Section 194Q Demystified: A Complete Guide to TDS on Purchase of Goods
- Nikhil hirani
- Sep 26, 2025
- 12 min read
By Nikhil Jain, TAXPATH INDIA FOUNDER
Navigating the landscape of Indian tax law requires constant vigilance, especially with the introduction of new provisions aimed at enhancing compliance and transparency. One such significant amendment is Section 194Q of the Income Tax Act, 1961, which introduced the concept of Tax Deducted at Source (TDS) on the purchase of goods. For businesses, particularly those with substantial procurement activities, understanding the nuances of this section is not just a matter of compliance but a critical component of financial management. This comprehensive guide delves into every facet of Section 194Q, from its fundamental principles to its practical application, addressing the common challenges and questions faced by businesses.
Table of Contents
1. Introduction to Section 194Q: The What and Why
Decoding Section 194Q: TDS on High-Value Purchases
Core Mandate: Introduced via the Finance Act, 2021, Section 194Q requires a buyer meeting specific turnover criteria to deduct TDS on payments to a resident seller for purchasing goods.
The Rule: If a buyer's total purchases from a single resident seller exceed ₹50 lakh in a financial year, the buyer must deduct TDS.
TDS Rate: The tax is deducted at a rate of 0.1% on the purchase value that exceeds the ₹50 lakh threshold.
Shift in Onus: This provision places the compliance responsibility on the buyer, a significant change from previous seller-centric obligations like Tax Collected at Source (TCS).
Objectives Behind the Legislation: Widening the Tax Net
Widen Tax Base: The primary goal is to expand the tax base and improve the tracking of high-value transactions that might otherwise go unreported.
Transaction Trail: It creates a verifiable trail of transactions, ensuring sellers accurately report their sales income.
Efficient Administration: This buyer-centric model is more efficient for tax authorities, as it's easier to monitor a smaller number of large buyers than a vast number of sellers. It's a strategic tool for ensuring compliance across the supply chain.
Effective Date and Transitional Provisions
Effective Date: Section 194Q came into effect on July 1, 2021.
Threshold Calculation: For the implementation year (FY 2021-22), the Central Board of Direct Taxes (CBDT) clarified that the ₹50 lakh purchase threshold must be calculated from the start of the financial year, April 1, 2021.
Prospective Liability: The duty to deduct TDS was prospective. Tax was only required on payments made or amounts credited on or after July 1, 2021. Any sum paid or credited before this date was not subject to TDS under this section.
2. Applicability Deep Dive: Is Your Business Liable?
The Buyer's Turnover Test: Crossing the ₹10 Crore Threshold
Who is a "Buyer"? Section 194Q applies to a buyer whose total sales, gross receipts, or turnover from their business exceeded ₹10 crore in the financial year immediately preceding the year of purchase.
Example: For a purchase made in FY 2024-25, the buyer's turnover from FY 2023-24 is considered.
Exclusions from Turnover:
Turnover from non-business activities is not included.
The Goods and Services Tax (GST) component is excluded from the turnover calculation.
The Purchase Value Test: The ₹50 Lakh Limit Per Seller
Transaction-Specific Trigger: The TDS obligation is triggered when the total value of goods purchased from a single resident seller exceeds ₹50 lakh in a financial year.
Seller-by-Seller Basis: This threshold is applied individually for each seller. A business can have high aggregate purchases without triggering the section if purchases from each individual seller remain below the limit.
Taxable Amount: TDS is deductible only on the amount that exceeds the ₹50 lakh limit, not on the entire purchase value.
Operational Challenge: This dual-threshold system requires businesses to perform an annual self-assessment of their turnover and maintain real-time, vendor-wise tracking of cumulative purchase values, often necessitating automated ERP or accounting systems.
Defining the "Buyer" and "Resident Seller"
Buyer: A person carrying on a business with a turnover exceeding the ₹10 crore limit in the preceding financial year. The Central Government can notify a list of persons to be excluded from this definition.
Seller: The seller must be a resident of India for Section 194Q to apply.1 This means transactions involving the import of goods from non-resident sellers are outside the scope of this section.
Scope of "Goods": What's Included and Excluded
Definition: The Income Tax Act does not define "goods." Reference is typically made to the Sale of Goods Act, 1930, which defines goods as any kind of movable property, excluding actionable claims and money.
