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

According to Section 194Q of the Income Tax Act, buyers in India are required to deduct Tax at Source (TDS) on purchases of goods above a specified threshold. The rule targets business owners with significant turnover, aiming to widen the tax net and improve compliance. This blog explains how Section 194Q TDS works, who it affects, the calculation process, compliance, and common exceptions.

Eligibility Criteria for Deducting TDS Under Section 194Q

Section 194Q of Income Tax Act applies only if the buyer meets specific criteria. Here are the conditions that have to be satisfied:

• The buyer has their own business

• They’re making a payment to a resident Indian for the purchase of goods

• The buyer’s turnover, total gross receipts or total sales from the preceding financial year, exceeds ₹10 crore

• The value or aggregate value of the goods purchased from the seller exceeds ₹50 lakhs

Also Read: Everything You Need to Know About Income Tax Returns Filing

How Section 194Q TDS Works

Section 194Q brings large buyers into the tax compliance framework. By making the buyer responsible for deducting TDS, the government aims to reduce gaps in tax collection, especially in business-to-business transactions. Here's a breakdown of the section:

Section 194Q TDS Rate and Limit

The TDS rate is 0.1% on the part of the purchase that exceeds ₹50 lakh in a financial year. This rule applies separately for each supplier, and the Surcharge and Health & Education Cess won’t further increase this rate. However, if the seller does not provide his PAN card to the buyer, tax deducted will be at the rate of 5% under Section 206AA.

Let’s understand this better with an example. A buyer has purchased goods from three different vendors—X, Y and Z—during FY 2025-26:

• Vendor X: ₹75 lakh

• Vendor Y: ₹48 lakh

• Vendor Z: ₹35 lakh

Since purchases from Vendor X have crossed the threshold limit of ₹50 lakh, TDS under Section 194Q needs to be deducted only for these purchases made from this seller.

Now, since the total purchase amounts to ₹75 lakh and the threshold exemption is ₹50 lakh, the taxable amount is ₹25 lakh. With the TDS rate at 0.1% of the taxable amount, the total TDS to be deducted is ₹25 lakh × 0.1% = ₹25,000.

Time of Deduction under Section 194Q

As per Section 194Q of Income Tax Act, the buyer is required to deduct tax when payment is made to the supplier, or the amount is credited to the supplier’s account, whichever is earlier. So, if a buyer makes an advance payment for the purchase of any goods, they must deduct TDS at the time of payment. 

How is GST treated?

If the invoice clearly lists the GST amount separately, calculate TDS under Section 194Q only on the value of the goods, excluding GST. If GST is not shown separately, TDS applies to the entire invoice amount.

Exceptions and Special Situations in Section 194Q

TDS under Section 194Q is not required if:

• TDS is deducted under any other provisions

• The business is still in its year of incorporation 

• The transaction is in securities (and commodities) traded through recognised stock exchanges or cleared and settled by the recognised clearing corporation

• Any Government department not carrying out any business or commercial activity is involved

• Any Central Government or State Government department is the seller

• The buyer is a non-resident of India, and the goods purchased are not connected or associated with the actual fixed location of the business or enterprise

Compliance Steps for Section 194Q TDS

To comply with Section 194Q TDS, buyers must:

1. Deduct TDS: Calculate 0.1% on the amount over ₹50 lakh per supplier in a financial year.

2. Deposit TDS: Pay the deducted amount to the government through Challan ITNS 281 by the 7th day of the next month.

3. File Returns: Submit quarterly TDS returns using Form 26Q.

4. Issue Certificate: Provide a TDS certificate (Form 16A) to the seller within 15 days of the due date of furnishing the TDS statement.

Also Read: Tax Benefits on Business Loans: What Every Entrepreneur Should Know

Penalties for Non-Compliance of 194Q TDS

Failing to comply with Section 194Q may lead to:

• Interest and late fees on undeducted or delayed TDS are charged at 1% per month until the tax is deducted, and 1.5% per month if the buyer has deducted TDS but not deposited it with the Central Government.

• Disallowance of expenditure of up to 30% of the transaction value under Section 40(a)(ia), increasing taxable income.

• Scrutiny and penalties during assessments for non-filing or late filing of returns.

Also Read: Tax Exemption & Its Various Categories

To Conclude

Introduced by the Finance Act, 2021, Section 194Q of the Income Tax Act makes it easier to monitor high-value business transactions and tackle the problems of tax evasion. Staying compliant requires timely deduction, deposit, and reporting, with exceptions already outlined. Keeping these points in mind is crucial for business owners to avoid any taxation issues and run their enterprise with ease.

For businesses handling large purchases, having sufficient working capital is crucial. With solutions like a Business Loan from Poonawalla Fincorp, you can manage cash flow smoothly while ensuring tax compliance and business growth.

FAQs

What is Section 194Q of the Income Tax Act?

Section 194Q requires buyers with gross receipts or turnover above ₹10 crore in the previous financial year to deduct TDS at 0.1%. This applies when the purchase value of goods from a resident supplier exceeds ₹50 lakh in a single financial year.

Who needs to deduct TDS under Section 194Q?

The provision applies to buyers whose gross receipts or total sales were more than ₹10 crore in the last financial year. Once such buyers purchase goods above ₹50 lakh from a single resident supplier, they must deduct TDS under this section.

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.

Is GST included when calculating TDS under Section 194Q?

When GST is shown separately on the invoice, TDS is calculated on the purchase value of goods alone, excluding GST. If GST is not mentioned separately, TDS must be deducted on the entire purchase value.

What are the penalties for not deducting TDS under Section 194Q?

If TDS is not deducted or deposited, penalties may include interest on the unpaid amount, fines for late or non-filing of returns, and a 30% disallowance of the expense, which increases taxable income.

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.

Can sellers claim credit for TDS deducted under Section 194Q?

Yes, sellers can claim credit for the TDS deducted by buyers. This credit is reflected in their Form 26AS and can be adjusted against their final tax liability.

Is Section 194Q linked to the buyer’s total sales or turnover?

Yes. Section 194Q applies only if the buyer’s total sales, gross receipts, or turnover in the previous financial year exceeded ₹10 crore. This threshold determines whether the buyer falls under the scope of this section.