Section 194Q of Income Tax Act: Applicability, TDS Rate, Example, Turnover Limit

Are you puzzled by Section 194Q of the Income Tax Act? This vital tax provision affects many businesses in India, yet remains misunderstood. Introduced in the Finance Act 2021, Section 194Q mandates Tax Deducted at Source (TDS) on purchases of goods above Rs. 50 lakhs from resident sellers.

For business owners managing finances, understanding 194Q is essential to avoid penalties and ensure compliance. The provision applies to buyers with turnover exceeding Rs. 10 crores in the previous financial year.

With 194Q regulations, businesses must monitor purchase values closely to apply the correct TDS rates. The 0.1% TDS rate might seem small, but incorrect application can lead to notices and penalties from tax authorities.

This article will explain the key aspects of Section 194Q, including applicability criteria, TDS rates, calculation methods, and important exceptions to help you navigate this tax provision effectively.

Budget 2025 update

The Budget 2025 maintained the existing framework of Section 194Q without major changes. The threshold limit for buyer's turnover remains at Rs. 10 crores, and the purchase threshold stays at Rs. 50 lakhs from the same seller.

Tax experts anticipated potential adjustments to the TDS rate under 194Q, but the government kept it at 0.1%. This stability helps businesses plan their tax strategies without sudden regulatory changes.

Eligibility criteria for section 194Q

Section 194Q applies when specific conditions are met:

• Buyer's turnover: The buyer's total sales, gross receipts, or turnover must exceed Rs. 10 crores in the immediately preceding financial year.
• Purchase value: The aggregate purchases from a single seller must exceed Rs. 50 lakhs during the financial year.
• Seller status: The provision applies only when purchasing goods from resident sellers in India.

For businesses with significant turnover, tracking these thresholds is critical for tax compliance. The 194Q provision does not apply to service purchases, focusing solely on goods transactions.

Example for who deducts TDS

Let's understand who bears the responsibility for TDS deduction:

• Company ABC had a turnover of Rs. 15 crores in FY 2023-24. In FY 2024-25, they purchase raw materials worth Rs. 75 lakhs from XYZ Traders. Since ABC's turnover exceeds Rs. 10 crores and purchases exceed Rs. 50 lakhs, ABC (the buyer) must deduct TDS under Section 194Q.
• The TDS applies only to the amount exceeding Rs. 50 lakhs. In this case, TDS will apply to Rs. 25 lakhs (Rs. 75 lakhs - Rs. 50 lakhs).

Rate of TDS

Section 194Q specifies a TDS rate of 0.1% on the purchase value exceeding Rs. 50 lakhs from a resident seller. This rate applies when the seller provides a valid PAN.

If the seller fails to furnish PAN details, the TDS rate increases dramatically to 5%, as per Section 206AA of the Income Tax Act. This five-fold increase can significantly impact cash flows for both parties.

For businesses dealing with multiple vendors, verifying PAN details is essential to avoid the higher TDS rate. The 194Q provision aims to track high-value transactions within India's economy.

Calculation of TDS

TDS under Section 194Q is calculated on the amount exceeding Rs. 50 lakhs at 0.1%. The formula is:

TDS Amount = (Total Purchase Value - Rs. 50 lakhs) × 0.1%

Remember that the Rs. 50 lakhs threshold applies to the aggregate purchases from a particular seller during the financial year, not to individual transactions.

The calculation includes GST paid on purchases, making the effective base amount higher than just the value of goods purchased.

Example for calculation of TDS

A manufacturing company purchases raw materials worth Rs. 90 lakhs from a supplier during FY 2024-25. The company had Rs. 12 crores turnover in the previous year.

TDS calculation:

• Amount exceeding threshold: Rs. 90 lakhs - Rs. 50 lakhs = Rs. 40 lakhs
• TDS at 0.1%: Rs. 40 lakhs × 0.1% = Rs. 4,000

The buyer deducts Rs. 4,000 from the payment to the seller and deposits it with the government. This amount is reflected in the seller's Form 26AS and can be claimed as tax credit.

Applicability of section 194Q

Section 194Q applies strictly to the purchase of goods and not services. The provision covers all types of goods purchased from resident sellers, barring specific exceptions.