Inclusions: The section applies to the purchase of both:
Revenue Goods: Items for resale or raw materials (e.g., stock-in-trade).
Capital Goods: Long-term business assets (e.g., machinery, equipment).
3. The Mechanics of TDS Deduction under Section 194Q
Calculating the TDS Amount: A Step-by-Step Guide
Track Cumulative Purchases: Maintain a running total of purchases from each resident seller during the financial year.
Identify the Taxable Portion: Once the cumulative purchase value from a seller crosses ₹50 lakh, the amount above this threshold becomes taxable for all subsequent purchases from that seller.
Apply TDS Rate: Apply the relevant TDS rate to this taxable portion.
Example 1: Single Large Purchase
Company A (turnover > ₹10 crore) buys goods worth ₹80 lakh from Seller B (resident with PAN).
Taxable Portion = ₹80,00,000 - ₹50,00,000 = ₹30,00,000.
TDS to be deducted = 0.1%×30,00,000=₹3,000.
Example 2: Multiple Small Purchases
Company X (turnover > ₹10 crore) buys from Seller Y:
June 1: ₹25 lakh (Cumulative: ₹25 lakh) - No TDS.
September 10: ₹20 lakh (Cumulative: ₹45 lakh) - No TDS.
December 5: ₹15 lakh (Cumulative: ₹60 lakh) - Threshold crossed.
On the December 5th transaction, the taxable amount is ₹10 lakh (₹60 lakh - ₹50 lakh).
TDS to be deducted = 0.1%×10,00,000=₹1,000.
Any subsequent purchase from Seller Y in the same year will be fully subject to TDS at 0.1%.
TDS Rates: Standard vs. Penal
Standard Rate: The prescribed TDS rate is 0.1%.
Penal Rate (No PAN): If the seller does not provide their Permanent Account Number (PAN), the buyer must deduct TDS at a higher rate of 5% under Section 206AA.
Higher Rate (Non-Filers): Under Section 206AB, a higher TDS rate applies to payments made to "specified persons" who have not filed their income tax returns. The rate will be the highest of the rate in the Act (0.1%), the rate in force, or the rates under Section 206AA (5%) and Section 206AB.
The "Whichever is Earlier" Rule: Timing of Deduction
Trigger Point: TDS must be deducted at the time of credit of the sum to the seller's account or at the time of payment, whichever occurs first.
Deemed Credit: Crediting any account, including a "suspense account," is considered a credit to the seller's account for this purpose, preventing deferral of TDS liability.
Special Consideration: TDS on Advance Payments
Liability on Advances: The "payment or credit, whichever is earlier" rule means that TDS is triggered at the moment an advance payment is made, as it constitutes a payment before an invoice is raised.
4. Navigating the Interplay with Other Tax Provisions
Section 194Q vs. Section 206C(1H): The Definitive Precedence Rule
The Golden Rule: If a transaction is subject to both Section 194Q (TDS by buyer) and Section 206C(1H) (TCS by seller), Section 194Q prevails. The primary obligation is on the buyer to deduct TDS.
Seller's Relief: If the buyer correctly deducts TDS, the seller is not required to collect TCS for that transaction.
Practical Exception: To avoid double taxation, if the seller collects TCS before the buyer deducts TDS (e.g., on an advance payment), the buyer is not required to deduct TDS again.
Shift in Liability: If a liable buyer fails to deduct TDS, the responsibility shifts back to the seller to collect TCS.
Need for Communication: This hierarchy necessitates proactive communication. Buyers often issue declarations to vendors confirming their 194Q liability and instructing them not to collect TCS.
