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- What is section 194Q of Income Tax Act?
- Eligibility of Section 194Q of the Income Tax Act
- Role of GST Under Section 194Q
- Rate and Calculation of TDS
- Non-furnishing of PAN
- Applicability of Section 194Q
- Exemptions Under Section 194Q
- Section 194Q vs. Section 206C
- When Should a Buyer Deduct TDS under Section 194Q?
- Form 26Q: Filing for TDS Return
- Declaration Format of Section 194Q
- FAQS - FREQUENTLY ASKED QUESTIONS
Section 194Q of the Income Tax Act of 1961 has brought a new provision to the tax system that ensures financial transparency, widens the tax structure and keeps a check on every major transaction.Here is all you need to know about what is section 194Q of Income Tax Act.
What is section 194Q of Income Tax Act?
The Central Board of Direct Taxes introduced section 194Q of the Income Tax Act of 1961. The section 194Q came into effect from 1st of July, 2021. The section 194Q applies to buyers making purchases of goods exceeding the amount of INR 50 lakhs from resident sellers in India and with a Tax Deducted at Source (TDS) rate of 0.1%.The main purpose for bringing the section 194Q into effect was to track the massive number of transactions, ensure effective compliance and improve transparency in the system.
Eligibility of Section 194Q of the Income Tax Act
The section 194Q is applicable to any buyer who:
- has an annual turnover of more than INR 10 crores in the preceding financial year
- is liable to make payments to the resident Indian seller
- needs to make a payment for purchase of goods whose total value is more than INR 50 lakhs
- has made a payment for purchase of goods with a total value exceeding INR 50 lakhs
To understand the applicability of section 194Q, let us take an example. For instance, Mr. A is a buyer who had a yearly turnover of INR 10 crores for the financial year that ended on 31st March 2024. He made a purchase of INR 15 lakhs from the same seller every quarter for an entire financial year. Here, the threshold of INR 50 lakhs is applicable to the total value of the goods purchased from the seller throughout the financial year. Any amount exceeding this threshold is applicable for TDS in the current financial year 2024-25.
Role of GST Under Section 194Q
Rate and Calculation of TDS
Under section 194Q, the TDS rate is applicable exclusively to purchase of goods exceeding INR 50 lakhs. The applicable rate is 0.1%. But this rate increases to 5% when the seller does not have a PAN. For instance, if a buyer purchases goods worth INR 10 lakhs, then the applicable TDS with 0.1% rate will be INR 1000. However, if the seller does not furnish PAN, then the TDS amount will rise to INR 50,000 at a rate of 5%.
Non-furnishing of PAN
If a seller, in any case, fails to furnish his or her Permanent Account Number (PAN) to the buyer, then 5% TDS will be deducted instead of 0.1%.
Applicability of Section 194Q
Section 194Q of the Income Tax Act, 1961, came into effect from 1st of July, 2021. This means that the TDS needs to be calculated only on the purchases made after 1st of July, 2021. Having said that, it’s important to note that the threshold limit of purchases exceeding INR 50 lacs must be taken into account from 1st of April, 2021. For instance, if a buyer has made a purchase of goods worth INR 60 lacs from a resident seller, then he first needs to subtract INR 50 lacs as an initial deduction as per the 194Q section and then calculate the TDS on the remaining 10 lacs at the rate of 0.1%, which amount to an applicable TDS of INR 1,000.
Exemptions Under Section 194Q
The provisions of section 194Q of the Income Tax Act, 1961 are exempted when:
- the buyer is a non-Indian and the purchase of goods has no direct connection to India
- the buyer purchases goods from a seller who has an income tax exemption
- the purchase made is in the the incorporation year (financial year) of the new buyer
- the purchase is made by the Government of a India or any Indian state governments
- section 1940 is already applied to a particular transaction
- TCS is applicable as per the provisions of section 206C [other than all the transactions wherein the TCS is applicable under section 206C(1H)]
Section 194Q vs. Section 206C
To avoid any discrepancies while deducting ot paying the tax, it is essential to under the basic differences between section 194Q and 206C. The primary details and differences are listed below:
| Specifications | Section 194Q | Section 206C |
| Deductor/collector of tax | Buyer (TDS) | Seller (TCS) |
| When is the tax deducted? | Payment/credit to the seller | During the sale of goods |
| Turnover of the buyer/seller | Buyer must have a turnover of more than INR 10 crore | Seller must have a turnover of more than INR 10 crore |
| Tax rate | 0.1% (5% in cases where PAN of the seller is not furnished) | 0.1% (Higher when PAN is not given) |
| Applicable to | All goods, capital and revenue, worth more than INR 50 lakhs | Specific goods worth more than INR 50 lakhs |
| Exceptions | Government agencies, recognized stock markets, non-resident sellers, renewable energy and electricity | Agricultural goods and other specific goods |
When Should a Buyer Deduct TDS under Section 194Q?
