TDS under section 194Q

TDS under Section 194Q: Complete Compliance Guide for FY 2026-27

Section 194Q requires every qualifying buyer — one whose turnover from business exceeded ₹10 crore in FY 2025-26 — to deduct TDS at 0.1 percent on purchases of goods from a resident seller once that seller's annual tally crosses ₹50 lakh in the current financial year. Introduced by the Finance Act 2021 and clarified by CBDT Circular 13/2021, the provision is now a mature part of the tax compliance calendar. For FY 2026-27 (Assessment Year 2027-28), the mechanics are settled — but the execution errors are not. This guide walks you through every step, from threshold tracking to return filing, with worked rupee examples throughout.

Who Is Liable to Deduct under Section 194Q

The deduction obligation sits entirely with the buyer. Before you do anything else, confirm whether you meet all four conditions simultaneously:

1. You carry on a business — the section does not apply to individuals or HUFs acting in a personal capacity, or to entities earning only professional income.
2. Your total sales, gross receipts or turnover from business exceeded ₹10 crore in the immediately preceding financial year — for FY 2026-27, the look-back year is FY 2025-26.
3. The seller is a resident — for non-resident sellers, section 195 governs; 194Q does not apply.
4. The aggregate value of goods purchased from that specific seller crosses ₹50 lakh during FY 2026-27.

All four conditions must be met. If your turnover in FY 2025-26 was ₹9.8 crore, you are below the threshold and 194Q does not apply to you as a buyer — even if your purchase from a single vendor is ₹2 crore. In that situation, if the seller's turnover exceeded ₹10 crore, the seller's obligation under section 206C(1H) kicks in instead.

New Entrants Mid-Year

A business that crosses ₹10 crore turnover for the first time in FY 2025-26 becomes a 194Q deductor from 1 April 2026. There is no partial-year exemption. Build this into your April vendor-master review every year.

The Rate, the Threshold and How the Arithmetic Works

The 0.1 Percent Rate

TDS under 194Q is deducted at 0.1 percent of the purchase value in excess of ₹50 lakh from a single seller in the financial year. The ₹50 lakh is not a per-invoice limit — it is a cumulative annual tally per seller, reset on 1 April every year.

What Happens When PAN Is Not Furnished

If the seller does not provide a valid PAN, section 206AA raises the rate to 5 percent on the amount exceeding ₹50 lakh. On a large purchase, this difference is punishing — see the worked example below.

Section 206AB: The ITR Non-Filer Surcharge

Where a seller is a "specified person" under section 206AB — meaning they have not filed income-tax returns for both of the two preceding assessment years and TDS or TCS in their name exceeded ₹50,000 in each of those years — the applicable TDS rate is the higher of 5 percent or twice the normal rate (i.e., 0.2 percent vs 5 percent → 5 percent applies). Check the seller's compliance status on the Income Tax portal's Compliance Check Utility before each financial year begins.

Timing of Deduction

TDS must be deducted at the earlier of:

• The date the amount is credited to the seller's account (including a suspense or purchase account)
• The date of actual payment (cash, cheque, NEFT, RTGS)

Crediting a purchase to a "goods in transit" or "goods received not invoiced" account triggers the obligation immediately. The section does not allow you to wait for invoice receipt.

Worked Example 1: Standard Threshold Crossing Mid-Year

Facts: Ashoka Traders Pvt. Ltd. had turnover of ₹14 crore in FY 2025-26. It buys industrial fittings from Regal Components (resident, PAN furnished) during FY 2026-27 as follows:

Total TDS for the year: ₹5,500

Notice the August invoice: the cumulative hit ₹55 lakh, so TDS is charged only on the ₹5 lakh overshoot, not the full ₹15 lakh invoice. Once the threshold is crossed, every subsequent invoice from that seller bears TDS on its full value.

Worked Example 2: The PAN-Missing Penalty in Numbers

Same facts as above, but Regal Components did not provide PAN at the time of vendor onboarding.

• October invoice: ₹20 lakh (cumulative already above ₹50L)
• Normal TDS at 0.1%: ₹2,000
• TDS without PAN at 5%: ₹1,00,000

The ₹98,000 difference is not a fine — it is withholding from a legitimate payment. It depresses the seller's cash flow, damages the commercial relationship, and gives them a credit they may not be able to utilise easily. Collect PAN at vendor onboarding, not after the first large invoice.

