Section 194Q TDS on Purchase of Goods — FY 2025-26 Rate, ₹50L Threshold + 194Q vs 206C(1H) Resolution

Why Section 194Q matters for Indian SMEs (and large buyers)

Historically, the TDS framework targeted service payments (contractors, rent, professional fees). Pure purchase of goods sat outside the TDS net. That changed when the government inserted Section 206C(1H) (effective 1 October 2020) requiring large sellers to collect 0.1% TCS on bulk sales, and then Section 194Q (effective 1 July 2021 via Finance Act 2021) requiring large buyers to deduct 0.1% TDS on bulk purchases — the buyer-side mirror of 206C(1H).

For SMEs scaling toward ₹10 crore turnover, crossing that threshold flips a major compliance bit: every bulk supplier becomes a 194Q deduction subject once aggregate FY purchases from that supplier cross ₹50 lakh. Failing to deduct triggers:

• Section 201 “assessee in default” status + 18% interest under Section 201(1A) on the shortfall
• Section 40(a)(ia) disallowance — 30% of the purchase expense disallowed in the buyer’s own income computation until the TDS is properly remitted (a substantial profitability hit for a growing trading business)

For FY 2025-26, the burden has reduced meaningfully because the Finance Act 2025 has repealed Section 206AB (no more compliance-check portal lookups for non-filer sellers). For the broader TDS context, see the TDS in India overview. For the contractor / professional companion sections, see Section 194C and Section 194J.

What Section 194Q covers

• Buyer deducts TDS at 0.1% on payment to a resident seller for the purchase of goods, on the value exceeding ₹50 lakh aggregate per seller per FY
• Applies only to buyers whose aggregate turnover in the immediately preceding FY exceeded ₹10 crore
• Applies to GOODS only — not services (which fall under 194C / 194J)
• Excluded categories: securities (covered by separate provisions), electricity, software in certain configurations (depending on facts), and other notified categories

When 194Q triggers — three eligibility tests

All three must be satisfied for 194Q to apply to a specific transaction:

Test 1 — Buyer turnover gate (₹10 crore)

Buyer’s aggregate turnover / gross receipts / sales in the immediately preceding FY must exceed ₹10 crore.

• For FY 2025-26 deductions: the test is whether the buyer’s FY 2024-25 turnover exceeded ₹10 crore
• Buyers below the ₹10 crore PY-turnover threshold have zero 194Q obligation regardless of how much they purchase

Test 2 — Seller residency

Seller must be a resident of India. Imports from foreign suppliers are outside 194Q scope — those transactions are governed by Section 195 + applicable treaties / TRC rules.

Test 3 — Per-seller aggregate threshold (₹50 lakh)

Aggregate purchases from the SAME seller in the current FY must exceed ₹50 lakh. The threshold is per-seller, not total purchases across all sellers.

Critical: TDS at 0.1% is calculated only on the amount exceeding ₹50 lakh — not on the entire purchase from zero.

Worked example

A manufacturing SME’s 194Q workflow in FY 2025-26:

• Buyer: Alpha Manufacturing — FY 2024-25 turnover ₹45 crore. Passes Test 1.
• Seller: Beta Steel Corp — resident company. Passes Test 2.

Month	Purchase	Cumulative FY 2025-26 from Beta	194Q action
April 2025	₹30 lakh	₹30 lakh	Below ₹50L threshold → No TDS
June 2025	₹15 lakh	₹45 lakh	Below threshold → No TDS
August 2025	₹25 lakh	₹70 lakh	Threshold crossed. Excess over ₹50L = ₹20 lakh. TDS = 0.1% × ₹20 lakh = ₹2,000 (deduct against August invoice payment)
October 2025	₹10 lakh	₹80 lakh	Threshold already crossed → TDS on entire October invoice. TDS = 0.1% × ₹10 lakh = ₹1,000

The persistence rule (similar to Section 194C): once the ₹50L per-seller threshold is crossed in the FY, every subsequent payment to that seller in the same FY attracts TDS.

194Q vs 206C(1H) — the resolution

Both sections operate at the same 0.1% rate and the same ₹50 lakh aggregate threshold but on opposite sides of the transaction:

• Section 206C(1H) — seller’s obligation, where seller’s PY turnover > ₹10 crore: collect 0.1% TCS from buyer on sales above ₹50 lakh aggregate
• Section 194Q — buyer’s obligation, where buyer’s PY turnover > ₹10 crore: deduct 0.1% TDS on purchases above ₹50 lakh aggregate

Where both buyer (> ₹10 cr) and seller (> ₹10 cr) are above the turnover gates, the same transaction could trigger both sections — leading to double withholding.

CBDT Circular 13/2021 — the resolution

CBDT Circular No. 13/2021 dated 30 June 2021 clarifies:

“Where Section 194Q applies, Section 206C(1H) shall not apply.”

