TDS on Purchase of Goods under Section 194Q: Thresholds, Rate and Worked Example
Section 194Q for buyers with turnover above ₹10 crore: 0.1% TDS on purchases above ₹50 lakh per seller, what changed after TCS 206C(1H) was withdrawn, and filing steps.
Section 194Q requires a business buyer to deduct TDS at 0.1% on purchases exceeding ₹50 lakh from a resident seller in a financial year, if the buyer’s preceding-year business turnover exceeded ₹10 crore. For FY 2025-26 / AY 2026-27, the Income-tax Act, 1961 applies. Deduct at credit or payment, whichever is earlier. Without the seller’s PAN, the rate is generally 5%; the former non-filer higher-rate rule no longer applies.
Who must deduct TDS under section 194Q?
A buyer must deduct when its preceding-year business turnover exceeds ₹10 crore and current-year purchases from a resident seller exceed ₹50 lakh.
Under Sec. 194Q Income-tax Act, check FY 2024-25 turnover to determine the buyer’s liability for FY 2025-26. Total sales, gross receipts or turnover from business must exceed ₹10 crore. Exactly ₹10 crore does not qualify.
The provision is not restricted to companies. Individuals carrying on business, proprietorships, firms, LLPs and other qualifying buyers can fall within it.
The ₹50 lakh purchase threshold applies:
- Separately to each resident seller.
- Cumulatively across the financial year, not invoice by invoice.
- Across branches dealing with the same seller, with vendor records consolidated by PAN.
A buyer’s turnover exceeding ₹10 crore during FY 2025-26 does not, by itself, trigger deduction for that year. Goods include capital goods, so machinery purchases also need checking.
What are the applicable thresholds, rates and deduction triggers?
Deduct 0.1% only on the purchase value exceeding ₹50 lakh, at the earlier of credit or payment.
| Item | Rule for FY 2025-26 |
|---|---|
| Buyer eligibility | Preceding-year business turnover exceeding ₹10 crore |
| Seller eligibility | Resident seller |
| Annual purchase threshold | Purchases exceeding ₹50,00,000 from that seller |
| Normal rate | 0.1% on the amount exceeding ₹50 lakh |
| Seller does not furnish PAN | 5% under Sec. 206AA Income-tax Act |
| Seller is a return non-filer | No separate higher rate under the omitted Sec. 206AB Income-tax Act |
| Deduction trigger | Credit or payment, whichever occurs earlier |
| Quarterly statement | Form 26Q |
| TDS certificate | Form 16A |
Credit to a suspense account or another account does not postpone deduction where it represents credit for the seller.
Advances are covered: if payment precedes booking the invoice, examine TDS at payment. Do not wait for delivery merely because the amount is recorded as a supplier advance.
What changed from 1 April 2025?
The general sale-of-goods TCS provision ceased to apply, and the higher TDS rate for specified return non-filers was removed.
The Finance Act, 2025 made Sec. 206C(1H) Income-tax Act inapplicable from 1 April 2025. Describing this solely as an omission is less precise than the statutory change.
Earlier, sellers with preceding-year turnover above ₹10 crore generally collected TCS on sale consideration received above ₹50 lakh, subject to exclusions and the interaction with buyer-side TDS.
For FY 2025-26, sellers should stop collecting TCS under that provision. Buyers must still independently test section 194Q.
However, not all goods-related TCS disappeared. Other provisions of Sec. 206C Income-tax Act, including those covering specified goods such as scrap, continue where applicable.
Sec. 206AB Income-tax Act was omitted from 1 April 2025. PAN-related higher deduction under Sec. 206AA Income-tax Act remains relevant.
How should GST, advances and purchase returns be handled?
Separately identified GST may be excluded from the deduction base when deduction occurs at credit, but advance payments require different treatment.
CBDT Circular No. 13/2021 clarifies that, where GST is separately indicated and deduction occurs when the amount is credited, TDS is calculated without that GST component.
If payment occurs before credit, deduction applies to the whole payment, because the future GST component cannot then be identified for this purpose. Avoid applying the credit-stage GST exclusion automatically to advances.
The circular’s clarification concerns the deduction base. Do not assume every GST exclusion automatically resolves how the ₹50 lakh threshold should be monitored; maintain a consistent, reviewed accounting approach.
For purchase returns, where the seller refunds the money after TDS has been deducted, the circular permits adjustment against subsequent purchases from that seller. No adjustment is required merely because returned goods are replaced.
How does the worked example operate in rupees?
Meridian Traders Pvt Ltd must deduct ₹5,500 because its eligible purchases above the annual threshold total ₹55 lakh.
Meridian had FY 2024-25 turnover of ₹18 crore. During FY 2025-26, it purchases goods from resident Supplier X, who has furnished a valid PAN.
