Section 194Q of Income Tax Act: TDS on Goods Purchase

In the year 2021, a new section was added to the TDS family. Being applicable from 1 July 2021,194Q TDS section was introduced for the buyers and sellers. A deduction of TDS is applicable and should be deducted by the buyer on any payment of an amount exceeding the threshold limit for the purchase of goods during a financial year. 

If you are a buyer or a purchaser, it is important to understand the fundamentals of this section. Through this blog, let us understand what section 194Q is, section 194Q TDS applicability  and what is the TDS rate under section along with several other aspects of the section.

What is Section 194Q of Income Tax Act

On the purchase of goods, a section of TDS may be applied on the buyer if the buyer pays any amount to the resident seller that exceeds Rs. 50,000,00 (50 Lakhs) within the previous financial year. Under the section 194Q, the aggregate amount is calculated, as soon as the amount hits 50 Lakhs, the buyer is entitled to TDS. As per the Income Tax Department, 0.1% is the section 194Q TDS rate which means the buyer here deducts 0.1% for the amount that exceeds 50 Lakhs as TDS.

When is the 194Q TDS Deducted?

Following are the two conditions that indicates when this TDS should be applied:

• At the time of credit of the sum into the seller’s account, or
• At the time of payment, through any mode, whichever is earlier.

This shows that section 194Q TDS can be applicable on advance payments as well as when a buyer is crediting the amount to seller’s account

The section 194Q is only valid for the purchase of goods, this is not applicable on the purchase of services exceeding any amount.

Applicability for 194Q TDS Section

The term “buyer” under section 194Q holds a different meaning, it is not applicable on all the buyers. 

• “Buyer” here refers to any person whose sum total sale of the business carried on by him exceeds Rs.10 Crores in a financial year, immediately preceding the financial year in which all these goods were purchased.
• Right when the purchase of goods exceeds Rs. 50,00,000, TDS is applicable on the exceeded amount

If your turn over in the preceding financial year was less than Rs. 10 Crores, then you are not under 194Q TDS applicability. 

Exemptions Under Section 194Q 

It is clearly mentioned under the section 194Q, if:

• Tax is already deducted under any provision of the income tax or if any TCS (Tax collected at source) is applicable (except 206[1H]), section 194Q is not applicable on all those transactions or
• If TCS on sale of goods (Sub-section 1H of section 206C) is applicable along with TDS, then only TDS under section 194Q will be deducted. 

How to Calculate Section 194Q TDS

This section was introduced by the government to control and keep a record on the transactions exceeding Rs. 50 Lakhs. The TDS rate is 0.1% which is very nominal. 

Let us take a hypothetical example to understand how is TDS calculated under this section:

There are 2 parties: Buyer and seller

Let’s assume ABC ltd (buyer) is a manufacturing company whose turnover is more than 10 crores and XYZ ltd (Seller) is a supplier of raw material. Now, ABC ltd purchases goods costing Rs. 60 Lakhs from XYZ ltd in the financial year 2024-25. 

Total amount= Rs. 60,00,000

Amount exceeding threshold= Total amount – threshold limit (50 Lakhs)

Amount exceeding threshold= Rs. 60,00,000 – Rs. 50,00,00

= Rs.10,00,000

Section 194Q TDS rate = 0.1%

Section 194Q TDS rate = 0.1% of Rs. 1,00,000

= Rs. 1,000

What is Form 26Q and How is it Related to 194Q TDS Section

TDS return is paid through a particular form introduced by the Income Tax Department. For TDS on non salary sections, there are two forms- 26Q and 27Q.

Form 26Q is used if the TDS is deducted on resident and if the TDS is deducted on any non-resident, form 27Q is used.

All these forms should be submitted before the specified due dates. Forms 26Q and 27Q are submitted quarterly and the usual due date is 31 days from end of the quarter. For example the due date for the quarter ending June 30 is 31 July. Following is a list that indicates the quarter number, time period and due date as well.

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

The government launched this section with the purpose of tracking transactions exceeding 50 lakhs. The Income Tax Department has clearly mentioned the penalty charges on anyone who falls under section 194Q and does not deduct TDS with complete honesty. 

• Section 41A, If the TDS is not deducted, 30% of the amount exceeding 50 Lakhs will be disallowed. Now, if you deduct TDS in the next financial year, you can claim this 30% allowance but there are two ways in which interest on this amount can be charged at 1% and 1.5%. 
• For example: An XYZ company buys goods worth Rs. 1 crore and is responsible to deduct TDS on this amount under section 194Q but does not deduct it. While making a balance sheet or filing an ITR, the auditor, CA or other government authorities will disallow 30 Lakhs from the sum total 1 Crore. It means a profit of Rs. 30 lakhs will be increased and the company is entitled to pay income tax on that additional amount.
• The section 194Q TDS rate for goods exceeding 50 Lakhs is 0.1% but if the seller does not have a PAN card, TDS will be deducted at 5%.

Impact of GST

• TDS Calculation: TDS will be applied at a rate of 0.1% solely on the value of goods/services, excluding GST.
• Turnover Calculation: The turnover will be calculated excluding GST and should be considered for the threshold of ₹50 lakhs.

As a buyer or as a seller, it is crucial to be aware of all components related to section 194Q of Income Tax Act and comply with it if you fall under the category. The deduction rate is only 0.1% which is a minimal cost for any buyer. Try to return the 194Q TDS section amount before the due date to safeguard yourself from any penalty and extra burden.