TDS on purchase of goods is a buyer-side withholding rule that businesses can easily miss because the trigger is not a service payment. Under the familiar section 194Q framework, an eligible buyer must deduct tax when purchases from a resident seller cross the prescribed threshold. For transactions on or after 1 April 2026, the Income Tax Department says the corresponding withholding is reported under section 393(1) of the Income Tax Act, 2025 rather than by quoting the old section number.
The Department's TDS transition FAQ confirms that rates and monetary thresholds were retained in the new Act, while the Income Tax Rules, 2026 identify purchase of goods under section 393(1), Table serial no. 8(ii). The old section 194Q remains useful for understanding legacy transactions and CBDT's detailed interpretive guidance.
When does TDS on purchase of goods apply?
Under section 194Q, the rule applied where a buyer's total sales, gross receipts or turnover from business exceeded ₹10 crore in the financial year immediately preceding the year of purchase. The buyer then deducted tax on the amount of purchases from a resident seller exceeding ₹50 lakh in the financial year.
The Income Tax Department's published TDS rate table states the rate for section 194Q as 0.1% on the sum exceeding ₹50 lakh. The Department's 2026 transition guidance says the rates and monetary thresholds continue under the corresponding new-Act framework. Accordingly, finance teams should retain the commercial threshold logic but use the correct new statutory reference for post-1 April 2026 reporting.
The threshold is seller-wise, not invoice-wise
The ₹50 lakh test is applied to purchases from the particular resident seller during the financial year. A single invoice below ₹50 lakh does not end the analysis. ERP controls should therefore accumulate purchases vendor-wise and flag the point at which the yearly threshold is crossed.
Example: assume an eligible buyer purchases goods worth ₹42 lakh from a resident seller by July and another ₹18 lakh in August. The annual purchases become ₹60 lakh. Subject to the other conditions, withholding applies on the amount exceeding ₹50 lakh, not on the full ₹60 lakh merely because the threshold has been crossed.
When is tax deducted?
The section 194Q mechanism uses the earlier of credit to the seller's account or payment. CBDT's Circular 13 of 2021 also addresses practical issues such as advance payments, GST shown separately and purchase returns.
This timing rule matters where an advance is paid before an invoice is booked. If payment occurs first, the withholding event can arise on payment rather than waiting for the purchase entry.
How should GST be treated for the TDS base?
CBDT clarified that where deduction occurs at the time of credit and the GST component payable to the seller is indicated separately under the agreement or contract, TDS under section 194Q may be deducted on the amount credited without including that GST component. If deduction occurs on payment because payment precedes credit, the circular says deduction is made on the whole amount because the future invoice's GST component cannot then be identified in the same way.
This distinction is a good reason to configure tax logic around the actual trigger event rather than applying one blanket 'exclude GST' rule to every vendor payment.
What happens on purchase returns?
CBDT's Circular 13 recognises that TDS may already have been deducted before goods are returned. Where the seller refunds the money, the circular permits the tax deducted on the returned purchase to be adjusted against the next purchase from the same seller. No adjustment is required where the seller replaces the returned goods, because the purchase is completed through replacement.
Interaction with other TDS and TCS provisions
Section 194Q was designed with priority rules to avoid overlapping withholding or collection on the same transaction. The statutory text provides that the purchase-of-goods provision does not apply where tax is deductible under another provision, and it contains a specific interaction rule for transactions that were also within section 206C.
One major historical overlap has now changed: the Income Tax Department states that section 206C(1H), the general TCS provision on sale of goods, was withdrawn with effect from 1 April 2025. Businesses should therefore not keep legacy 206C(1H) collection logic active merely because an old SOP still refers to it.
Non-resident buyers and exempt sellers
Circular 13 clarifies that section 194Q does not apply to a non-resident buyer where the purchase from a resident seller is not effectively connected with the buyer's permanent establishment in India. It also clarifies that the provision does not apply to purchases from a seller who, as a person, is wholly exempt from income tax under the Act or another Act of Parliament. The clarification does not extend merely because only part of the seller's income is exempt.
Practical buyer-side control checklist
- Check prior-year business turnover: determine whether the buyer crosses the ₹10 crore eligibility threshold.
- Track purchases seller-wise: aggregate purchases from each resident seller across the financial year rather than testing invoices in isolation.
- Flag the ₹50 lakh crossing point: withholding applies to the amount above the threshold, subject to the governing provision and exceptions.
- Use earlier of credit or payment: include advances in the control design.
- Handle GST based on the trigger: follow CBDT's separate treatment for credit-stage deduction and earlier payment.
- Build a purchase-return adjustment process: link refunds or replacements to the vendor's withholding ledger.
- Check other withholding provisions first: do not apply purchase-of-goods TDS mechanically where another specific TDS rule governs the transaction.
- Use the correct law reference: the Department says post-1 April 2026 transactions should use the corresponding section 393 reference in TDS reporting.
Common mistakes
- Testing the ₹50 lakh limit invoice-by-invoice instead of seller-wise for the year.
- Ignoring advance payments because no purchase invoice has yet been booked.
- Excluding GST automatically even where payment occurs before credit.
- Failing to adjust withholding records after a purchase return and refund.
- Continuing obsolete section 206C(1H) sale-of-goods TCS logic after its withdrawal.
- Using old section 194Q codes in post-1 April 2026 TDS returns instead of the new-Act reporting reference.
Practical takeaway
TDS on purchase of goods is best controlled through the vendor master and purchase ledger, not through a year-end tax checklist. Identify whether the buyer crosses the prior-year turnover test, aggregate purchases seller-wise, trigger withholding at the earlier of credit or payment, and apply CBDT's specific guidance for GST and purchase returns. For current transactions, retain the substantive threshold logic but use the Income Tax Act, 2025 section 393 reporting reference required by the Department.