Assume credit precedes payment, GST is separately stated, and the purchase values below exclude GST.
| Month | Purchase excluding GST | Cumulative purchases | TDS |
|---|---|---|---|
| June | ₹30,00,000 | ₹30,00,000 | Nil |
| September | ₹35,00,000 | ₹65,00,000 | 0.1% × ₹15,00,000 = ₹1,500 |
| December | ₹40,00,000 | ₹1,05,00,000 | 0.1% × ₹40,00,000 = ₹4,000 |
| Total | ₹1,05,00,000 | ₹5,500 |
Suppose the September invoice carries GST at 18%:
- Invoice value: ₹35,00,000 + ₹6,30,000 = ₹41,30,000.
- TDS withheld: ₹1,500.
- Amount paid to Supplier X: ₹41,28,500.
- Amount deposited with the government: ₹1,500.
TDS is not an additional purchase cost: it divides the invoice settlement between the seller and the government. Deposit the September and December deductions within their respective deadlines and report them in Form 26Q.
When must TDS be deposited and reported?
For an ordinary non-government deductor, deposit TDS by the seventh of the following month, except March deductions, which are due by 30 April.
Under Rule 30 Income-tax Rules, March 2026 deductions are therefore normally payable by 30 April 2026.
Form 26Q deadlines under Rule 31A Income-tax Rules are:
| Quarter ending | Normal filing deadline |
|---|---|
| 30 June 2025 | 31 July 2025 |
| 30 September 2025 | 31 October 2025 |
| 31 December 2025 | 31 January 2026 |
| 31 March 2026 | 31 May 2026 |
Issue Form 16A within 15 days of the applicable statement due date, under Rule 31 Income-tax Rules. Check for any officially notified extensions.
What happens if the buyer misses deduction or filing?
Failures can cause interest, expense disallowance and statement late fees, even when the underlying TDS amount is small.
| Default | Consequence |
|---|---|
| Failure to deduct | Interest at 1% per month or part thereof, from when deductible until deduction, under Sec. 201(1A) Income-tax Act |
| Deducted but deposited late | Interest at 1.5% per month or part thereof, from deduction until actual payment, under Sec. 201(1A) Income-tax Act |
| Late Form 26Q | ₹200 per day under Sec. 234E Income-tax Act, capped at the TDS amount |
| Relevant expenditure with unfulfilled TDS obligations | Potential 30% disallowance under Sec. 40(a)(ia) Income-tax Act |
In Meridian’s example, assuming the ₹55 lakh is otherwise deductible revenue expenditure, a 30% disallowance means ₹16.5 lakh added to taxable profit, not ₹16.5 lakh of additional tax.
The disallowance rules recognise payment by the applicable return-filing deadline and permit subsequent-year deduction when conditions are met. Qualifying resident-payee compliance, supported by Form 26A, can provide relief from assessee-in-default treatment and corresponding disallowance; interest may still remain.
Which transactions fall outside section 194Q?
Section 194Q does not apply where buyer eligibility fails, the seller is non-resident, or a statutory exclusion governs the transaction.
Key exclusions include:
- Preceding-year buyer turnover of ₹10 crore or less.
- Purchases from non-resident sellers, whether or not they have an Indian permanent establishment; other withholding provisions may need examination.
- Transactions on which tax is deductible under another provision.
- Transactions subject to applicable TCS under Sec. 206C Income-tax Act.
- Specified exchange-based transactions covered by CBDT guidance.
The exchange exclusion covers specified securities and commodity transactions and electricity, renewable energy certificates and energy-saving certificates traded through registered power exchanges. It is not a blanket exemption for all electricity purchases.
How SP & SC helps
SP & SC Legal and Taxation Services, Bengaluru, helps businesses assess applicability, configure vendor-wise tracking and manage TDS compliance.
We review turnover, PAN records, advances, GST treatment and purchase ledgers; assist with Form 26Q and Form 16A; and reconcile vendor differences. Fees are a fixed quote after reviewing the case. Explore our compliance services or use the TDS calculator.
Frequently asked questions
Does section 194Q apply to capital goods?
Yes. Capital goods are covered, although expense-disallowance consequences require separate analysis for capitalised expenditure.
Must TDS be deducted on supplier advances?
Yes, where applicable, because payment before credit triggers deduction.
Does the seller receive credit for TDS?
Yes. Correctly reported TDS is reflected in the seller’s Form 26AS and related AIS information.
Is TDS payable on the first ₹50 lakh?
No. Deduction applies only to the amount exceeding ₹50 lakh for that seller during the financial year.
Can one seller’s branches be treated separately?
Not merely because they have different GST registrations. Consolidate purchases belonging to the same seller, ordinarily using PAN-based records.
Written by
SP & SC Editorial
Editorial team at SP & SC Legal and Taxation Services — practising advocates, chartered accountants, and company secretaries publishing hands-on guidance from live client files.
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