Income tax liability in India is discharged through five mechanisms rather than a single payment. TDS collects tax at source on specified payments, while TCS applies to specified transactions or receipts. Advance tax is payable during the year once the estimated liability is INR 10,000 or more, following the June, September, December and March instalment schedule. After year-end computation, any shortfall is cleared as self-assessment tax before filing the return. If assessment proceedings result in an outstanding demand, that becomes a further payment obligation. For Tax Year 2026-27 onwards, these mechanisms continue under the Income-tax Act, 2025, while earlier years remain governed by the Income-tax Act, 1961.
An Indian subsidiary may have tax deducted on payments it receives, make advance tax payments during the year and still have an amount payable when its income tax return is prepared. A foreign company earning taxable income in India can face a similar sequence, with withholding on payments, advance tax and a final reconciliation determining whether further tax is payable or a refund arises. Tax liability in India is therefore not necessarily discharged through one payment at year-end.
The Indian tax framework provides several mechanisms for collecting or paying income tax, including Tax Deducted at Source (TDS), Tax Collected at Source (TCS), advance tax, self-assessment tax and tax payable following assessment. For Tax Year 2026-27 onwards, the Income-tax Act, 2025 (Act 30 of 2025, in force from 1 April 2026) governs the new tax-year framework, while liabilities relating to earlier years continue under the Income-tax Act, 1961. The Income Tax Department has specifically confirmed that the fundamental methods of discharging tax remain substantially unchanged under the new Act.
What Does Tax Liability Mean in India?
Tax liability is the amount of income tax that a taxpayer is required to pay for a particular tax period after applying the relevant tax provisions. The amount is determined from taxable income and the applicable rates, with relevant adjustments such as TDS, TCS and advance tax already paid being taken into account.
For foreign companies, the starting point is not simply the accounting profit recorded in India. The taxable position depends on the nature and source of income, the taxpayer’s status, applicable provisions and, where relevant, treaty considerations. The actual amount payable therefore has to be determined for the specific entity and tax period rather than inferred from cash movements alone.
Once the liability is determined, Indian tax law provides different mechanisms through which it can be discharged.
What Are the Ways to Discharge Tax Liability in India?
The principal mechanisms can be summarised as follows:
| Method | When it applies | Who generally pays or remits | Purpose |
|---|---|---|---|
| TDS | When specified payments are subject to withholding | Payer or deductor | Collects tax at source from specified payments |
| TCS | When specified transactions or receipts attract collection at source | Collector | Collects tax at source from specified transactions |
| Advance tax | When sufficient tax is not otherwise collected and the advance-tax threshold is met | Taxpayer | Pays tax during the relevant tax year |
| Self-assessment tax | When tax remains payable after year-end computation | Taxpayer | Clears the residual liability before filing the return |
| Assessment or outstanding demand | When an amount becomes payable following assessment or other proceedings | Taxpayer | Pays the amount determined as outstanding |
The Income Tax Department confirms that these modes, including regular assessment, continue under the Income-tax Act, 2025. The new Act also retains the existing authorised banking channels and electronic mechanisms for tax payments.
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Get a Free Consultation ↗What is TDS and TCS in India?
TDS and TCS are two core tax collection mechanisms used under the income tax framework. While both involve tax being collected before the final tax position is determined, they are applied in different circumstances.
Tax Deducted at Source
TDS is a collection mechanism under which tax is deducted from specified payments when the relevant conditions are met. For an Indian company, this can arise on payments such as specified amounts to employees, contractors, professionals and non-residents.
This becomes particularly relevant to international groups where an Indian entity pays an overseas parent, group company or other non-resident. The nature of the payment, its taxability in India and the applicable withholding provisions determine whether TDS is required. Treaty provisions may also need to be considered where relevant.
The deductor may need a Tax Deduction and Collection Account Number (TAN), deposit the tax within the prescribed period and report the deduction through the applicable TDS statement. For Tax Year 2026-27, the Income Tax Department states that TDS provisions for payments or credits on or after 1 April 2026 are governed by the Income-tax Act, 2025, where the erstwhile sections 192 to 196D have been consolidated into section 392 (salary) and section 393 (all other payments). Payments or credits up to 31 March 2026 remain governed by the 1961 Act.
For example, the Department’s current procedures provide for quarterly reporting of TDS on specified payments to residents and separate reporting for specified payments to non-residents.
