Section 194Q of the Income-tax Act, 1961 covers the deduction of Tax Deducted at Source (TDS) on the purchase of goods. Under this provision, the buyer must deduct TDS at 0.1% when making payment to a resident seller, provided the value of goods purchased exceeds ₹50 lakh in a financial year.

What is Section 194Q?

Section 194Q mandates TDS on purchase-related transactions. It was introduced to reduce tax evasion by ensuring tax is collected directly during the transaction. This provision became applicable from 1st July 2021. Additionally, Tax Collected at Source (TCS) on the sale of goods under Section 206C(1H) stands withdrawn from 1st April 2025, meaning only TDS under Section 194Q will continue.

Applicability of Section 194Q

Section 194Q comes into effect when the following criteria are met:

• The buyer’s turnover, sales, or gross receipts in the previous financial year exceed ₹10 crore.
  
• Purchases of goods from a resident seller exceed ₹50 lakh in a financial year.
  
• It applies to both capital goods and goods purchased for regular business operations.
  

Note: Section 194Q is not applicable when the seller is a non-resident. From 1st April 2025, TCS under Section 206C(1H) will no longer apply.

Example
If Mr. X had a turnover above ₹10 crore in the financial year ending 31 March 2025, he must deduct TDS from payments made to resident sellers on purchases exceeding ₹50 lakh in FY 2025–26.

TDS Rate Under Section 194Q

TDS is deducted at 0.1% on the purchase value exceeding ₹50 lakh in a financial year.
This means ₹50 lakh is excluded from the total purchases, and TDS applies only to the amount beyond this threshold.
The ₹50 lakh limit is calculated separately for each seller every financial year.

Examples

• If a buyer purchases goods worth ₹20 lakh three times from a seller, totaling ₹60 lakh, TDS will be deducted only on ₹10 lakh (₹60 lakh – ₹50 lakh) at 0.1%.
  
• If Mr. A buys goods worth ₹60 lakh, ₹50 lakh, and ₹40 lakh from vendors C, D, and E respectively in FY 2025–26, TDS under Section 194Q will be deducted only for purchases from vendor C, as only those exceed the threshold.
  

TDS Rate Under Section 194Q on Non-furnishing of PAN

If the seller does not provide their PAN to the buyer, the applicable TDS rate increases to 5% instead of the standard 0.1%.
While the default rate in other situations without PAN is 20%, Section 194Q specifically mandates a 5% deduction in such cases.

Impact of GST on TDS Calculation

• The turnover considered for the ₹50 lakh threshold must be computed excluding GST.
  
• TDS at 0.1% is also to be calculated only on the value of goods or services without including GST.
  

When Should TDS Be Deducted Under Section 194Q?

TDS must be deducted at the earlier of the following events:

• When the amount is credited to the seller’s account, or
  
• When payment is made to the seller.

This means that if no advance is paid, TDS must be deducted at the time of purchase.
However, if an advance payment has been made, TDS must be deducted at the time that advance is paid.

Once deducted, the TDS amount must be deposited with the government, and the quarterly TDS statement should be filed within the applicable due dates.

Penalty for Non-Compliance Under Section 194Q of the Income Tax Act

If a buyer does not deduct or fails to deposit the TDS required under Section 194Q:

• Up to 30% of the transaction amount may be disallowed as a business expense under the Income Tax Act.
  
• Additional interest and penalties may also be levied.
  

Conclusion

Section 194Q outlines the compliance requirements for buyers purchasing goods from resident sellers where the value exceeds ₹50 lakh in a financial year. When the seller provides PAN details, TDS must be deducted at 0.1% on the amount crossing the threshold.

FAQs on Section 194Q of the Income Tax Act

1. At what rate is TDS deducted under Section 194Q?
The buyer must deduct TDS at 0.1% on the purchase value exceeding ₹50 lakh if the seller provides a valid PAN or Aadhaar. If PAN or Aadhaar is not furnished, the applicable TDS rate becomes 5%.

2. What is the due date for depositing TDS?
As per Section 194Q, the TDS deducted must be deposited to the government on or before the 7th day of the month following the deduction.

3. What happens if the seller does not provide PAN?
If the seller does not share PAN details, the buyer is required to deduct TDS at a higher rate of 5% as prescribed under Section 194Q.

4. What are the consequences of not deducting or not depositing TDS?
Failure to deduct or deposit TDS attracts interest and applicable penalties. Additionally, 30% of the related expenditure may be disallowed while computing the taxable income of the buyer.

5. What does Section 194Q of the Income Tax Act cover?
Section 194Q mandates TDS on payments made for the purchase of goods from a resident seller when the total purchases exceed ₹50 lakh (excluding GST). TDS is deducted at 0.1% on the amount surpassing the threshold. This provision replaces TCS on the sale of goods under Section 206C(1H) from 1st April 2025.

6. What is the TDS threshold under Section 194Q?
TDS under Section 194Q applies only when the purchase value from a seller exceeds ₹50 lakh in a financial year.

7. Who is considered a ‘buyer’ under Section 194Q?
A buyer is any person whose total sales, turnover, or gross receipts exceeded ₹10 crore in the preceding financial year.

8. Does Section 194Q apply to non-resident sellers?
No, Section 194Q applies only when the seller is a resident. It is not applicable to purchases made from non-residents.

9. Is GST included when calculating the ₹50 lakh threshold?
No, GST must be excluded when determining whether the ₹50 lakh limit has been crossed and when calculating the TDS amount.

10. Is TDS required on advance payments?
Yes, if an advance is paid toward the purchase of goods, TDS must be deducted at the time of making the advance payment.

11. Can both TDS under 194Q and TCS under 206C(1H) apply together?
No, from 1st April 2025, TCS under Section 206C(1H) will cease. Even prior to that, if both sections apply, TDS under Section 194Q takes precedence.

12. Is TDS deducted on capital goods?
Yes, Section 194Q applies to both capital goods and goods purchased for normal business use.

13. What documents should the buyer maintain for compliance?
Buyers should maintain purchase invoices, TDS deduction records, challans, and quarterly TDS return acknowledgments.

14. When is the buyer not required to deduct TDS under Section 194Q?
TDS is not required if:

• The seller is a non-resident, or
  
• The transaction already attracts TDS under another provision of the Act.