Use tio when you don't know the nature of what you are pointing or if you don't want to mention its nature. (By "nature", I mean every kind of concept, such as cars, dogs, ideas ...)
You can read "tio" as "that thing/situation".
Kio estas tio? = What is that? / What thing is that thing?
Use tiu when you know the nature of what you are pointing.
Kio estas tiu aŭto? = What is that car? / What thing is that car?
Here, the nature is a car. It is often present in the same sentence, often just after tiu, or any correlative that ends with -u.
Note 1: Be careful, because some Esperantists tends to use "tiu" without mentionning the nature in the same sentence. They do this because they think the nature is obvious because of the context or if they already mentionned it in past sentences. So, you might see something like that:
Estas multaj aŭtoj. Kio estas tiu? = There are a lot of cars. What is that (car)?
Note 2: When a correlative with -u (such as tiu) is used without mention of a nature of any sort, the nature is likely to be homo(j) = person/people.
Ĉiu volas lerni Esperanton. = Every person wants to learn Esperanto.
Note 3: If you are a beginner, avoid doing what is mentionned in Note 1 and Note 2.