What is tax collected at source?
Most withholding works by subtraction. A payer owes money, holds part of it back, deposits it against the recipient's permanent account number, and pays the remainder. Tax collected at source works by addition. A seller charges the buyer the price plus a percentage, deposits that percentage against the buyer's permanent account number, and the buyer claims it as credit in their return.
The logic is the same in both cases. The tax administration wants an early trail on a transaction and a payment on account against the eventual liability. What differs is who is out of pocket in the meantime. Under deduction it is the recipient of the income. Under collection it is the buyer of the goods or service, who has paid more than the price.
Form 27EQ is where a collector reports all of this each quarter, and Form 27D is the certificate it produces.
How does it differ from a TDS return?
Structurally the two are close. Both are quarterly, both are filed against a tax deduction and collection account number, both feed the annual tax statement, and both produce a certificate that cannot be typed up by hand. The differences are worth setting out because they decide which form applies.
| Form 24Q | Form 26Q | Form 27EQ | |
|---|---|---|---|
| Covers | Salary deduction | Other deduction from residents | Collection |
| Direction | Withheld from payment | Withheld from payment | Added to price |
| Filed by | Employer | Deductor | Collector, usually the seller |
| Credit belongs to | Employee | Payee | Buyer |
| Certificate | Form 16 | Form 16A | Form 27D |
A single organisation can be filing several of these at once. A company that employs people, pays vendors and also sells goods on which collection applies files a salary return, a non-salary return and a collection return for the same quarter, from the same account number.
What is collection charged on?
The list has grown well beyond where it started. It began with a narrow set of traded commodities, and has since been extended to categories most organisations meet in ordinary business.
- Scrap, and certain forest and mineral products, which is where the provision originally sat.
- Sale of a motor vehicle above a prescribed value.
- Remittances abroad under the liberalised remittance scheme, with the rate varying by purpose and a threshold below which nothing is collected.
- Overseas tour programme packages.
- Sale of goods above a prescribed turnover and consideration threshold, where the buyer is not already deducting on the same transaction.
Every rate, threshold and exclusion in that list has been amended, some more than once, and the interaction between collection on sale of goods and deduction on purchase of goods has its own ordering rule. Confirm each of them against the current provision rather than working from memory.
Why does payroll care about someone else's return?
Because the credit shows up in the employee's annual tax statement, and until recently there was nothing payroll could do with it.
Consider an employee who remits money abroad for a child's education, or buys an overseas tour package. Tax is collected on that spending. It is their money, credited against their permanent account number, and it will eventually reduce their liability. But salary deduction through the year was computed without reference to it, so the employer deducts as though the credit did not exist. The employee ends the year with tax paid twice over and waits for a refund.
That gap has been narrowed. An employee can report collected tax, and deduction made by others, to their employer in the prescribed manner, and the employer takes it into account when computing deduction on salary. The mechanics are the familiar ones: a declaration from the employee, evidence retained by the employer, and a computation that reflects it.
For payroll this is a new input rather than a new calculation. The rules for accepting it are the same rules that already apply to any other employee declaration. Ask for the evidence, apply it to the remaining months rather than retrospectively rewriting the year, and keep the declaration on file, because the employer who acted on it is the one who has to explain the lower deduction.
What goes wrong?
The failures split between collectors and the people whose credit it is.
- Collection missed on a category that was added by amendment, most often on sale of goods or on remittances, where the obligation arrived after the process was built.
- The buyer's permanent account number not captured at the point of sale, so the credit has nowhere to go and a higher rate applies.
- Form 27D never issued, because the collector treated the return as the end of the obligation.
- On the employee side, collected tax simply forgotten. It sits in the annual statement, is not claimed, and turns into a refund the employee did not know to ask for.
- Employees reporting collected tax to payroll as though it were a deduction from salary, which it is not. It is a separate credit taken into account in the computation, and recording it in the wrong place produces a Form 16 that does not reconcile.
Statutory reference
- Act
- Income-tax Act, 2025, with the Income-tax Rules, 2026
- Section
- From tax year 2026-27: rule 219(1) of the Income-tax Rules, 2026, Table Sl. No. 4 (Form 143, for collection under section 394(1)), made under section 397(3)(b) of the Income-tax Act, 2025, with rule 215(1) Table Sl. No. 4 (the certificate, Form 133, within fifteen days of the statement due date) and rule 219(4) (due dates). For tax year 2025-26 and earlier, preserved by section 536(2) of the Income-tax Act, 2025: Section 206C of the Income-tax Act, 1961 and Rule 31AA of the Income-tax Rules, 1962 (Form 27EQ).
- Key limits
- Section 536 is on its amended-section list, but section 122 of that Act touches only sub-section (2) clauses (g) and (h), on interest for refunds and defaults and on clawback of deductions. Section 394(1) is amended by section 85, which substitutes the rate in column D against serial numbers 1, 2, 4, 5, 7(a) and 8, in each case to 2%. Section 397(1)(c) is substituted by section 87. Section 394 of the Income-tax Act, 2025 carries the collection Table, and section 394(1) is the provision this statement answers to. The references are historical and deliberate. Section 536(2) of the Income-tax Act, 2025 saves the repealed Act for tax years beginning before that date, so an employer dealing with tax year 2025-26 or earlier is still governed by it.
Frequently asked questions
What is Form 27EQ?
It is the quarterly return in which a collector reports tax collected at source. It sits alongside Form 24Q for salary and Form 26Q for other deductions, and the certificate generated from it is Form 27D.
What is the difference between TDS and TCS?
Deduction is withheld from money paid to a recipient, so the recipient receives less. Collection is added to the price a buyer pays, so the buyer pays more. Both end up as credit against the person's permanent account number, but the direction and the party out of pocket differ.
Which certificate does Form 27EQ produce?
Form 27D, issued by the collector to the buyer. It is not the salary certificate or the non-salary deduction certificate, Form 16 and Form 16A, or Form 130 and Form 131 from tax year 2026-27, all of which relate to deduction, and a buyer asking for the wrong certificate is a common source of delay.
Tax was collected when I sent money abroad. Can my employer take it into account?
Yes. Collected tax, and deduction made by others, can be reported to the employer in the prescribed manner and taken into account when computing deduction on salary. Without that, you pay tax through payroll as if the credit did not exist and wait for a refund.
Does a company file Form 27EQ as well as its TDS returns?
If it collects tax at source, yes, in the same quarter and against the same account number as its deduction returns. Employing people, paying vendors and selling goods that attract collection are three separate reporting obligations.
How Engage helps here
Engage treats an employee's reported collected tax as what it is: a credit taken into account in the salary computation, held against the declaration and evidence that supports it, and spread across the remaining months rather than applied as a retrospective adjustment. The employee sees the effect on their deduction in the month it happens, and the Form 16 at the end of the year reconciles to what was actually deducted.
See TDS handling in Engage