Buying a Car Over ₹10 Lakhs? Don’t Forget the Hidden 1% TCS Cost

Introduction

If you are planning to buy a car worth more than ₹10 lakh, the Income Tax Act has an additional condition you must know. It is called Tax Collected at Source (TCS). This means in addition to the price of your car, insurance, registration fees, and road tax, the seller will also collect 1% of the car’s price as TCS on behalf of the government.

This rule often surprises first-time buyers because the dealer quietly adds it into your invoice, but it can increase your upfront bill amount significantly. At the same time, it isn’t really a “cost” in the traditional sense; it can be claimed back while filing your Income Tax Return (ITR). So, let us dive deep into this topic, clarify misconceptions, and help you understand why this exists, how it works, and what it means for your finances.

Understanding TCS on Cars Over ₹10 Lakhs

TCS, or Tax Collected at Source, is governed by Section 206C of the Income Tax Act, 1961. It is not a new tax but a mechanism by which the government ensures it has data about high-value transactions conducted by individuals.

For cars, the rule is straightforward:

• If the purchase price of a car exceeds ₹10,00,000, the seller (usually the dealer) must collect 1% of the sale consideration from the buyer at the time of transaction.
• This collected amount is then deposited with the Income Tax Department linked to your PAN (Permanent Account Number).

For example:

• Price of Car = ₹11,00,000
• TCS @1% = ₹11,000
• Total payable upfront = ₹11,11,000

This ₹11,000 is not going into the pocket of the dealer but directly to the government, tagged to your PAN.

GST on Cars: Applicable Rates from September 2025

Under the GST regime, cars fall under the luxury goods category, subject to a mix of 28% base GST and additional cess rates depending on engine type, fuel, and length of the car. These cess slabs continue to apply from September 2025 onwards without relaxation.

Here’s a snapshot of the GST and Compensation Cess applicable on cars (September 2025):

How GST Impacts Your Car Bill

Suppose you are eyeing a compact SUV priced at ₹11 lakh ex-showroom (petrol variant under 1200cc).

• Base Price (before taxes): Assume ₹8,50,000
• GST @28%: ₹2,38,000
• Cess @1%: ₹8,500
• Subtotal (Ex-showroom after GST): ₹10,96,500
• TCS @1% on ex-showroom (₹10,96,500): ₹10,965
• Road tax, insurance, handling (~₹1,50,000 extra):
• On-road final cost: ₹12,57,465 approx.

So while the “sticker” is ₹11 lakh, the actual driving-out cost climbs by almost ₹1.6 lakh with GST + cess + TCS.

TCS vs GST: Key Difference

One major misconception is that TCS is part of GST. In fact, they work differently:

In short: GST permanently increases your cost, while TCS is only a temporary adjustment to be claimed back.

Updated Buyer’s Checklist (September 2025 Onwards)

1. GST Contribution: For most mid-size cars and SUVs, expect effective taxes between 43-50% of base price.
2. TCS @1%: On cars above ₹10 lakh, calculated on ex-showroom (inclusive of GST).
3. Registration + Insurance: Varies state-to-state, another 10–12% usually.
4. Budget Wisely: If you are stretching from ₹9.9 lakh to ₹10.1 lakh, the tax jump due to TCS is real.

Why Does the Government Charge TCS on Cars?

The logic behind TCS is vigilance. The government uses it as a tool to track big-ticket spending habits of individuals and businesses. Purchasing a high-end car indicates certain financial capacity, and collecting TCS creates a digital footprint of the transaction, eliminating chances of tax evasion.

In simpler terms:

• TCS is not about burdening the taxpayer—it is about keeping a record.
• Think of it as advance tax that is adjusted later when you calculate your actual yearly tax liability.

Thus, when the seller deducts TCS and files it against your PAN, it shows up in your Form 26AS or Annual Information Statement. This record ensures that while filing returns, you can adjust or claim it back.

Situations When TCS is Applicable on Cars

The carve-out is specific, and understanding when it applies is crucial:

• Applicable: When a car is sold to a buyer for more than ₹10 lakh.
• Not Applicable: When the car’s price is ₹10 lakh or below. The threshold is strict-₹10,00,001 onwards, the levy kicks in.
• Applicable irrespective of cash, loan, or credit: Whether you’re paying fully in cash, availing a loan, or through EMI, the total purchase price is considered for calculation. Only the final sale value matters.
• Applicable to both individual buyers and businesses: If a company buys a luxury car, the same rule applies.

Breaking Down the Costs

Let us consider the step-by-step billing when you purchase a car worth ₹11 lakh:

• Ex-showroom price of the car: ₹11,00,000
• Road tax, registration, insurance: (say) ₹1,50,000
• Accessories and handling: ₹50,000
• TCS @1% on ₹11,00,000: ₹11,000

Final invoice total = ₹13,11,000

Notice that TCS is charged only on the ex-showroom price of the car, not on registration, insurance, or road tax.

Do You Lose Money with TCS?

