TDS on Purchase of Goods – Section 194Q

Your accounts team pays a supplier 80 lakh rupees over the year. Someone asks, “Do we deduct TDS on this?” The answer depends on your turnover, the seller, and the date of payment. Many buyers get it wrong, and the price of a miss can be much greater than the tax itself.
Why does this matter now? The rule is in a new section of the Income Tax Act, 2025, from 1 April 2026. The rate and limits are unchanged. Let’s clear it up so you know exactly what to deduct, when and how.

Quick Answer: What Is TDS on the Purchase of Goods?

In case the buyer’s business turnover in the previous financial year was more than ₹10 crore, the buyer has to deduct TDS at 0.1% if purchases from a resident seller exceed ₹50 lakh in a year. The deduction is allowed only on the amount over ₹50 lakh.

Briefly:

• Deducted by: Purchaser
• From: Local goods seller
• Rate: 0.1% (5% if the seller does not provide PAN)
• Base: The portion of the purchases exceeding ₹50 lakh in a financial year

Section 194Q at a Glance

The new Act’s reporting says the old purchase-of-goods rule is now consolidated under Section 393(1), Table Serial No. 8(ii). The buyer turnover and seller limit tests carry over. Another explainer observes that the tax still stands at 0.1% on the amount over ₹50 lakh.

Who Must Deduct Under Section 194Q?

Two tests, and you must pass both.

• 1. Your turnover test: The total sales, turnover, or gross receipts of your business should have exceeded ₹10 crore in the immediately preceding financial year. “Exactly ₹10 crore is not acceptable; it should be more than that.”
• 2. The seller test: You must have purchased goods worth more than ₹50 lakh from any resident seller in the current financial year.

Timing is easily missed. If your FY 2025-26 turnover is more than ₹10 crore, then you start deducting from FY 2026-27. If it stays below, you owe nothing under this section, no matter how much you buy. The section consists of capital goods and revenue goods.

How the ₹50 Lakh Limit Works

The limit applies per seller and per financial year. TDS is only in the excess. Say you buy from one supplier in three invoices (all figures excluding GST):

(This example is fictitious. Note that the second invoice only triggers TDS on the amount exceeding the limit. All invoices from that time onwards are liable for TDS on the total amount. This count is reset every fiscal year.)

How GST Affects the Calculation

In most of the cases, the base is not inflated by GST. The CBDT’s guidelines state that when GST is separately mentioned in the amount payable, you deduct tax on the amount credited without that GST. The catch is there are advances. If you deduct on a payment basis because you paid before the invoice, you deduct the whole amount because the GST part cannot be separated. Ask vendors to break out GST as a separate line item on each invoice.

When to Deduct TDS

Deduct at the earlier of two events: Crediting the sale to the seller’s account in your books or paying the seller. So, booking a purchase in accounts payable can cause the deduction to occur before you pay anything. The same circular confirms that advance payments to the seller are covered, as the rule applies on payment or credit, whichever is earlier.

What Is Not Covered

The rule does have limits. Check these before deducting.

• Sellers who are not residents: There is a separate provision for payments to non-residents which is not covered by this section. Imports are included.
• Transactions of exchange: CBDT said the rule does not apply to transactions through recognised stock exchanges settled by recognised clearing corporations. The circular’s guidance also lists electricity transactions among the exclusions.
• E-commerce payments: Where TDS on payments to e-commerce participants applies to the same transaction, that provision overrides the purchase rule.
• Transactions already discussed elsewhere: The section will not apply where there is another provision that already requires TDS on the same transaction, e.g., a works contract that involves goods as well as services.

What Happened to TCS on Sale of Goods?

Before April 2025, there was an overlap for buyers and sellers. The seller could collect tax at source (Section 206C(1H)) while the buyer deducted tax under 194Q. Section 194Q took precedence, and with effect from 1st April 2025, the Finance Act 2025 removed the TCS on sale of goods by the seller, and thus the overlap ended. Now only buyers’ deduction is applicable. Hence, sellers do not collect TCS on such sales.

