TDS on Purchase of Goods: Section 194Q and the Income-tax Act, 2025 Transition
Tax Deduction at Source (TDS) on the purchase of goods, introduced as Section 194Q of the Income Tax Act, 1961, with effect from July 1, 2021, continues to apply in substance, but the governing law has changed. The Income Tax Act, 1961, was repealed with effect from April 1, 2026, and its TDS provisions, including Section 194Q, are now consolidated under Section 393 of the Income Tax Act, 2025. This page reflects the current legal position for buyers with compliance obligations from Financial Year 2025-26 (Tax Year 2026-27) onward.
What the Provision Covers
The obligation requires a buyer to deduct tax at 0.1% on the purchase of goods from a resident seller on the value exceeding INR 50 lakh in a financial year, provided the buyer’s turnover in the immediately preceding year exceeded INR 10 crore. This obligation, originally a standalone Section 194Q, now sits within Section 393’s consolidated TDS table rather than as an independent section number.
Applicability Conditions
| Trigger | Purchase of goods by a buyer from a resident seller |
| Turnover threshold | The buyer’s turnover exceeded INR 10 crore in the immediately preceding financial year |
| Purchase threshold | Aggregate purchase value from a single seller exceeds INR 50 lakh in the financial year |
| Time of deduction | At the time of credit or payment, whichever is earlier including credit to a suspense account |
| Value on which it was deducted | Purchase value in excess of INR 50 lakh |
TDS Rate and Calculation
The rate is 0.1% on the amount exceeding INR 50 lakh. Where the seller does not furnish a PAN, the rate rises to 5% under Section 206AA (PAN-linked provisions continue to apply; only the non-filer-status provisions were removed, see below). GST is included in the purchase value for computing the INR 50 lakh threshold and the TDS base.
Example: A buyer with turnover above INR 10 crore purchases goods worth INR 80 lakh from a single resident seller in a financial year. TDS applies on INR 30 lakh (INR 80 lakh − INR 50 lakh) at 0.1%, i.e., INR 3,000.
Why the Comparison With Section 206C(1H) No Longer Applies
Earlier versions of this guidance compared Section 194Q with Section 206C(1H), the parallel TCS obligation on sellers. That comparison is no longer relevant: Section 206C(1H) was withdrawn with effect from April 1, 2025, a year ahead of the wider Act replacement, specifically to remove the dual TDS/TCS burden on the same transaction. From FY 2025-26 onward, sellers have no TCS obligation on the sale of goods under this provision; the buyer’s TDS obligation under (now) Section 393 is the sole applicable mechanism. If your systems or vendor contracts still reference 206C(1H) TCS clauses, those references need to be removed.
The End of Higher TDS for Non-Filers
Sections 206AB and 206CCA, which required buyers to apply a higher TDS/TCS rate where the seller had not filed income tax returns for the preceding two years, were omitted effective April 1, 2025. Buyers no longer need to verify a seller’s ITR-filing status before applying the standard 0.1% rate. PAN-based higher deduction under Section 206AA is unaffected and continues to apply.
What Changes Under the Income Tax Act 2025, From April 1, 2026
The rates and thresholds are unchanged; the structural reference has moved. Section 194Q sits within Section 393’s consolidated non-salary TDS table rather than as a standalone provision. Quarterly TDS returns, challan references, and ERP/accounting system tax codes built around “Section 194Q” should be updated to reference the corresponding Section 393 table entry to avoid validation errors on the income tax portal. Proceedings and assessments relating to periods before April 1, 2026,, continue to be governed by the 1961 Act’s numbering under the transitional provisions.
Compliance Checklist for Buyers
- Confirm turnover exceeded INR 10 crore in the preceding financial year
- Track cumulative purchases per seller against the INR 50 lakh threshold
- Verify seller PAN at onboarding to avoid the 5%/20% higher rate under Section 206AA
- Remove any remaining 206C(1H) TCS logic from billing and ERP systems
- Update TDS return preparation and challan references from “194Q” to the Section 393 table entry for transactions from April 1, 2026, onward.
- Retain records under the old Act’s numbering for any FY 2025-26 or earlier reconciliations
How MBG Can Help
Navigating the transition between the Income Tax Act, 1961, and the Income Tax Act, 2025, across TDS, TCS, and compliance systems requires close tracking of transitional provisions. MBG’s Direct Tax team supports buyers through applicability assessment, system reconfiguration, and ongoing compliance monitoring. For a broader compliance gap review, see our Direct Tax Health Check service.