TDS is not necessarily the recipient’s final income tax liability. It is generally a mechanism through which tax is collected in advance and subsequently credited against the recipient’s tax position.
Tax Collected at Source
TCS operates differently. Instead of the payer deducting tax from a specified payment, the person responsible for a covered transaction collects tax from the buyer or other specified person and remits it to the Government.
TCS is relevant only where a transaction falls within the applicable collection provisions. For Tax Year 2026-27 onwards, TCS provisions are consolidated under section 394 of the Income-tax Act, 2025, which replaces section 206C of the 1961 Act. Transactions governed by the earlier period continue under the corresponding provisions of the 1961 Act.
What is Advance Tax and When Is It Paid?
Advance tax is tax paid before the end of the relevant tax year based on the taxpayer’s estimated liability. It becomes relevant where the amount of tax payable under the advance-tax provisions is INR 10,000 or more. The Income Tax Department has confirmed that this threshold continues under section 404 of the Income-tax Act, 2025, with the wider advance-tax framework set out in sections 403 to 408. A resident senior citizen who has no income under the head “Profits and gains of business or profession” is not liable to pay advance tax.
For taxpayers subject to the normal instalment system, advance tax is generally paid cumulatively during the year:
- By 15 June: at least 15%
- By 15 September: at least 45%
- By 15 December: at least 75%
- By 15 March: 100%
The calculation takes account of tax already deducted or collected and advance tax already paid. Short payment or deferment of an instalment attracts simple interest at 1% per month under sections 424 and 425 of the Income-tax Act, 2025 (sections 234B and 234C of the 1961 Act).
For an Indian subsidiary generating taxable business income, advance tax can therefore form a significant part of its income tax payment cycle. The estimate should be revisited during the year as profitability, withholding credits and other relevant tax factors change.
The Income-tax Act, 2025 does not fundamentally alter the advance-tax framework. However, the relevant law depends on the tax period. Advance tax relating to FY 2025-26 remains governed by the Income-tax Act, 1961, whereas advance tax for Tax Year 2026-27 relates to income from 1 April 2026 and is governed by the new Act.
Self-Assessment Tax and Residual Liability
After the tax period ends, the taxpayer calculates the final tax position and reconciles amounts already discharged through TDS, TCS and advance tax. If the tax already paid does not fully cover the liability, the remaining amount is generally discharged as self-assessment tax before filing the applicable income tax return.
The Income Tax Department describes self-assessment tax as the amount that remains payable after taking account of TDS and advance tax in the return computation. The obligation arises under section 140A of the Income-tax Act, 1961 and, for Tax Year 2026-27 onwards, under the corresponding self-assessment provision of the Income-tax Act, 2025, with the tax, interest and fee being payable before the return is furnished.
The tax period must be identified correctly when making this payment. This is particularly important during the 2026 transition. For example, self-assessment tax relating to FY 2025-26, even if paid after 1 April 2026, continues to be governed by the Income-tax Act, 1961. The corresponding payment for income of Tax Year 2026-27 falls under the Income-tax Act, 2025.
How Are Income Tax Payments, Returns and Outstanding Demands Managed?
Paying the correct amount is only one part of income tax compliance. The payment also needs to be connected to the correct taxpayer, tax period and payment category so that the credit is reflected properly.
The e-Filing portal provides the e-Pay Tax facility for making tax payments through authorised channels. During the 2026 transition, the Income Tax Department has specifically instructed taxpayers to select Assessment Year 2026-27 for payments relating to FY 2025-26 and Tax Year 2026-27 for payments relating to FY 2026-27. On the e-Pay Tax service, the taxpayer first selects the applicable Act – the Income-tax Act, 1961 or the Income-tax Act, 2025 – and then the relevant year, minor head and payment type before generating the challan (CRN).
After payment, businesses should reconcile:
- Tax computed in the books and tax computation
- TDS and TCS credits
- Advance tax payments
- Self-assessment tax payments
- Amounts reported in the income tax return
- Challan or payment references
- Any outstanding demands appearing on the e-Filing portal
An outstanding demand may arise after processing or assessment. The taxpayer can review the demand through the e-Filing portal and, where appropriate, either pay it or submit a response disputing all or part of the amount.
How Can Foreign Businesses Manage Income Tax Payments in India?
The payment cycle becomes more interconnected where an international group operates through an Indian subsidiary, branch office, project office or another taxable presence.