TDS on Purchase of Goods Under the Income Tax Act, 2025

The new Act took effect on 1 April 2026, and the rule was moved to a table-driven section. The rate, obligation, and limit are unchanged; only the section number, return form name, and payment code have changed.
The new forms are used for reporting. Form 140, previously called Form 26Q, is the quarterly statement of TDS on non-salary payments to residents. TRACES issues Form 131, the new Form 16A, as the TDS certificate for payments other than salary. Be sure to use the correct payment code when you post the deposit. And update your accounting software before the end of the next quarter.

How to Deduct, Deposit, and Report

• 1. Look at your turnover: Confirm last year’s turnover crossed ₹10 crore.
• 2. Track purchases by seller: Maintain a vendor-wise register apart from GST.
• 3. Deduct at the right moment: Use the earlier of credit or payment at 0.1% on the excess.
• 4. Make deposit payments on time: TDS deducted in a month has to be deposited by the 7th of the next month.
• 5. Quarterly statement: File. The due dates are 31 July, 31 October, 31 January and 31 May. Use Form 140.
• 6. Issue certificate: The deductor has to issue Form 131 to the seller within 15 days from the due date of return.

What Happens If You Miss the Deduction

Missing TDS is more expensive than tax. The reported consequence is disallowance of 30% of the purchase expenditure as a business expense, plus interest, a penalty equal to the tax not deducted, and possible prosecution for failure to deposit. Interest on late deposit runs at 1.5 per cent per month from the deduction date, with part of a month counted as a full month.
Here is a hypothetical comparison. Suppose you purchase goods for ₹80 lakh and do not claim a deduction. The TDS you missed was ₹3,000. But 30% of ₹80 lakh is ₹24 lakh disallowed. At a 25% tax rate, that adds about ₹6 lakh of tax. One small deduction protects a very large deduction claim. Penalty section numbers changed under the new act, so ask your adviser which provisions apply to your year.

Common Mistakes to Avoid

• Counting per invoice, not per seller. The ₹50 lakh limit uses cumulative purchases from one seller.
• Including GST in the base when it appears separately on the invoice.
• Ignoring advances. Advance payments trigger the deduction too.
• Skipping PAN checks. Without a valid PAN, the rate rises from 0.1% to 5%.
• Deducting under two sections. Classify each payment first, so a works contract does not also get 194Q.
• Forgetting year-start checks. Review your turnover every April.

A Quick Checklist for FY 2026-27

• Confirm whether FY 2025-26 turnover exceeded ₹10 crore.
• Collect and verify vendor PANs.
• Set an alert when a seller’s cumulative purchases near ₹45 lakh.
• Ask vendors for invoices with GST shown separately.
• Deposit by the 7th and file Form 140 on time.

If your team is small, finance support can cover the routine. The Startup Gig’s homepage lists GST and TDS compliance, accounting and tax compliance, and MIS and budgeting under its Virtual CFO and Tax vertical. A clean vendor ledger makes every threshold check faster.

Contracts help too. Supply agreements can state that prices exclude GST, that the buyer deducts TDS where the law requires it, and that the seller provides a PAN. The Startup Gig describes vendor and service agreement work covering liability caps, indemnification, and termination rights, and it reviews counterparty drafts for hidden obligations. A lawyer can advise you on which clauses suit your deal.

Wrapping Up

TDS on purchase of goods boils down to four facts: a ₹10 crore turnover test for the buyer, a ₹50 lakh limit per seller, a 0.1% rate on the excess, and deduction at the earliest of credit or payment. Track purchases by vendor, separate GST, and file on time. For plain-language contract and compliance guides, a good next stop is the blog on The Startup Gig’s website. This article provides general information only and is not tax advice; speak with a qualified professional about your own situation.

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