Section 394 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 394 of the Income-tax Act, 2025 requires certain sellers, an authorised dealer and licensors or lessors to collect tax from the buyer, remitter, licensee or lessee, on nine kinds of receipt listed in a Table. The rates in the Table were substituted for six of the rows by the Finance Act, 2026. This article gives every row as the Act now prints it, together with sub-sections (2) to (6), as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
The collector collects tax on the receipts in column B, at the rate in column D, at the earlier of debiting the amount to the buyer's, licensee's or lessee's account and receipt of the amount. The rate is 2% for liquor, tendu leaves, timber and forest produce, scrap, coal, lignite and iron ore, overseas tour packages and the use of a parking lot, toll plaza, mine or quarry. It is 1% on a sale consideration exceeding ten lakh rupees of a motor vehicle or notified goods. For a Liberalised Remittance Scheme remittance exceeding ten lakh rupees it is 2% for education or medical treatment and 20% for other purposes.
How section 394(1) works
Every person specified in column C of the Table shall collect tax (a) on the receipts in column B; (b) at the rate in column D; and (c) at the time of debiting the amount payable by the buyer, licensee or lessee to the account of the buyer, licensee or lessee, or at the time of receipt of the amount from him in cash or by cheque, draft or any other mode, whichever is earlier. The mirror section for deduction is section 393; see our post on section 393 and the Table-wise articles on that section. The earlier Act's provisions are mapped in our TDS and TCS sections mapping note (see our note on where the earlier Act's provisions sit in the 2025 Act). Section 394 was amended by section 85 of the Finance Act, 2026. Later amendments, rules and notifications should be checked.
For help with collection of tax at source and TCS returns, see our page on TCS compliance.
The Table: tax collection at source (each cell as the Act now prints it)
| Serial number | Nature of receipt (column B) | Person (column C) | Rate of tax collected at source (column D) | Limit printed in column B |
|---|---|---|---|---|
| 1 | Sale of alcoholic liquor for human consumption | Seller | 2% | None |
| 2 | Sale of tendu leaves | Seller | 2% | None |
| 3 | Sale of timber whether obtained under a forest lease or otherwise; or any other forest produce (not being timber or tendu leaves) obtained under a forest lease | Seller | 2% | None |
| 4 | Sale of scrap | Seller | 2% | None |
| 5 | Sale of minerals, being coal or lignite or iron ore | Seller | 2% | None |
| 6 | Sale consideration exceeding ten lakh rupees in case of (a) motor vehicle; or (b) any other goods, as may be notified by the Central Government | Seller | 1% | Sale consideration exceeding ten lakh rupees |
| 7 | Remittance under the Liberalised Remittance Scheme of an amount or aggregate of the amounts exceeding ten lakh rupees | Authorised dealer | (a) 2% for purposes of education or medical treatment; (b) 20% for purposes other than education or medical treatment | Amount or aggregate of amounts exceeding ten lakh rupees |
| 8 | Sale of "overseas tour programme package" including expenses for travel or hotel stay or boarding or lodging or any such similar or related expenditure | Seller | 2% | None |
| 9 | Use of parking lot or toll plaza or mine or quarry for the purpose of business, excluding mining and quarrying of mineral oil (including petroleum and natural gas) | Licensor or Lessor | 2% | None |
What the Finance Act, 2026 changed
The copy consulted prints the rate for serial numbers 1, 2, 4, 5 and 8 and the rate (a) in serial number 7 in square brackets, each with a footnote saying it was substituted by the Finance Act, 2026 with effect from 1 April 2026 (footnotes 86 to 89, with 88a and 88b). The rates in the table above are the rates now printed. The older figures printed in those footnotes are not law and are not stated here. Serial numbers 3, 6, 9 and the rate (b) of 20% in serial number 7 carry no such footnote. The page break in the copy consulted falls after serial number 4, with the header repeated; the cells above were read from the lines on either side.
Reading the limits in serial numbers 6 and 7
Section 394(1)(a) says the collector collects tax "on receipts specified in column B", and column B for serial number 6 reads "sale consideration exceeding ten lakh rupees" and for serial number 7 "an amount or aggregate of the amounts exceeding ten lakh rupees". The Table and the sub-section do not say, in so many words, whether the rate applies to the whole amount once the limit is exceeded or only to the part above ten lakh rupees. The text consulted is silent on this point; read the Table together with the rules and notifications and check how it is applied before relying on a figure.