Section 194Q vs Section 206C(1H): Getting the Priority Right

This is the most litigated operational question under 194Q. Here is the rule in plain English:

• If the buyer qualifies under 194Q (turnover > ₹10 crore), the buyer deducts TDS and the seller is expressly released from collecting TCS under 206C(1H) on the same transaction.
• If the buyer does not qualify (turnover ≤ ₹10 crore) but the seller's turnover exceeded ₹10 crore in the preceding year, the seller's 206C(1H) obligation continues and the seller collects TCS at 0.1 percent.
• If neither party qualifies, neither provision applies.
• If both parties qualify but the buyer has NOT deducted 194Q, the seller must collect TCS. The release from 206C(1H) is conditional on actual deduction, not mere eligibility.

The Practical Decision Matrix

A Note on the ₹50 Lakh Threshold for 206C(1H)

Section 206C(1H) also has a ₹50 lakh threshold per buyer per year on the seller's side. The thresholds run independently — a seller must track per-buyer receipts; a buyer must track per-seller purchases. They do not offset each other.

What Falls Outside Section 194Q

The section is specifically limited to goods. Several categories are excluded by statute or by CBDT clarification:

• Services — TDS on services is governed by sections 194C, 194J, 194H and others. A composite supply (goods + services on a single invoice) should ideally be split; where not possible, CBDT Circular 13/2021 suggests applying 194Q to the goods component if it is identifiable.
• Imports from non-residents — section 195 applies to the payment; 194Q does not.
• Securities — shares, debentures, derivatives and other securities transactions are outside 194Q.
• Electricity bought through exchanges — specifically excluded by the proviso to section 194Q.
• Transactions already subject to TDS under another provision — if tax is actually deducted under, say, section 194C (for a works contract with a goods element), 194Q does not apply again.
• Buyers with turnover ≤ ₹10 crore — as discussed, the threshold is not just a lower rate; it is a gate.

Step-by-Step Compliance Procedure for FY 2026-27

Step 1: Confirm Your Eligibility in April 2026

Pull your audited or provisional turnover for FY 2025-26. If it exceeded ₹10 crore (excluding GST, per CBDT guidance), 194Q applies from 1 April 2026. Document this determination in writing — it will be required during assessment or audit.

Step 2: Build Per-Vendor Purchase Ledgers

Create or tag vendor master records in your ERP or accounting software to track cumulative goods purchases per seller, per financial year. This is a configuration task, not an accounting task — do it in April, not August.

Step 3: Communicate with Your Suppliers

Send a written intimation to all resident suppliers of goods informing them that you will deduct TDS under 194Q once their cumulative tally crosses ₹50 lakh. This:

• Prevents disputes on reduced invoice payments
• Documents your intent to deduct (relevant if a dispute arises)
• Gives the seller the opportunity to ensure their 206C(1H) collection process is switched off for your transactions

Step 4: Collect and Verify PAN and ITR Status

• Obtain PAN from every supplier at onboarding
• Run a bulk check via the Income Tax portal's Compliance Check for Section 206AB/206CCA before the financial year starts
• Flag high-value suppliers where the 5% rate risk is material

Step 5: Configure the Deduction Logic

Your ERP or purchase workflow must:

• Track cumulative goods purchases per vendor from 1 April
• Auto-trigger TDS deduction when the running total crosses ₹50 lakh
• Apply 0.1% only to the excess amount on the crossing invoice
• Apply 5% for no-PAN or 206AB-flagged vendors

Step 6: Deposit TDS on Time

TDS deducted must be deposited to the Central Government:

• By the 7th of the following month for deductions made in April through February
• By 30 April 2027 for deductions made in March 2027

Use Challan ITNS 281, with the correct minor head (200 for TDS on purchase of goods) and the seller's PAN. Mismatching PAN or challan heads is a common source of mismatch notices.

Step 7: File Form 26Q Quarterly

Section 194Q TDS is reported in Form 26Q (TDS on non-salary payments). The quarterly due dates for FY 2026-27 are:

Step 8: Issue Form 16A

Issue Form 16A to the seller within 15 days of the due date of the TDS return for that quarter. The seller uses this to claim TDS credit in their ITR, and it reconciles with their AIS (Annual Information Statement) on the income tax portal.

Step 9: Quarterly AIS/26AS Reconciliation

Log into the Income Tax portal and cross-check:

• TDS deposited per challan against what appears in Form 26AS
• TDS credits appearing in the seller's AIS against your Form 26Q filings
• Any mismatches flagged by TRACES

Mismatches are now surfaced automatically to both parties and trigger compliance notices if not resolved within a specified window.

