct tax at source under any other provision of the Act and has actually deducted it.
Meaning of "forest produce"
"Forest produce" has the same meaning as defined in the relevant State Act, or in the Indian Forest Act, 1927.
Step-by-step flow for applying Section 394
- 1
Is the receipt listed in the Table in Section 394(1)?
Examples: sale of alcoholic liquor, tendu leaves, timber and forest produce, scrap, coal, lignite or iron ore, motor vehicles above ₹10 lakh, LRS remittances, overseas tour packages, and parking lot, toll plaza, mine or quarry licences.
- No: No TCS under Section 394.
- Yes: Go to the next step.
- 2
For Sl. Nos. 1 to 5: has a resident buyer given the prescribed declaration that the goods are for manufacturing, processing, producing or power generation and not for trading?
- Yes: No TCS (Section 394(2)); keep the declaration and deliver it as Section 394(3) requires.
- No: Go to the next step.
- 3
Does a threshold or special exclusion apply?
Check the amount limits stated in the Table (for example, ₹10 lakh for motor vehicles and LRS) and the specific exclusions for certain remittances.
- 4
Collect at the rate in column D at the earlier of debit to the buyer's account or receipt
Practical checklist
Do
- Identify the covered receipt, collector and buyer or remitter under the relevant table row and section 402 definitions.
- Check the row-specific threshold, rate and collection event against the current amended text.
- Assess any applicable statutory declaration, exemption or overlap with deduction at source before deciding not to collect.
- Retain records supporting collection and reconcile remittance, statements and certificates under the Chapter.
Avoid
- Do not apply an overseas-tour or remittance rate to a goods transaction.
- Do not assume a purchaser’s declaration exempts every TCS transaction; check the serial numbers and conditions.
Illustrative example
Worked example: scrap sold to a manufacturer
Hypothetical facts (illustration only, not a real taxpayer): A factory sells scrap to two buyers: a resident steel mill that gives the prescribed declaration that it will melt the scrap for manufacturing, and a scrap trader who gives no declaration.
Category
Sale of scrap is within Sl. Nos. 1 to 5 of the Table.
Steel mill
The resident buyer's declaration of manufacturing use (not trading) means no TCS under Section 394(2).
Trader
No declaration, so TCS is collected at the Table rate when the amount is debited or received, whichever is earlier.
Outcome
- TCS applies only to the trader's purchases.
- The factory must keep the mill's declaration and deliver copies as required under Section 394(3).
Glossary
- Collector
- The person designated in the applicable section 394 table row to collect tax on the specified receipt.
- Liberalised Remittance Scheme
- The Reserve Bank of India remittance scheme referred to in the section 394 table.
Frequently asked questions
What is the current TCS rate on sale of scrap?
2% - the Finance Act, 2026 substituted this rate from 1% to 2%, effective 1 April 2026.
What is the TCS rate on sale of a motor vehicle above ₹10 lakh?
1% of the sale consideration, where it exceeds ₹10,00,000, under Section 394(1) Sl. No. 6.
How can a buyer avoid TCS on purchase of scrap or timber?
A resident buyer may furnish the declaration under section 394(2), in duplicate and in the prescribed form and manner, confirming use for manufacturing, processing, producing articles or things, or generating power, and not for trading. The exception applies only to the specified receipts in Table rows 1–5.
Need help applying this provision to your situation?
Get help with TCS compliance and ratesLast updated 10 October 2026