TDS u/s 194Q vs TCS u/s 206C(1H): Buyer vs Seller Obligations on High-Value Purchases

TDS u/s 194Q vs TCS u/s 206C(1H): Side-by-Side Comparison for Buyers and Sellers

Two provisions introduced in recent years have created significant confusion in the Indian business community: Section 194Q (effective July 2021) requires buyers to deduct TDS on purchases above a threshold. Section 206C(1H) (effective October 2020) requires sellers to collect TCS on the same high-value transactions.

Both provisions target the same commercial transaction — the purchase and sale of goods — from opposite sides. Both cannot apply simultaneously. And the rules for determining which one takes precedence depend on facts that many businesses get wrong.

This guide sets out both provisions side by side, explains the priority rule, and shows how HelloBooks handles the compliance automatically.

The Big Picture

Section 194Q — Buyer's Obligation

Section 194Q applies when both of these are true:
1. The buyer's total turnover in the immediately preceding financial year exceeded ₹10 crore.
2. The buyer purchases goods worth more than ₹50 lakh from a single seller in the current financial year.

If a buyer with ₹20 crore turnover purchases ₹60 lakh of raw materials from Vendor A in FY 2025–26, Section 194Q applies. The buyer must deduct TDS at 0.1% on the amount exceeding ₹50 lakh — on ₹10 lakh, the buyer deducts ₹1,000.

TDS under 194Q is deducted at the time of credit to the seller's account or at the time of payment, whichever is earlier. For businesses that book accruals, this means the deduction may trigger when the bill is entered, not when payment is made.

If the seller does not have a PAN or has not furnished it, the rate jumps to 5% instead of 0.1% — a 50x increase. Always collect and verify PAN before crossing the ₹50 lakh threshold.

Section 194Q does not apply to:
- Goods imported into India (covered by Customs Act)
- Transactions on which TCS has already been collected by the seller under 206C(1H)
- Goods notified by the Central Government as exempt

• Deducted amount deposited via ITNS 281 by the 7th of the following month
• Reported in Form 26Q quarterly return
• Form 16A issued to the seller quarterly

Section 206C(1H) — Seller's Obligation

Section 206C(1H) applies when both of these are true:
1. The seller's total turnover in the immediately preceding financial year exceeded ₹10 crore.
2. The seller receives consideration for goods exceeding ₹50 lakh from a single buyer in the current financial year.

Note: 206C(1H) is triggered by receipt of consideration, not by booking of sale. A seller books a ₹60 lakh sale in March but receives payment in April — the TCS applies in April at the time of receipt.

0.1% on the amount exceeding ₹50 lakh. If the buyer does not furnish PAN, the rate is 1% — not 5% like under 194Q. This asymmetry is important for small buyers.

206C(1H) does not apply to:
- Goods already covered by other TCS provisions under Section 206C(1) — scrap, timber, alcohol, etc.
- Transactions where the buyer is liable to deduct TDS under Section 194Q

• Collected amount deposited via ITNS 281 by the 7th of the following month
• Reported in Form 27EQ quarterly return
• Form 27D issued to the buyer quarterly

The Priority Rule: Which Section Applies?

This is the most important and most misunderstood part. Both sections cannot apply to the same transaction. CBDT clarified this via Circular 13/2021:

> If the buyer is liable to deduct TDS under Section 194Q on a transaction, the seller is exempt from collecting TCS under Section 206C(1H) on the same transaction.

In plain terms: 194Q (buyer deducts) takes priority over 206C(1H) (seller collects).

The practical implication: Sellers above ₹10 crore turnover should check at the start of each buyer relationship whether the buyer qualifies under 194Q. If the buyer qualifies, the seller does nothing. If the buyer does not qualify, the seller must collect TCS once the ₹50 lakh threshold is crossed.

Practical Scenarios

Buyer (₹50 crore turnover) purchases ₹80 lakh of machinery from Seller (₹25 crore turnover).