Common Mistakes and How to Avoid Them

Mistake 1: Applying the ₹50 Lakh Threshold to Each Invoice

The ₹50 lakh limit is annual and cumulative per seller, not per invoice. Applying it per invoice means you are under-deducting. If a vendor had ₹60 lakh of purchases in the year and you only deducted TDS on invoices individually exceeding ₹50 lakh, you have a shortfall.

Mistake 2: Confusing Goods Turnover with Total Turnover for Eligibility

The ₹10 crore threshold refers to your total sales, gross receipts or turnover from business — not just goods revenue. A manufacturing company with ₹8 crore in goods sales but ₹3 crore in job-work receipts has total turnover of ₹11 crore and is fully within 194Q.

Mistake 3: Including GST in the TDS Base

CBDT Circular 17/2020 (clarifying a similar provision) and subsequent guidance indicate that TDS should ideally be deducted on the amount exclusive of GST where GST is separately indicated on the invoice. If GST is not separately shown — i.e., the invoice shows only a gross amount — deduct on the full invoice value. Always insist on GST-compliant invoices from vendors showing tax separately.

Mistake 4: Not Switching Off 206C(1H) After 194Q Kicks In

Some buyers deduct TDS under 194Q and simultaneously allow the seller to collect TCS under 206C(1H) — leading to double taxation on the same transaction. The seller is obligated to stop collecting TCS once they have actual confirmation that the buyer is deducting. Your written intimation in Step 3 above should trigger this.

Mistake 5: Late Deposit and Ignoring the Interest Clock

Interest under section 201(1A) runs at:

• 1% per month (or part thereof) from the date tax was due to be deducted until the date of actual deduction
• 1.5% per month (or part thereof) from the date of deduction to the date of deposit

On a TDS liability of ₹50,000 deposited three months late, interest alone is ₹50,000 × 1.5% × 3 = ₹2,250 — not catastrophic, but also entirely avoidable.

Mistake 6: Missing the March Deadline Extension

The deposit due date for March deductions is 30 April — not 7 April. Many finance teams that run on autopilot miss this extended window, creating unnecessary defaults.

Mistake 7: Ignoring Section 40(a)(ia) Disallowance

If TDS under 194Q is not deducted at all, 30 percent of the purchase value attributable to that transaction can be disallowed as a business expenditure under section 40(a)(ia) when computing your income under AY 2027-28. On a ₹1 crore purchase, a 30% disallowance means ₹30 lakh added back to taxable income — multiples more than the TDS itself.

Worked Example 3: The Cost of Non-Compliance

Facts: Prism Industries Ltd. (turnover ₹18 crore in FY 2025-26) purchases raw materials worth ₹1.5 crore from Apex Metals during FY 2026-27. Finance team overlooks 194Q. Total TDS that should have been deducted: 0.1% × ₹1 crore (i.e., amount above ₹50L) = ₹1,000.

Consequences during assessment:

The ₹1,000 TDS default exposes the company to roughly ₹7.5 lakh in additional tax. This is the arithmetic that makes 194Q commercially material despite the small rate.

Deposit Challan and Return: Practical Pointers

• Use Challan ITNS 281 on the TIN-NSDL portal or via net banking
• Select TAN of the deductor (not PAN)
• Select Nature of Payment: 194Q (ensure your bank's system recognises this code)
• TRACES is the portal for downloading Form 16A, viewing TDS credits and submitting online correction statements
• AIS/TIS on the income-tax portal is where your sellers will verify the credit — reconcile before you receive a notice, not after
• Corrections to Form 26Q (wrong PAN, wrong amount, wrong challan) must be filed via TRACES correction statements; do not wait for a TRACES default notice to initiate corrections

Key Takeaways

• 194Q applies to you as a buyer if your FY 2025-26 turnover exceeded ₹10 crore — confirm this in the first week of April 2026.
• TDS is 0.1% on the amount exceeding ₹50 lakh from each resident seller, tracked cumulatively from 1 April; it is not a per-invoice threshold.
• The ₹50 lakh crossing invoice triggers TDS only on the overshoot, not on the full invoice value; subsequent invoices from the same seller attract TDS on their full value.
• PAN absence costs 50× more — the rate jumps from 0.1% to 5% under section 206AA; collect PAN at vendor onboarding without exception.
• 194Q displaces 206C(1H) where the buyer qualifies; communicate this to your suppliers in writing so they stop collecting TCS on the same transactions.
• Non-deduction triggers a 30% disallowance under section 40(a)(ia) — the real compliance risk is not the TDS itself but the income-tax exposure on the underlying purchase.
• File Form 26Q on time and issue Form 16A promptly — delayed filing attracts ₹200/day under section 234E, and mismatches in the seller's AIS generate automatic compliance queries from the Income Tax Department.