The buyer must deduct the TDS either when he credits the amount to the seller or when he pays the seller in cash; whichever scenario is met first. So, if the buyer has not paid any advance amount to the seller, then he needs to deduct the TDS at the time of buying the goods. But, if there is an advance amount paid by the buyer then he needs to deduct the TDS amount immediately.
| Particulars | Section 194Q applicable/not applicable |
| Deduction of TDS at the time of amount credited to the seller’s account. The contract or agreement between the buyer and seller signifies the GST item separately. | The provisions of 194Q TDS section are not applicable to the GST item. |
| Deduction of TDS on payment basis when the payment is made prior to the credit. | The provisions of TDS under section 194Qare applicable to the GST item. This means that the TDS here applies to the entire amount. |
Also Read: All You Need to Know About Filing Income Tax Returns (ITR)
Form 26Q: Filing for TDS Return
| Quarters ending | Due date of TDS filing |
| June 30 | July 31 |
| September 30 | October 31 |
| December 31 | January 31 |
| March 31 | May 31 |
Declaration Format of Section 194Q
It is important to understand and know the format of the declaration of section 194Q. A sample declaration letter is given below:Seller’s letterheadTo,Buyer’s name and addressSub: Declaration for tax deduction at source under section 194Q of Income Tax Act, 1961Dear Sir/Madam,This is with respect to your letter dated dd/mm/yyyy asking for our declaration or details with reference to tax deduction at source under section 194Q of the Income Tax Act, 1961. The required information is mentioned below:1. As your company is required to deduct tax under section 194Q of Income Tax Act, 1961, you may deduct the same at the rate of 0.1% of the sale of the goods considering that the transaction amount is paid or credited to us on the amount that exceeds INR 50 lacs during the current financial year. This is also to confirm that you will not be liable to pay any tax at source under section 206C(1H) of the Act w.e.f. 1st of July, 2021.2. Our company's Permanent Account Number (PAN) is XXXXXXXXXX. Moreover, we have diligently filed our income tax returns for the past three assessment years and the tax return details are stated below: (add all the details about the last 3 year’s income tax return filing)Ready to make the most of your money? Start your tax planning journey now!
FAQS - FREQUENTLY ASKED QUESTIONS
Is Section 194Q applicable to the import of goods ?
No. Section 194Q does not apply to the import of goods. It is only applicable to the purchase of goods when the buyer makes a purchase worth more than INR 50 lakhs from a resident seller in an entire financial year.
Who needs to furnish the PAN ?
The seller needs to furnish the PAN details to the buyer.
What are the consequences of failing to furnish PAN ?
If a seller fails to provide his or her PAN details to the buyer, then under section 194Q the buyer is liable to deduct TDS of 5%.
What is the last date to deposit TDS ?
According to section 194Q of Income Tax Act 1961, TDS amount must be deposited on or before the 7th of the following month. For example, the TDS amount deducted for the month of May must be paid to the government by the 7th of June. However, any TDS amount deducted for the month of March can be deposited on or before 30th April.
Which are the cases where section 194Q is not applicable ?
Government institutions do not fall under the radar of section 194Q. Moreover, this section also does not apply to transactions related to recognized stock markets, renewable energy and electricity. Also, section 194Q is not applicable in cases where the TDS to be deducted for a transaction purchase falls under any other provision of the Income Tax Act. For instance, if a purchase transaction falls under section 194Q and section 1940, then the TDS shall be deducted only for section 1940, which covers e-commerce transactions TDS.
However, one can find an exception in the case of section 206C(1H). This section provides for the
What are the consequences of not deducting TDS on time ?
Failing to deduct TDS on time can have serious repercussions. If a buyer fails to deduct TDS then he needs to pay an interest of 1% per month starting from the TDS due date till the date it was deducted.
What are the consequences of not depositing TDS on time ?
When a buyer deducts TDS but fails to deposit the amount on time, he needs to pay an interest of 1.5% per month starting from the date of TDS deduction till the date it is deposited.
Is section 194Q applicable on water ?
Whether or not section 194Q is applicable on water depends on two crucial factors:
The transaction’s nature
Since section 194Q is applicable on goods alone and not services, if the buyer is purchasing water as a good/commodity, for instance if he or she makes a bulk purchase, then TDS under section 194Q could be applicable. But if the buyer is paying for a service, for example water supply bill, then this transaction would not come under section 194Q.
The turnover of the buyer
If the transaction does fall under good’s purchase but the section 194Q of income tax act only applies to those buyers whose yearly turnover or gross receipts from business are more than INR 10 crore in the preceding financial year.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
