Section 194Q of Income Tax Act, 1961 - Eligibility, Exemptions, & More

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.

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.

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.

While calculating the total turnover of a financial year, the GST is not applicable or calculated. But GST at a rate of 0.1% is included when calculating the TDS to be paid.

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%.

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%.

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.

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)]

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:

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.

Also Read: All You Need to Know About Filing Income Tax Returns (ITR)

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!