Section 194Q overrides Section 206C(1H). The buyer’s 194Q TDS obligation is primary; the seller’s 206C(1H) TCS obligation falls away on the same transaction.

Operational best practice

At the start of each FY, a buyer above ₹10 crore turnover should send a formal communication to all material sellers stating:

“We are liable to deduct TDS under Section 194Q on purchases from your firm exceeding ₹50 lakh aggregate in FY 2025-26. Per CBDT Circular 13/2021, please do not collect TCS under Section 206C(1H) on these invoices. We will deduct 194Q TDS at 0.1% on the excess over ₹50 lakh and issue Form 16A within the prescribed timeline.”

This prevents the seller’s accounts-receivable system from auto-adding TCS on invoices and avoids reconciliation friction.

Section 206AB removal + 206AA continues

Until FY 2024-25, before applying the 194Q rate, the buyer had to check the Income Tax “Compliance Check” portal to verify whether the seller had filed ITR for the prior FY. Where the seller was a “specified person” (non-filer + aggregate TDS/TCS ≥ ₹50,000 in the relevant prior year), Section 206AB required deduction at the higher of (twice the normal rate, 5%). For 194Q that meant up to 5% (since 2× 0.1% = 0.2%, and 5% is higher).

The Finance Act 2025 omitted Section 206AB with effect from 1 April 2025. For FY 2025-26 onwards:

• No “compliance check” portal lookup before applying the 194Q rate
• Standard 0.1% applies regardless of seller’s ITR-filing history
• Section 206AA continues to apply — no valid PAN from the seller triggers a higher rate. For 194Q specifically, Section 206AA(7) caps the no-PAN rate at 5% (not the general 20%). PAN remains the operational gate.

GST exclusion + computation basis

Per CBDT Circular No. 13/2021:

• GST shown separately on the invoice: TDS on the value EXCLUDING GST
• GST not shown separately: TDS on the gross invoice value (a defensible composite computation)

For threshold testing (₹50 lakh aggregate per seller), the gross invoice value (including GST) is typically used in practice — the threshold tracks the operational purchase relationship, while the rate applies to the GST-excluded base. ERP configurations should support both: threshold-counter on gross + TDS-calculation-base on net-of-GST.

For GST-side invoicing compliance that determines whether GST is shown separately, see the GST ITC Rules guide.

Compliance mechanics

Once 194Q is deducted:

1. Deposit (Challan ITNS 281) — TDS deducted in any month is deposited by the 7th of the following month (April deduction → deposit by 7 May). Exception: TDS deducted in March is depositable by 30 April.
2. Quarterly Form 26Q — non-salary TDS return. Due dates: Q1 — 31 July, Q2 — 31 October, Q3 — 31 January, Q4 — 31 May.
3. Form 16A — TDS certificate to seller, downloadable from TRACES, due within 15 days of Form 26Q due date. See Form 16 vs Form 16A reference.
4. Form 3CD Tax Audit disclosure — Clause 34 of the buyer’s tax audit report discloses 194Q deductions for the FY (where the buyer is also subject to tax audit under Section 44AB).

Common 194Q mistakes

1. Missing the ₹10 crore buyer-turnover gate — small buyer (PY turnover < ₹10 cr) deducting 194Q because a large seller asked them to. There is no legal authority to deduct 194Q below the gate.
2. Double withholding (194Q + 206C(1H)) — failing to communicate with the seller, resulting in seller adding 0.1% TCS to invoice AND buyer deducting 0.1% TDS on payment. CBDT Circular 13/2021 says 194Q overrides; operational communication prevents the double-hit.
3. Deducting from zero instead of from ₹50L excess — calculating 0.1% on the full ₹60 lakh purchase instead of the ₹10 lakh excess. Over-deducts ₹5,000 in the example; seller can claim refund but creates working-capital drag and reconciliation noise.
4. Applying 194Q to services — deducting 0.1% on a consulting invoice or a works-contract payment where the correct section is 194J (10%) or 194C (1-2%). Massive under-deduction → Section 201 default + 18% interest + Section 40(a)(ia) disallowance.
5. Deducting on GST-inclusive total — failing to strip GST from the TDS base where GST is shown separately on the invoice.
6. Continuing 206AB checks in FY 2025-26 — the section is repealed; the compliance-check portal step is no longer required.
7. Counting cumulative-across-sellers — applying the ₹50L threshold to total purchases across all sellers combined instead of per-seller. The threshold is per-seller in the FY.
8. Foreign-supplier confusion — applying 194Q to imports. 194Q is for resident sellers only; non-resident sellers fall under Section 195 + applicable DTAA.

For the cross-section TDS rate reference, see the TDS Rate Chart FY 2025-26. For quarterly Form 26Q filing + TRACES reconciliation + Form 3CD Clause 34 disclosure, see the TDS Return Filing service.