→ Buyer's turnover > ₹10 crore + transaction > ₹50 lakh: 194Q applies.
→ Buyer deducts 0.1% TDS on ₹30 lakh (amount above ₹50 lakh threshold) = ₹3,000.
→ Seller is exempt from 206C(1H) on this transaction.

Buyer (₹8 crore turnover) purchases ₹70 lakh of raw materials from Seller (₹30 crore turnover).

→ Buyer's turnover ≤ ₹10 crore: 194Q does not apply.
→ Seller's turnover > ₹10 crore + receipts > ₹50 lakh: 206C(1H) applies.
→ Seller collects 0.1% TCS on ₹20 lakh (amount above ₹50 lakh threshold) = ₹2,000.

Buyer (₹5 crore turnover) purchases ₹1 crore of goods from Seller (₹7 crore turnover).

→ Neither buyer nor seller crosses the ₹10 crore turnover threshold.
→ Neither 194Q nor 206C(1H) applies. No TDS/TCS on this transaction.

Key Differences at a Glance

Compliance Checklist for Businesses

For buyers (> ₹10 crore turnover):
- Identify all sellers from whom cumulative purchases will exceed ₹50 lakh in the FY
- Collect PAN of all such sellers before crossing ₹50 lakh
- Notify sellers that 194Q applies so they do not also collect 206C(1H)
- Set up TDS deduction trigger in your accounting system at the ₹50 lakh mark
- Deposit via ITNS 281 by the 7th of each month
- Report in Form 26Q quarterly
- Issue Form 16A to sellers quarterly

For sellers (> ₹10 crore turnover):
- Identify buyers whose cumulative purchases will exceed ₹50 lakh
- Check if each such buyer qualifies under 194Q (turnover > ₹10 crore) — get a declaration
- For buyers who qualify under 194Q: collect no TCS
- For buyers who do not qualify under 194Q: collect 0.1% TCS once ₹50 lakh is crossed
- Deposit via ITNS 281 by the 7th of each month
- Report in Form 27EQ quarterly
- Issue Form 27D to buyers quarterly

How HelloBooks Handles 194Q vs 206C(1H)

HelloBooks tracks cumulative purchase and sale totals per counterparty within the financial year. When the ₹50 lakh threshold is approached, a banner alerts you.

For buyers, HelloBooks automatically applies 194Q TDS deduction on the incremental amount and adds it to the monthly challan.

For sellers, HelloBooks checks if the buyer is tagged as a 194Q-eligible deductor. If yes, no TCS is applied. If no, TCS is computed under 206C(1H) and added to the invoice.

Quarterly, the correct amounts flow into 26Q (for 194Q) or 27EQ (for 206C(1H)) with no manual bucketing required.

Frequently Asked Questions

Do 194Q and 206C(1H) apply to services?

No. Both provisions explicitly apply only to goods. For services, TDS under 194J (professional/technical fees) or 194C (contracts) applies separately.

What if the seller collects TCS even though the buyer deducted 194Q?

This results in double taxation for the buyer. The buyer can claim credit for the 194Q deduction in their ITR. The seller must refund the TCS collected in error. Avoid this situation by communicating clearly at the start of each relationship and getting a written declaration from large buyers about their 194Q eligibility.

Is GST included in the ₹50 lakh threshold?

No. CBDT Circular 13/2021 clarified that the threshold and the TDS/TCS base for both 194Q and 206C(1H) are on the amount excluding GST. TDS/TCS should not be deducted or collected on the GST component of the invoice.

What if I cross the ₹50 lakh threshold mid-invoice?

Deduct or collect only on the amount in that invoice that causes the cumulative total to exceed ₹50 lakh. If cumulative purchases were ₹48 lakh and you receive a ₹5 lakh invoice, TDS under 194Q applies only on ₹3 lakh.

Does the ₹10 crore turnover threshold use total receipts or net sales?

The provision refers to total sales, gross receipts, or turnover from business. For FY 2025–26 applicability, you look at your FY 2024–25 total turnover as shown in your books of accounts and income tax return.