Section 194Q of the Income Tax Act: TDS on Purchase of Goods Explained

Section 194Q of the Income Tax Act was introduced by the Finance Act, 2021 and came into effect from 1st July 2021. It mandates that any buyer whose total sales/gross receipts/turnover exceeds ₹10 crore in the preceding financial year must deduct TDS at 0.1% on purchases of goods exceeding ₹50 lakh from a resident seller. The provision aims to curb tax evasion and enhance transparency in high-value purchase transactions. Businesses must ensure compliance, as failure to deduct or deposit TDS can result in interest, penalties, and disallowance of expenses.

What is Section 194Q?

Section 194Q of the Income Tax Act was introduced by the Finance Act, 2021 and became effective from 1st July 2021. It deals with TDS on the purchase of goods. The Government introduced this section to:

• Improve the reporting of transactions,
• Expand the tax base
• Limit tax leakage and
• Enhance business compliance

Thus, under Section 194Q, the liability to deduct and deposit TDS with the Government lies with the Purchaser.

Section 194Q TDS Applicability

It is essential to understand the applicability of Section 194Q before calculating your TDS liability. The Section applies only when certain conditions are satisfied.

Conditions for Applicability

Section 194Q applies when:

• The buyer is engaged in carrying on a business or profession
• The seller is a resident of India
• The buyer’s total turnover (sales/gross receipts) exceeded ₹10 crore during the previous financial year
• The value of purchases from a particular seller exceeds ₹50 lakh in the relevant financial year

Once all of these conditions are met, TDS at 0.1% becomes applicable on the amount exceeding ₹50 lakh. Importantly, the purchase value must be tracked seller-wise, meaning businesses should monitor vendor-specific purchases to ensure compliance.

Who Must Deduct TDS Under Section 194Q?

Only those buyers whose turnover exceeds ₹10 Crore are required to withhold TDS under Section 194Q.

For example:

If your turnover last year was ₹15 crore and you purchase goods worth ₹80 lakh from a single supplier this year, Section 194Q applies.

If your turnover was below ₹10 crore, Section 194Q would not apply.

Section 194Q TDS Rate

TDS rate: 0.1% on the amount exceeding ₹50 lakh.

If PAN is not furnished by the seller, Section 206AA applies and the rate increases to 5%

Example of TDS Calculation Under Section 194Q

Supplier A: ₹75,00,000

Supplier B: ₹42,00,000

Supplier C: ₹30,00,000

Only Supplier A crosses the ₹50 lakh threshold.

Taxable amount = ₹75,00,000 – ₹50,00,000 = ₹25,00,000

TDS = 25,00,000 × 0.1% = ₹2,500

When Should TDS be Deducted?

TDS must be deducted at the earlier of:

• Payment made to the seller
• Credit to the seller’s account

This includes advance payments.

Transactions Excluded from Section 194Q

No TDS liability arises under Section 194Q in the following cases:

• Purchases below ₹50 lakh per seller
• Buyers with turnover below ₹10 crore in the preceding FY
• Transactions where tax is deductible/collectable under other provisions (except Section 206C(1H), where Section 194Q prevails)
• Transactions in securities/commodities traded on recognised exchanges
• Transactions with government entities not engaged in business
• Purchases from non-resident sellers without a business connection in India

Update: Section 206C(1H (TCS on sale of goods) has been abolished effective 1 April 2025. Section 194Q now exclusively governs purchase transactions.

Compliance Requirements Under Section 194Q

• Deduct TDS correctly once the threshold is crossed
• Deposit TDS via Challan ITNS 281 within 7 days of the month-end
• File quarterly TDS returns in Form 26Q
• Issue TDS certificates (Form 16A) to suppliers

Penalties for Non-Compliance 194Q TDS

• Interest @ 1% per month for non-deduction
• Interest @ 1.5% per month for non-deposit
• Disallowance of 30% of expenditure under Section 40(a)(ia)
• Penalties, scrutiny, and notices for delayed filing

Best Practices for Section 194Q Compliance

Businesses can simplify and ease the burden of complying with the provisions of Section 194Q by implementing the following best practices:

• Maintain documented vendor-wise purchase records.
• Ensure vendors have proper PAN information.
• Reconcile accounts at least once a month.
• Monitor and maintain monthly thresholds regularly.
• Clearly separate your GST from the total on invoices.
• File your returns on or before the due date.

By following these best practices, companies can avoid unnecessary penalties and/or disputes with the tax authorities.

Read Also: Everything You Need to Know About New Income Tax Rules Coming Into Effect From April 1, 2026

To Conclude

Section 194Q is an essential compliance requirement for companies undertaking significant purchases of goods. A buyer is required to deduct TDS once purchases from a resident seller exceed ₹50 lakh, at the earliest of payment or credit. With the abolition of Section 206C(1H) from April 2025, Section 194Q is now the sole provision governing TDS on purchase of goods. Maintaining accurate records and timely compliance will protect businesses from penalties and disputes.

FAQs

What is Section 194Q of the Income Tax Act?

Section 194Q of the Income Tax Act requires an eligible buyer to deduct TDS from the purchases of any goods from a resident seller that exceed ₹50 Lakh.

How do I know if my purchases fall under Section 194Q?

You need to track the total purchase value from each resident supplier. If the total crosses ₹50 Lakh in a year and your gross receipts are above ₹10 Crore, Section 194Q of the Income Tax Act becomes applicable from that point onwards.

How does Section 194Q differ from Section 206C(1H)?

Under Section 194Q of the Income Tax Act, the buyer is responsible for deducting TDS, while under Section 206C(1H), the seller collects TCS. As of April 2025, Section 206C(1H) has been removed, and sellers no longer have to collect TCS.

Is GST included while calculating TDS under Section 194Q?

Generally, if GST is separately mentioned in the invoice and TDS is deducted at the time of credit, TDS under Section 194Q may be calculated excluding the GST component.

What if TDS under Section 194Q is not deducted?

Failure to deduct or deposit TDS under Section 194Q may result in interest charges, penalties, and disallowance of up to 30% of the related expenditure under Section 40(a)(ia).