An Indian subsidiary may have its own corporate income tax liability while also acting as a deductor on payments to its foreign parent or other overseas parties. A cross-border payment can therefore raise a separate withholding question even though the recipient’s ultimate Indian tax position is a different matter.
A practical compliance cycle is:
Tax computation → TDS/TCS → Advance tax → Self-assessment → Return filing → Reconciliation → Assessment or demand, where applicable
The underlying accounting records, withholding documentation, tax payment records and return disclosures should tell a consistent story. Cross-border payments require particular attention because the withholding position can depend on the character of the payment, the recipient’s status and applicable treaty provisions.
What Determines the Cost of Discharging Income Tax Liability?
The tax payment itself is determined primarily by the taxpayer’s taxable income and the applicable provisions for the relevant tax period. The final amount can also reflect:
- Applicable tax regime and rates
- Allowable deductions or exemptions, where available
- TDS and TCS already credited
- Advance tax already paid
- Applicable surcharge and cess
- Adjustments arising from the tax computation
- Outstanding tax demand, where relevant
These factors should be considered before determining the amount to be paid. Professional assistance, where required, is separate from the tax itself, and its cost depends on the nature and complexity of the engagement.
Conclusion
Discharging tax liability in India is a process rather than a single year-end transaction. TDS and TCS may collect tax at source, advance tax addresses the liability during the year, and self-assessment tax can clear the balance after the final computation. The resulting figures then need to be reflected correctly in the income tax return and reconciled with tax credits and payment records. Any later assessment or outstanding demand may create a further payment obligation.
For foreign companies and Indian subsidiaries, the process also needs to account for cross-border withholding, the entity’s own income tax position and the distinction between tax periods governed by the Income-tax Act, 1961 and those governed by the Income-tax Act, 2025. For assistance in assessing and managing an Indian tax position and its related payment and compliance requirements, contact the professionals at Stratrich.
Frequently Asked Questions (FAQs)
The main methods of discharging income tax liability in India are TDS, TCS, advance tax, self-assessment tax and payment of tax arising from an assessment or outstanding demand. TDS and TCS operate at source for specified payments or transactions. Advance tax allows applicable taxpayers to pay tax during the relevant tax year based on estimated liability. After the tax period ends, self-assessment tax may be payable where the final liability exceeds the TDS, TCS and advance tax already accounted for. A separate payment may arise if an assessment or other tax proceeding results in an outstanding demand.
Advance tax is generally payable when the tax payable under the applicable advance-tax provisions reaches the prescribed threshold after considering relevant tax credits. Under the framework applicable from Tax Year 2026-27, the Income-tax Act, 2025 retains the INR 10,000 threshold for advance tax. For taxpayers following the normal instalment system, advance tax is generally paid cumulatively by 15 June, 15 September, 15 December and 15 March. The amount to be paid should be based on tax already deducted or collected and advance tax already paid. The applicable rules should be determined with reference to the relevant tax period.
Advance tax is paid during the tax year, whereas self-assessment tax generally arises after the tax year when the taxpayer completes the final tax computation. Advance tax is based on estimated income and expected tax liability. Self-assessment tax covers the balance that remains payable after considering amounts such as TDS, TCS and advance tax already credited. For an Indian subsidiary, this can mean making advance tax payments during the year and then paying a further amount before filing the return if the final computation shows a shortfall. The applicable tax law depends on the relevant tax period.
Yes. TDS and advance tax are taken into account when determining the final income tax liability, subject to the applicable rules and availability of the relevant tax credits. TCS may also be available as a tax credit where applicable. The final tax computation compares the total liability with amounts already deducted, collected or paid. If the amounts already credited are insufficient, the taxpayer generally needs to discharge the balance as self-assessment tax. If eligible tax credits exceed the final liability, the excess may result in a refund, subject to the applicable provisions and processing of the income tax return.
An Indian subsidiary generally needs to manage both, its own income tax liability and its withholding obligations. Its own liability may be discharged through advance tax during the year and self-assessment tax after the year-end computation, after considering applicable TDS or TCS credits. Separately, payments made to the foreign parent or other non-residents may require withholding tax analysis. The nature of the payment, applicable provisions and relevant tax treaty can affect the withholding position. The subsidiary should also reconcile its accounting records, withholding statements, tax payment records, tax credits and income tax return for the relevant tax period.
