Budget 2026 changes TDS, TCS rates across sectors: Who pays more, who gets relief

The Union Budget 2026–27 has proposed targeted changes to the Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) framework, underlining the government’s attempt to simplify compliance while recalibrating tax collection across sectors. According to CA (Dr.) Suresh Surana, the proposals combine selective tightening with rationalisation, with most changes slated to take effect from April 1, 2026, under the new Income Tax Act, 2025.

On the TCS front, one of the most notable changes relates to the sale of alcoholic liquor for human consumption. Currently, sellers collect TCS at 1% with no threshold. The Budget proposes to raise this rate to 2%, while retaining the absence of any minimum threshold. Dr. Surana said the move reflects a clear policy intent to increase collections from high-cash, consumption-led sectors where tracking leakages has traditionally been challenging.

At the same time, the Budget offers relief in select areas. The TCS rate on the sale of tendu leaves is proposed to be reduced sharply from 5% to 2%, again without any threshold. According to Dr. Surana, this change is likely to ease the burden on traders and small businesses dealing in forest produce, a segment that typically operates on thin margins.

However, tightening is evident in other commodity-linked provisions. The sale of scrap, which currently attracts TCS at 1%, will now be taxed at 2%, with no threshold. A similar increase has been proposed for the sale of specified minerals such as coal, lignite and iron ore, where the TCS rate will rise from 1% to 2%. Dr. Surana noted that the uniform 2% rate across alcohol, scrap and minerals suggests an attempt to standardise collections in sectors involving large-value transactions.

A key compliance-friendly change has been announced under the Liberalised Remittance Scheme (LRS). Presently, remittances for education (other than loans under Section 80E) or medical treatment attract TCS at 5%, while other remittances are taxed at 20%, once annual remittances exceed ₹10 lakh. Under the proposed framework, the TCS rate for education loans and medical treatment will be reduced to 2%, providing relief to families sending money abroad for essential purposes. The 20% rate for other remittances remains unchanged, and the ₹10 lakh threshold continues.

Dr. Surana said this reflects a clear distinction between essential and discretionary foreign spending. Lowering TCS for education and medical remittances eases cash-flow pressure, while retaining higher rates for non-essential remittances preserves revenue intent.

Notably, the Budget does not alter thresholds for most commodity-linked TCS provisions, signalling a preference for administrative certainty over frequent structural tweaks. By raising some rates and cutting others, the framework seeks to balance revenue needs with taxpayer convenience.

TDS changes

On the TDS side, Budget 2026 proposes several relief-oriented measures. A key change relates to motor accident compensation. Under the new provisions, no TDS will be deducted on interest awarded by Motor Accident Claims Tribunals to accident victims or their families. Currently, TDS applies if the interest exceeds ₹50,000. The proposed change ensures that compensation reaches beneficiaries in full.

The Budget has also clarified the treatment of manpower supply services. Such services have been explicitly included within the definition of “work” under Section 402(47), bringing them clearly under contractor payments. As a result, TDS will apply at 1% or 2%, reducing ambiguity and disputes.

Another simplification relates to property transactions involving non-residents. A Tax Deduction and Collection Account Number (TAN) will no longer be required when deducting tax on the purchase of immovable property from a non-resident. Buyers can now deduct tax using their PAN and report the transaction by quoting the seller’s PAN, aligning procedures for resident and non-resident sellers.

Relief has also been extended to non-life insurance companies. Expenses disallowed earlier due to non-deduction or non-payment of TDS will no longer be permanently disallowed. Once TDS is deducted and paid, the expense can be claimed in a subsequent year.

Finally, the Budget reiterates penalties for non-compliance. Failure to pay TDS or TCS can attract imprisonment of up to two years or a fine, reinforcing the importance of timely compliance even as the overall framework becomes more facilitative.