This is where confusion arises. Most buyers think of it as an “extra cost,” but in reality:

• If you have a tax liability in your ITR, you can reduce it by the exact TCS amount. Example: Your tax payable for the year is ₹50,000. Since ₹11,000 has already been collected as TCS, you only pay ₹39,000 more as self-assessment tax.
• If you have no tax liability (say your taxable income is within the exemption limit), then you can claim a refund of the entire TCS amount after filing your ITR.

So, yes; it does pinch your pocket upfront. But come tax season, it is adjusted or refunded.

TCS vs TDS: Clearing the Confusion

Another common doubt buyers face is the difference between Tax Collected at Source (TCS) and Tax Deduction at Source (TDS).

Here’s a quick comparison:

The core principle of both is the same: tax collection in advance, ensuring accountability.

TCS in Broader Context of Luxury Purchases

The government doesn’t just monitor car purchases. TCS also extends to:

• Purchase of jewellery above ₹5 lakh
• Foreign remittances under the Liberalised Remittance Scheme beyond ₹7 lakh
• Overseas tour packages
• Sale of coal, timber, scrap in commercial transactions

Cars above ₹10 lakh find mention in this basket because they’re symbols of high-end expenditure.

Real-Life Impact on Buyers

Let’s illustrate through two scenarios:

Case 1: Salaried Buyer with Taxable Income

• Arjun, a salaried professional, buys a car worth ₹15 lakh.
• The dealer collects ₹15,000 as TCS and deposits it in Arjun’s PAN.
• At the end of the financial year, Arjun’s tax liability comes to ₹1,20,000.
• He simply subtracts the ₹15,000 already credited as TCS, and pays only ₹1,05,000.

Case 2: Non-Taxpayer (No Taxable Income)

• Meera, a homemaker, buys a similar ₹15 lakh car in her name, and the dealer collects ₹15,000 TCS.
• Since her income is below the taxable slab, she files ITR and claims a refund.
• Within a few months, the ₹15,000 comes back to her account via refund.

In both cases, no money is lost. The system just ensures accountability.

TCS and Loan Purchases

What if you buy through a loan? Many assume that since EMI financing is part of the deal, TCS might not apply directly. But the rule is blunt: TCS is collected on the entire price of the car, regardless of payment mode.

So, if you book a ₹12 lakh car, the dealer will deduct ₹12,000 as TCS immediately. Even if you finance 90% through the bank and only pay 10% upfront, the TCS cut happens on the full ₹12 lakh; not on your down payment.

Compliance for Sellers

It’s not only buyers who must be cautious. Dealers face strict compliance duties. If a car dealer sells a car above ₹10 lakh but fails to collect and deposit TCS:

• They can face a penalty equal to the TCS amount.
• Interest liability accrues until the amount is paid.
• Their audit records can face scrutiny.

This makes dealers extra cautious-they ensure every eligible car sale has TCS added to the bill.

Common Misconceptions About TCS on Cars

1. “It’s a new tax.” Not true. TCS provisions have existed for years, although they keep expanding to new types of transactions.
2. “It increases the overall cost of the car permanently.” Wrong. It is only a deposit, adjustable against tax/refundable.
3. “I can avoid it if I pay in cash.” No chance. Dealers are bound by law; payment method does not matter.

Why Knowing This Rule Matters

For a buyer planning a purchase around the ₹10-12 lakh segment, an additional 1% immediately impacts budgeting. It could mean adjusting your financing, rethinking accessories, or negotiating with the dealer for freebies.

More importantly, not knowing could lead to shock at the dealership while finalising the invoice. And in financial planning, shocks are the last thing one needs.

Pro-Tips for Buyers

• Always check the quotation properly. If the car crosses the ₹10 lakh barrier even by a small margin, factor 1% TCS into your budget.
• Verify Form 26AS after purchase. Ensure the TCS deducted is reflected in your tax credit statement for the year.
• Claim it in your ITR. Don’t let the amount sit unused, either adjust it against your tax dues or claim a refund.
• Plan wisely. If you’re choosing between two variants, one at ₹9.9 lakh and one at ₹10.1 lakh, remember that the second comes with mandatory TCS of at least ₹10,100 extra.

The Bigger Picture: Linking Spending to Transparency

Beyond individual hassle, this provision reflects a shift in India’s tax philosophy. By capturing big-ticket spends through tools like TCS, the government is pushing toward:

• Wider tax net: More individuals reported for high-value consumption.
• Digital trail: PAN-linked transactions leave little room for unreported income.
• Fairness: Those who can spend more are in the tax system radar for scrutiny.

While it feels like an extra burden, the ultimate goal is financial transparency.

Conclusion

Buying a car is one of the most cherished milestones in life. But as with any milestone in India’s financial landscape, taxation pops up. The rule of TCS @1% on cars above ₹10 lakh is one such checkpoint. It doesn’t rob you of wealth but ensures the government keeps a record of high-value purchases.

What you must remember:

• It increases cash outflow at the time of purchase, yes.
• It is not lost money; you get it back during tax filing.
• Knowing it beforehand helps you prepare, avoid surprises, and negotiate better.

In the end, financial smartness isn’t just about earning or saving; it’s also about awareness. The next time you eye that shiny sedan or luxury SUV, don’t just compare horsepower and boot space; remember the hidden 1% TCS ride-along as well.

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