TDS 194Q vs TCS 206C(1H): Who Deducts, Who Collects, With Examples
- Section 194Q applies to the BUYER who must deduct TDS on purchases above ₹50 lakh; Section 206C(1H) applies to the SELLER who must collect TCS on sales above ₹50 lakh.
- Both sections cannot apply simultaneously — 194Q takes priority, so once the buyer deducts under 194Q, the seller is exempt from collecting TCS under 206C(1H).
- Both rates are 0.1% of the amount exceeding ₹50 lakh, but missing the applicability test can trigger interest, penalty, and disallowance of 30% of the expense.
If your business buys or sells goods worth more than ₹50 lakh in a financial year, you are caught between two overlapping tax provisions — Section 194Q (TDS by buyer) and Section 206C(1H) (TCS by seller). The practical bottom line: the buyer always goes first. If the buyer is liable to deduct TDS under 194Q, the seller does NOT collect TCS under 206C(1H) on the same transaction. Get this wrong and you face interest at 1% per month, a penalty equal to the tax amount, and a 30% disallowance of your purchase expense.
What Is Section 194Q? (The Buyer's Obligation)
Section 194Q was inserted in the Income Tax Act effective 1 July 2021. It puts the compliance burden on the buyer of goods.
- Who must deduct: Any buyer whose total sales, turnover, or gross receipts exceeded ₹10 crore in the immediately preceding financial year.
- On what amount: Purchases of goods from a single seller that exceed ₹50 lakh in the current financial year. TDS is deducted only on the amount above ₹50 lakh.
- Rate: 0.1% of the purchase value exceeding ₹50 lakh. If the seller has not furnished their PAN, the rate jumps to 5%.
- When to deduct: At the time of credit to the seller's account OR at the time of payment, whichever is earlier.
- Deposit due date: 7th of the following month (30 April for March transactions).
What Is Section 206C(1H)? (The Seller's Obligation)
Section 206C(1H) came into effect on 1 October 2020. It puts the compliance burden on the seller of goods.
- Who must collect: Any seller whose total sales, turnover, or gross receipts exceeded ₹10 crore in the immediately preceding financial year.
- On what amount: Sale of goods to a single buyer that exceed ₹50 lakh in the current financial year. TCS is collected only on the amount above ₹50 lakh.
- Rate: 0.1% of the sale consideration exceeding ₹50 lakh. Rate doubles to 1% if the buyer does not furnish PAN/Aadhaar.
- When to collect: At the time of receipt of sale consideration.
- Deposit due date: 7th of the following month (7 May for April collections).
The Golden Rule: 194Q Overrides 206C(1H)
The CBDT has clarified through circulars that if Section 194Q applies to a transaction, Section 206C(1H) does not apply. The logic is simple — the government does not want the same transaction taxed twice at source. Here is how to apply this in practice:
- First, check if the buyer has turnover exceeding ₹10 crore in the previous FY. If yes, the buyer must deduct under 194Q and the seller is relieved of TCS.
- If the buyer's turnover is below ₹10 crore (so 194Q does not apply), but the seller's turnover exceeds ₹10 crore, then the seller must collect TCS under 206C(1H).
- If neither party crosses ₹10 crore turnover, neither section applies.
Side-by-Side Comparison Table
| Feature | Section 194Q (TDS) | Section 206C(1H) (TCS) |
|---|---|---|
| Who is responsible | Buyer of goods | Seller of goods |
| Trigger turnover (previous FY) | Buyer's turnover > ₹10 crore | Seller's turnover > ₹10 crore |
| Transaction threshold | Purchases > ₹50 lakh per seller | Sales > ₹50 lakh per buyer |
| Rate (with PAN) | 0.1% | 0.1% |
| Rate (without PAN) | 5% | 1% |
| Effective from | 1 July 2021 | 1 October 2020 |
| Applies to services? | No (goods only) | No (goods only) |
| Priority | Higher — overrides 206C(1H) | Lower — does not apply if 194Q applies |
| Return form | Form 26Q (quarterly) | Form 27EQ (quarterly) |
Worked Example with Real Numbers
Scenario: Ravi Traders (buyer, turnover ₹18 crore in FY 2025-26) purchases goods worth ₹80 lakh from Mehta Suppliers (seller, turnover ₹15 crore in FY 2025-26) during FY 2026-27.
Step 1 — Does 194Q apply? Ravi Traders' previous year turnover is ₹18 crore, which exceeds ₹10 crore. The purchase from Mehta Suppliers exceeds ₹50 lakh. Yes, 194Q applies.
