TDS on Purchase of Goods under Section 194Q: Key Rules and Thresholds

TDS on Purchase of Goods under Section 194Q – A concise explanation of Section 194Q covering applicability, compliance, and key practical points for businesses.

Brief Summary

Section 194Q of the Income Tax Act, 1961 requires some buyers to deduct TDS on high value purchases of goods. It was introduced through the Finance Act 2021 and took effect from 1 July 2021. The section remains active, as amended up to the Finance Act 2025. Its goal is to expand the TDS base and improve the reporting of large business to business (B2B) transactions. This article explains its applicability, reasoning, exclusions, and practical compliance points in simple language.

Introduction

Previously, many large transactions involving goods went unreported because neither the seller collected TCS nor the buyer deducted TDS. To address this issue, the government added Section 194Q to the Income Tax Act. This provision ensures that big purchases made by large businesses are included in the income tax system and can be matched with GST data. Even after three years, taxpayers often remain confused about how it relates to Section 206C(1H) (TCS on the sale of goods). The following explanation clarifies how Section 194Q works.

1. Why Section 194Q Was Introduced

Before 194Q, sellers with a turnover over ₹10 crore had to collect TCS under Section 206C(1H) on sales exceeding ₹50 lakh per buyer. In practice, many sellers overlooked this requirement, leading to large transactions not being officially reported. To ensure that at least one side of the trade—either the buyer or the seller—records such purchases, Section 194Q shifted the responsibility for deducting TDS to the buyer in certain situations.

This law applies only to buyers whose total turnover in the previous financial year exceeds ₹10 crore. This limit is intentional; it reduces the compliance burden on smaller businesses and focuses only on larger buyers who have the systems and resources to deduct and deposit TDS correctly.

With this approach, the Income Tax Department can track high-value movements of goods, reconcile purchase data with GST filings, and curb cases of under-reporting or fake invoicing.

2. What Section 194Q Says

Section 194Q requires the buyer to deduct TDS at 0.1% on purchases of goods from a resident seller if both of the following conditions are met:

1. The buyer’s total sales, gross receipts, or turnover in the previous financial year exceeded ₹10 crore; and

2. The total value of purchases from that seller in the current financial year exceeds ₹50 lakh.

TDS must be deducted on the amount above ₹50 lakh, at the earlier of:

• credit to the seller’s account; or
• payment to the seller.

Example:

If a buyer with ₹15 crore turnover purchases goods worth ₹70 lakh from a seller in FY 202425,

TDS = 0.1% × ₹20 lakh = ₹2,000.

3. Understanding Subsection (2): Credit to Suspense Account

Even if the buyer credits the purchase amount to a “suspense” or any other account, the law treats it as credited to the seller’s account. This means that once the purchase liability is recorded, the obligation to deduct TDS arises immediately—you can’t postpone the deduction just because the seller’s account name isn’t finalized. If TDS isn’t deducted at that point, the buyer becomes liable for interest under Section 201(1A) and possible disallowance under Section 40(a)(ia).

4. Exclusions and Non Applicability

According to CBDT Circular No. 13/2021 and Circular No. 20/2021, Section 194Q does not apply in the following cases:

• If tax is deductible under any other TDS section.
• If TCS is collectible under Section 206C, except in overlapping cases under 206C(1H)—where TDS under 194Q takes precedence.
• If payments are made to a non resident seller, unless that income is taxable in India under the Income Tax Act or an applicable DTAA. In these situations, Section 195 applies instead.
• TDS under 194Q is calculated excluding GST, as clarified by CBDT on 30 June 2021.

5. TDS vs TCS – Who Should Deduct or Collect?

If both could technically apply, TDS under Section 194Q takes precedence. The buyer deducts, and the seller does not need to collect TCS on that transaction.

6. Practical Compliance Steps

1. Regularly review vendor wise purchases to identify those exceeding ₹50 lakh.

2. Deduct TDS when you credit or pay, whichever comes first.

3. Deposit TDS by the 7th of the following month using Form 26Q.

4. Include details in the quarterly TDS return and issue Form 16A to every seller.

5. Keep a yearly vendor wise register to track limits and deductions.

7. Common Errors to Avoid

• Deducting TDS on the GST inclusive value instead of the taxable value.
• Missing deductions on advance payments once the limit is exceeded.
• Incorrectly applying 194Q to imports or non resident sellers.
• Ignoring TDS on credits to suspense or purchase related accounts.
• Delaying deposits, resulting in interest under section 201(1A) and disallowance under section 40(a)(ia).

Conclusion

Section 194Q was created to enhance transparency and traceability in large value goods transactions within the income tax system. Although the deduction rate is small, its purpose is significant—it ensures that major B2B deals appear within the reporting network. For buyers, timely tracking of limits, correct deductions, and accurate filings are crucial for compliance and avoiding penalties.

References

• Income Tax Act, 1961 – Section 194Q
• CBDT Circular No. 13/2021 dated 30 June 2021
• CBDT Circular No. 20/2021 dated 25 November 2021
• Finance Act 2021 (as amended up to  Finance Act, 2025)