Section 194Q: TDS on Purchase of Goods Guide

Introduced under the Finance Act 2021, Section 194Q of the Income Tax Act mandates the deduction of Tax Deducted at Source (TDS) on the purchase of goods. This section became effective from July 1, 2021, and applies to large buyers, shifting the tax responsibility from the seller to the buyer.

Failing to deduct TDS under Section 194Q can lead to a 30% disallowance of your purchase expenses under Section 40(a)(ia) when calculating your taxable business income. In this guide, we cover applicability rules, rates, the critical interaction with TCS Section 206C(1H), exclusions, and Tally Prime setup.

Applicability and Threshold Limits

Section 194Q applies to a purchase transaction only when both of these statutory conditions are met:

1. Buyer Turnover Limit: The buyer's aggregate annual turnover from business activities must have exceeded ₹10 Crores in the preceding financial year.
2. Purchase Threshold: The value of goods purchased (or payment made) from a single supplier exceeds ₹50 Lakhs in the current financial year.

Note: The ₹50 Lakh threshold is tracked per seller (PAN-wise) across the entire financial year. Once aggregate purchases from a single vendor cross ₹50L, TDS applies on every subsequent rupee paid to that vendor.

TDS Rate and Calculation Examples

The standard TDS rate under Section 194Q is 0.1% of the purchase value that exceeds ₹50 Lakhs (or 5% if the supplier does not provide a PAN card).

Section 194Q vs. TCS Section 206C(1H): Which Overrides?

Section 206C(1H), introduced in October 2020, required sellers with turnover above ₹10 Crores to collect TCS at 0.1% on receipts exceeding ₹50 Lakhs from a single buyer. Section 194Q (July 2021) created a potential overlap. The CBDT clarified the priority rule clearly:

Key rule: If 194Q applies, 206C(1H) is completely exempt. The seller need not collect TCS once the buyer starts deducting TDS under 194Q. Ensure your supplier is informed to avoid double taxation.

Goods Excluded from Section 194Q

Section 194Q does not apply to goods that are already covered under existing TDS or TCS provisions. Key exclusions include:

• Scrap — covered under Section 206C(1)
• Timber / tendu leaves / forest produce — covered under Section 206C
• Alcoholic liquor for human consumption — covered under Section 206C
• Goods imported into India (not covered under TDS provisions for residents)
• Transactions on which TDS is deductible under any other provision of the Income Tax Act

Tracking the ₹50 Lakh Threshold Per Supplier in Tally Prime

In Tally Prime, the TDS engine automatically tracks cumulative purchase values per vendor ledger within the financial year. Once the running total crosses ₹50 Lakhs for a particular vendor, Tally begins calculating and deducting 0.1% TDS on each subsequent purchase voucher. To verify this, navigate to Gateway of Tally → Display More Reports → TDS Reports → TDS Outstandings and filter by supplier.

Section 194Q Ledger Setup in TallyPrime

To automate Section 194Q deductions, configure your Tally Prime ledger groups as follows:

1. TDS Nature of Payment: Go to Create > TDS Nature of Payments. Name it TDS u/s 194Q, enter Section as 194Q, set the rate to 0.1%, and enter the exemption limit as 50,000,000.
2. TDS Duties Ledger: Create a ledger named TDS 194Q Payable under Duties & Taxes. Select TDS as the tax type and link it to your TDS u/s 194Q nature of payment.
3. Supplier Ledger: Under your supplier's ledger, set Is TDS Deductible to Yes and select Company / Individual as the deductee type.

Quarterly Return Filing: Form 26Q and TDS Certificate Form 16A

TDS deducted under Section 194Q must be deposited to the government by the 7th of the following month and reported in the quarterly Form 26Q TDS return. Form 26Q covers all non-salary TDS deductions; Section 194Q entries appear in the relevant quarter's return.

After filing Form 26Q, you must issue a Form 16A TDS certificate to your supplier within 15 days of the due date for quarterly return filing. Form 16A is auto-generated from the TRACES portal and shows the supplier the TDS amount deducted and deposited on their behalf — which they can then claim as a tax credit in their ITR.

Automating Purchase Data Entry with TrulyInvoice

A common reason for errors in TDS calculation is incorrect taxable values recorded on purchase vouchers. You can automate this process using TrulyInvoice.

TrulyInvoice uses OCR to extract line items, quantities, and tax splits from supplier invoice PDFs. It maps this data and syncs formatted F9 purchase vouchers directly into Tally Prime. This eliminates manual data entry errors for a flat subscription of plans starting at ₹399/month, ensuring your purchase books are accurate before calculating TDS — and your Form 26Q data is always clean and audit-ready.