The 194Q applies throughout the financial year once the Rs. 50 lakhs threshold is crossed. Every subsequent purchase from the same seller attracts TDS at 0.1%, regardless of amount.

Time of deduction of TDS

TDS under Section 194Q must be deducted at the earlier of:

• The time of credit of purchase amount to the seller's account
• The time of payment to the seller

For accrual basis accounting, TDS applies when the purchase is booked as an expense, even if payment is pending. For cash basis, TDS applies when actual payment occurs.

The timing distinction is crucial for businesses to avoid defaults in TDS deduction. Tax authorities strictly monitor compliance with the time of deduction rules under 194Q.

TDS deposit due date

After deduction, the TDS amount must be deposited with the government by the 7th day of the month following the deduction month. For March (last month of the financial year), the due date extends to 30th April.

Late deposit attracts interest penalties under Section 201(1A) at 1.5% per month. Additional penalties may apply for consistent non-compliance.

Electronic payment through the NSDL TIN platform is mandatory for most businesses. The challan used for payment is ITNS 281 with proper mention of Section 194Q.

TDS return: Form 26Q

TDS deducted under Section 194Q must be reported in quarterly TDS return Form 26Q. The return includes details of all deductions made during the quarter.

Due dates for filing Form 26Q:

• Quarter ending June: 31st July
• Quarter ending September: 31st October
• Quarter ending December: 31st January
• Quarter ending March: 31st May

Accurate reporting in Form 26Q ensures sellers can claim credit for TDS in their tax returns. Late filing attracts penalties under Section 234E at Rs. 200 per day.

Exceptions

Section 194Q does not apply to certain transactions:

• Goods imported from outside India
• Transactions where TCS under Section 206C(1H) applies
• Transactions where TDS is required under any other section
• Purchases from non-resident sellers

Government entities and individuals not required to get tax audits are exempt from the buyer's perspective. However, if you qualify as a buyer under 194Q, you must deduct TDS even if the seller is an exempt entity.

Important points to consider for 194Q of Income Tax Act

Key aspects to remember about Section 194Q:

• Threshold application: The Rs. 50 lakhs threshold applies per seller, not cumulatively across all vendors.
• TDS calculation base: TDS applies only on the amount exceeding Rs. 50 lakhs, not the entire purchase value.
• GST component: GST amount is included in calculating TDS but excluded from turnover calculations.
• Documentation: Maintain proper records of all purchases and TDS deducted for audit purposes.

Non-furnishing of PAN

If a seller fails to provide PAN, the TDS rate increases to 5% instead of 0.1%. This significant increase serves as a deterrent against non-compliance with PAN requirements.

Businesses should verify seller PAN details before making payments. The verification can be done through the Income Tax Department's PAN verification service.

The higher TDS rate affects the seller's cash flow significantly. Good business practice includes collecting and verifying PAN details of all vendors at the onboarding stage to avoid complications.

Impact on GST

GST is included in the value of goods for calculating TDS under Section 194Q. For example, if goods worth Rs. 60 lakhs plus GST of Rs. 10.8 lakhs are purchased, TDS applies on Rs. 20.8 lakhs (Rs. 70.8 lakhs - Rs. 50 lakhs).

However, for determining the Rs. 10 crores turnover threshold, GST is excluded from the calculation. This distinction is important for businesses operating near the threshold limit.

The interplay between GST and income tax provisions requires careful record-keeping and accounting practices to ensure compliance with both tax regimes.

Section 194Q declaration format

While no standard format is prescribed for Section 194Q declarations, businesses often exchange documents confirming:

• The seller's PAN details
• Confirmation of resident status
• Cumulative purchase value in the current financial year
• Applicable TDS rate agreement

These declarations help maintain transparency between business partners and reduce disputes related to TDS deductions.

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Conclusion

Understanding Section 194Q is vital for businesses with turnover exceeding Rs. 10 crores. The provision aims to enhance tax compliance by tracking high-value goods purchases. With the 0.1% TDS rate on purchases exceeding Rs. 50 lakhs from resident sellers, businesses must establish robust systems to track vendor-wise purchases.

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