Union Budget 2025: Will FM Sitharaman look at simplifying TDS-TCS regime further this time?

With the Union Budget for 2025-26 approaching in just a month, industry bodies have been engaging in discussions with Finance Minister Nirmala Sitharaman to present their recommendations. Among the key proposals are measures aimed at simplifying India’s tax system and providing tax relief to middle-class taxpayers.

Last week, the Federation of Indian Chambers of Commerce and Industry (FICCI) shared its recommendations, emphasizing the need for tax reforms to enhance the ease of doing business and reduce complexity. FICCI has proposed a comprehensive overhaul of the country's tax structure in the upcoming budget, advocating for a more streamlined and simplified system.

TDS-TCS simplification

One of the key recommendations of FICCI is to streamline the current multiple TDS/TCS rates into a more straightforward two- or three-tier system. This streamlining would help reduce confusion and disagreements regarding tax classifications, ultimately facilitating compliance for businesses.

According to a survey conducted by Deloitte, a significant majority of income tax filers are in favor of simpler ITRs for individuals, an easier method for calculating incentives and deductions, and a simplified TDS framework adopting a 'one rate one section' approach.

Moreover, the Income-Tax Policy Survey suggests eliminating the requirement for issuing Form 16A, as the TDS information is already reported and accessible in the recipient's Form 26AS and AIS.

TDS-TCS relief in Budget 2024

In Budget 2024, FM Sitharaman offered some relief to salaried taxpayers in terms of TCS and TDS. The Budget proposed a reduction in the TDS rate from 5% to 2% for rents exceeding Rs 50,000 paid by an individual or Hindu Undivided Family (HUF) for a month or part thereof. 

In addition to TDS deduction by employers, salaried individuals are also subject to TCS collection from various transactions. The proposed change, effective October 1, 2024, allowed all TCS collected and other TDS deductions from employees to be considered in calculating tax at source on salary.

For residential properties priced over Rs 50 lakh, buyers were required to deduct TDS at a rate of 1% of the price paid. Previously, transactions could be structured to avoid TDS by splitting the share of the buyer or seller.

In the 2024 Budget, it was emphasized that TDS should be deducted on the value of the immovable property exceeding Rs 50 lakh, regardless of the amount of sellers (or joint owners) involved in the property.

From January 1, 2025, parents can now claim the TCS collected from a minor child's income if the child's income is being clubbed with the parent's for income tax purposes. This change will allow parents with taxable investment income, like interest earned on fixed deposits in the name of a minor child, to utilize the TCS collected in the child's name while computing their own tax liability.

This adjustment aims to streamline the tax process for families and ensure that TCS credits are appropriately utilized.

TDS relief for salaried taxpayers

From October 1, 2024, the government mandated that employers provide the benefits of TDS/TCS deducted on non-salary income when computing the TDS to be deducted from an employee's salary. By adjusting the tax already paid through TDS/TCS on non-salaried income when deducting TDS against salary, the TDS liability for a salaried employee can be reduced. 

This amendment was implemented to minimise the occurrence of excess TDS being deducted from salary income. Although the law was already enforced, the required technical infrastructure updates took some time to be completed.

Protean (previously known as NSDL e-Governance) has announced that the necessary updates have been implemented in the TDS software starting from December 27, 2024. As a result, the TDS certificate will now accurately reflect the revised changes for Q4 of the 2024-25 TDS statement onward.

This modification allows employers to factor in the TDS/TCS already deducted or collected on any additional income while calculating the TDS on the total income. This adjustment streamlines the TDS process and ensures that individuals do not face double taxation on their income. It alleviates the need for pursuing tax refunds and eases cash flow constraints, particularly for those earning significant non-salary income.