Comparative Analysis of Section 194Q and Section 206C(1H)
Parameter | Section 194Q (TDS) | Section 206C(1H) (TCS) |
Basis of Charge | Purchase of Goods | Sale of Goods |
Responsible Person | Buyer | Seller |
Trigger Event | Credit to Seller's A/c or Payment, whichever is earlier | Receipt of Sale Consideration |
Applicable Rate (PAN provided) | 0.1% | 0.1% |
Applicable Rate (No PAN) | 5% | 1% (prior to amendment) |
Buyer's Turnover Threshold | > ₹10 Crore in preceding FY | Not Applicable |
Seller's Turnover Threshold | Not Applicable | > ₹10 Crore in preceding FY |
Transaction Threshold | Aggregate purchases from a seller > ₹50 Lakh in a FY | Aggregate sale consideration from a buyer > ₹50 Lakh in a FY |
Precedence Rule | Prevails over Section 206C(1H) | Subordinate to Section 194Q |
Section 194Q vs. Section 194-O: E-Commerce Transactions
Precedence: Section 194-O (TDS by e-commerce operators) takes precedence over Section 194Q.
Primary Obligation: If an e-commerce operator deducts TDS under 194-O, the end customer (buyer) is not required to deduct TDS under 194Q.
Interaction with Other TDS/TCS Sections
General Exemption: Section 194Q does not apply to transactions where:
Tax is deductible under any other provision of the Act.
Tax is collectible under Section 206C, except for Section 206C(1H).
Purpose: This clause prevents double taxation on a single transaction under different sections.
5. Practical Implementation: Addressing Common Business Doubts (CBDT Clarifications)
The CBDT provided key clarifications via Circular No. 13 of 2021 and Circular No. 20 of 2021.
Treatment of GST and Other Indirect Taxes
Deduction on Credit: If TDS is deducted when booking an invoice that shows the GST component separately, TDS should be calculated on the base value of goods, excluding GST.
Deduction on Payment: If TDS is deducted on a payment (like an advance), it must be calculated on the entire payment amount, as the GST component cannot be identified at that stage.
Handling Purchase Returns and Adjustments
Purchase Return with Refund: If goods are returned and the seller refunds the money, the TDS deducted on that portion can be adjusted against a subsequent purchase from the same seller in the same financial year.
Purchase Return with Replacement: If goods are simply replaced, no TDS adjustment is needed as the original transaction is considered fulfilled.
Debit Notes: Issuing a debit note for rate differences or quality issues does not require a reversal of the TDS already deducted on the original transaction.
Applicability to Non-Residents and Imports
Imports: The section does not apply to imports as the seller is a non-resident.
Non-Resident Buyers: A non-resident buyer is not required to deduct TDS unless the purchase is "effectively connected with a permanent establishment" of that non-resident in India.
Transactions with Exempted Sellers
Tax-Exempt Sellers: No TDS is required on purchases from a seller whose income is fully exempt from tax (e.g., entities registered under Section 10). This does not apply if only part of the seller's income is exempt.
Government Entities: Central and State Governments are not considered "sellers." However, Public Sector Undertakings (PSUs) and government corporations must comply with Section 194Q.
Specific Goods: Clarifications
Electricity:
Applicable: Direct purchases from power generation and distribution companies are subject to TDS.
Exempt: Transactions in electricity, renewable energy certificates, and energy-saving certificates traded through registered power exchanges are exempt.
Securities and Commodities: Transactions traded through recognized stock exchanges and settled by recognized clearing corporations are exempt.
Software:
Treated as Goods: Purchase of standardized, off-the-shelf software falls under Section 194Q.
Treated as Services/Royalty: Payments for customized software or licensing may attract TDS under other sections like 194J.
6. Compliance and Consequences: A Roadmap for Due Diligence
Step-by-Step Compliance
Deduct Tax: Deduct the correct TDS amount at the time of credit or payment.
Deposit TDS: Deposit the tax with the government using Challan ITNS-281.
The due date is the7th of the following month. For March, the due date is April 30th.
File TDS Return: File a quarterly statement in Form 26Q.
Issue TDS Certificate: Provide a TDS certificate in Form 16A to the seller.
Compliance Calendar for Section 194Q
Quarter | Period | Due Date for Monthly TDS Deposit | Due Date for Filing Quarterly Form 26Q |
Q1 | April - June | May 7, June 7, July 7 | July 31 |
Q2 | July - September | Aug 7, Sept 7, Oct 7 | October 31 |
Q3 | October - December | Nov 7, Dec 7, Jan 7 | January 31 |
Q4 | January - March | Feb 7, Mar 7, April 30 | May 31 |
Consequences of Non-Compliance
Interest on Late Deduction/Deposit:
Late Deduction: Interest at 1% per month (or part thereof) from the due date of deduction to the actual date of deduction.