Step 2 — Does 206C(1H) apply? Because 194Q applies, 206C(1H) does not apply. Mehta Suppliers need not collect TCS.
Step 3 — Calculate TDS under 194Q:
- Total purchase value: ₹80,00,000
- Threshold exemption: ₹50,00,000
- Taxable amount: ₹80,00,000 − ₹50,00,000 = ₹30,00,000
- TDS @ 0.1%: ₹30,00,000 × 0.1% = ₹3,000
Ravi Traders pays Mehta Suppliers ₹79,97,000 and deposits ₹3,000 to the government by the 7th of the next month. Mehta Suppliers claims this ₹3,000 as credit in their Form 26AS / AIS.
Alternate scenario: If Ravi Traders had a turnover of only ₹7 crore (below ₹10 crore), Section 194Q would NOT apply. Mehta Suppliers (turnover ₹15 crore) would then be required to collect TCS under 206C(1H) — ₹3,000 on the same ₹30 lakh excess amount.
Common Mistakes Businesses Make
- Applying both 194Q and 206C(1H) on the same invoice. This is the most frequent error. Once the buyer qualifies under 194Q, the seller must NOT also collect TCS. Double deduction leads to a refund hassle for the buyer and incorrect TCS returns for the seller.
- Counting the ₹50 lakh threshold from the invoice date rather than cumulatively. The ₹50 lakh limit is the aggregate purchases from one seller across the entire financial year. Many businesses start deducting only from the invoice that crosses ₹50 lakh but forget to apply TDS on the portion of that very invoice that exceeds the threshold.
- Ignoring the provision when the seller raises a GST-inclusive invoice. TDS under 194Q is deducted on the amount credited or paid, which typically includes GST. CBDT clarified (Circular No. 17/2020 for TCS and similar guidance for TDS) that TCS/TDS should be on the amount received inclusive of GST where GST is not separately identifiable. Many businesses wrongly exclude GST from the base amount.
- Not tracking turnover of the counterparty. A buyer with turnover above ₹10 crore often assumes the seller is also large. If the buyer's turnover is below ₹10 crore, the buyer cannot deduct under 194Q — but the seller (if large) must then collect TCS. Failing to communicate this between parties leads to neither party complying.
- Missing the TDS deposit deadline in March. For transactions in March, TDS must be deposited by 30 April — not 7 April. Many buyers miss this extended deadline and attract interest for late deposit.
Filing Returns: What Forms to Use
Buyers deducting under 194Q must file Form 26Q quarterly. Sellers collecting under 206C(1H) must file Form 27EQ quarterly. Both must issue certificates — buyers issue Form 16A, sellers issue Form 27D. If you find the quarterly filing process cumbersome, KyaTax's TDS Return Filing service handles the end-to-end filing, reconciliation, and certificate generation so you never miss a deadline.
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Open TDS Return Filing →Frequently asked questions
My turnover is ₹8 crore. Do I still need to deduct TDS under Section 194Q?
No. Section 194Q only applies to buyers whose turnover, sales, or gross receipts exceeded ₹10 crore in the preceding financial year. If your turnover is ₹8 crore, you are not liable to deduct under 194Q. However, if your seller's turnover exceeds ₹10 crore, they may be required to collect TCS from you under Section 206C(1H).
Does the ₹50 lakh threshold reset every financial year?
Yes. The ₹50 lakh threshold is calculated fresh at the start of each financial year for each buyer-seller pair. Purchases made before 1 April of a new financial year do not count toward the threshold of the new year. Only the cumulative purchases in the current FY from a single seller are considered.
Is TDS under 194Q applicable on purchase of services or only goods?
Section 194Q applies only to the purchase of goods. Services are excluded. For services, other TDS sections such as 194C (contracts), 194J (professional fees), or 194H (commission) may apply depending on the nature of the service.
What happens if the buyer fails to deduct TDS under 194Q?
Three consequences follow: (1) Interest at 1% per month is charged from the date tax was deductible until the date it is actually deducted or paid. (2) A penalty equal to the amount of TDS not deducted can be levied under Section 271C. (3) Thirty percent of the purchase expenditure becomes disallowable under Section 40(a)(ia), increasing your taxable income. This makes non-compliance very expensive.
General information for FY 2026-27, not professional advice for your specific case. Rules change — verify against the latest notification or ask a KyaTax expert.
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