Late Deposit: Interest at 1.5% per month (or part thereof) from the date of deduction to the date of deposit.
Disallowance of Expenditure (Section 40(a)(ia)):
This is the most severe penalty. If a buyer fails to deduct or deposit TDS, 30% of the related purchase expenditure will be disallowed when calculating the buyer's taxable income.
Other Penalties and Prosecution:
Late Filing of Return (Section 234E): A fee of ₹200 per day, up to the TDS amount.
Penalty (Section 271H): A penalty ranging from ₹10,000 to ₹1,00,000.
Prosecution (Section 276B): Can be invoked in serious cases of default.
7. Frequently Asked Questions (FAQs) on Section 194Q
1. When is the ₹50 lakh purchase threshold calculated from?
The threshold is calculated from the beginning of the financial year, April 1st.
2. Does Section 194Q apply to services?
No, it only applies to the purchase of "goods." Services are covered by other TDS sections.
3. Does 194Q apply to a newly incorporated business?
No. A business in its first year of operation cannot meet the condition of having a turnover > ₹10 crore in the preceding financial year.
4. Is GST included for calculating thresholds and TDS?
For the ₹10 crore turnover threshold, GST is excluded.8 For the ₹50 lakh purchase threshold and TDS calculation, deduct on the base value excluding GST if it's shown separately on the invoice. If deducting on an advance payment, TDS is on the whole amount.
5. Is TDS applicable on advance payments?
Yes. Since TDS is deducted at payment or credit, whichever is earlier, an advance payment triggers the TDS liability.
6. How are purchase returns handled for TDS?
If goods are returned and the seller provides a monetary refund, the TDS already paid can be adjusted against a future purchase from the same seller. No adjustment is needed if the goods are replaced.
7. Is TDS applicable on electricity purchases?
Yes, for direct purchases from power companies. It is exempt if the electricity is traded through a registered power exchange.
8. If both my and my seller's turnover exceed ₹10 crore, who is responsible?
The buyer is responsible. Section 194Q (TDS) has priority over Section 206C(1H) (TCS).
9. What if my turnover is below ₹10 crore but my seller's is above ₹10 crore?
You (the buyer) are not liable under 194Q. The seller will be liable to collect TCS from you under Section 206C(1H) if your purchases exceed ₹50 lakh.
10. Does Section 194Q apply to barter transactions?
Generally, no, as it applies to the payment of a "sum." Barter involves the exchange of goods for goods, not money.
11. What is the accounting entry for TDS under Section 194Q?
For a purchase of ₹60,00,000 (where the taxable portion is ₹10,00,000 and TDS is ₹1,000):
Purchase A/c Dr. 60,00,000
To Vendor A/c Cr. 59,99,000
To TDS Payable (194Q) A/c Cr. 1,000
12. Do government entities deduct TDS under 194Q?
A government department not engaged in business is not considered a "buyer." However, PSUs and other commercial government corporations must comply.
13. If a seller has no PAN, is the rate 5% or the higher rate under Section 206AB for non-filers?
You must deduct at the higher of the rates specified in Section 206AA (5%) and Section 206AB. If the seller is also a non-filer, the higher rate would apply.
14. How can I manage compliance for thousands of vendors?
Manual tracking is impractical. It is essential to configure your accounting or ERP system to automate the tracking of vendor-wise purchase thresholds and apply TDS accordingly.
15. What documents should I maintain for compliance?
Maintain a vendor-wise purchase register, TDS deposit challans (ITNS-281), filed quarterly returns (Form 26Q), and TDS certificates issued to sellers (Form 16A). It is also best practice to keep declarations from sellers with their PAN details.
About the Author
Nikhil Jain is a Founder and CEO of TAXPATH INDIA with over 7 years of experience in taxation and compliance. He specializes in GST implementation and has helped numerous businesses navigate the complexities of indirect tax compliance
Contact Information:
Email: contact@taxpathindia.com
Phone: +91-9042364130
Website: www.taxpathindia.com
Disclaimer:
This article is for informational purposes only and should not be considered as professional tax advice. Readers are advised to consult qualified tax professionals for specific compliance requirements and business decisions.