Who is the "seller", the "buyer" and the other persons (section 402)
- Seller (section 402(33)): for serial numbers 1 to 6, the Central Government; a State Government; a local authority or a corporation or authority established by an Act; a company, firm or co-operative society; or an individual or Hindu undivided family whose total sales, gross receipts or turnover from business or profession exceeded one crore rupees (business) or fifty lakh rupees (profession) in the tax year immediately preceding the tax year of sale. For serial number 8, a person who sells an overseas tour programme package.
- Buyer (section 402(6)): for serial numbers 1 to 5, a person who obtains goods of that kind in a sale by auction, tender or any other mode, or the right to receive them, other than a public sector company; the Central or a State Government, and an embassy, High Commission, legation, commission, consulate or trade representation of a foreign State; a club; or a buyer in the retail sale of goods purchased for personal consumption. For serial number 6, a person who obtains goods in a sale, other than the persons in the Government and embassy group, a local authority (as in Schedule III, Table: serial number 22) and a public sector company engaged in carrying passengers. For serial number 7, a person remitting under the Liberalised Remittance Scheme of the Reserve Bank of India; for serial number 8, a person who purchases an overseas tour programme package. The Central Government may notify other persons to be excluded; what is notified is not in the text consulted.
- Licensor or lessor and licensee or lessee (section 402(21) and (22)): persons, other than a public sector company, who grant, or receive, a lease or licence or right in a parking lot, toll plaza, mine or quarry for the purposes of business.
- Forest produce has the meaning in any State Act in force, or in the Indian Forest Act, 1927 (section 394(6)); check those laws where it matters.
Sub-sections (2) to (5): when tax is not collected
Sub-section (2): declaration by a manufacturer. Irrespective of sub-section (1) for serial numbers 1 to 5, tax is not collected from a buyer resident in India who furnishes a written declaration in duplicate, in such form and manner as may be prescribed, to the person responsible for collecting tax, mentioning that the goods are to be utilised (a) for manufacturing, processing or producing articles or things or for generating power; and (b) not for trading purposes.
Sub-section (3): delivery of the declaration. Where no collection is to be made under sub-section (2), the collector delivers one copy of the declaration to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner on or before the seventh day of the month following the month of receipt of the declaration.
Sub-section (4): authorised dealer, serial number 7. No collection by the authorised dealer (a) on the amount on which the seller has collected tax under serial number 8; or (b) if the amount being remitted is a loan obtained from any financial institution as defined in section 129(3)(b), for the purpose of pursuing any education.
Sub-section (5): buyer liable to deduct. No collection by the authorised dealer or seller for serial numbers 7 and 8 if the buyer is liable to deduct tax at source under any other provision of the Act and has deducted it.
The forms and procedure are left to the Income-tax Rules, 2026; see our rule-wise guides. A certificate for lower collection is dealt with in section 395; see our post on section 395.
Worked examples
Scrap, serial number 4. Greenfield Metals Private Limited (invented), a company and therefore a seller, sells scrap for Rs. 40,000 to a trader. The rate is 2%: tax = 2% of Rs. 40,000 = Rs. 800, collected at the earlier of debiting the trader's account and receiving the money.
Timber and coal. A State forest corporation (invented) sells timber for Rs. 3,00,000: tax = 2% = Rs. 6,000. A company sells coal for Rs. 10,00,000: tax = 2% = Rs. 20,000. There is no limit in column B for these rows.
Manufacturer's declaration. A buyer resident in India buys iron ore for use in his own steel-making plant. He gives the seller a written declaration in duplicate that the ore is for manufacturing and not for trading. Under sub-section (2) the seller does not collect tax, and delivers a copy to the authority by the seventh day of the month after the month of receipt of the declaration.
Motor vehicle, serial number 6. A dealer company (invented) sells a vehicle for Rs. 8,00,000: the consideration does not exceed ten lakh rupees, so serial number 6 does not apply. For a sale at Rs. 12,00,000 the rate is 1%. If the rate applies to the whole consideration the tax is Rs. 12,000; if it applies only to the part above ten lakh rupees, it is Rs. 2,000. As explained above, the text consulted does not settle which; the example shows both figures.
Remittance, serial number 7. An authorised dealer remits Rs. 15,00,000 for an education course abroad for a customer who has not taken a loan for it. The amount exceeds ten lakh rupees and the purpose is education, so the rate is 2%: Rs. 30,000 on the whole amount, or Rs. 10,000 on the part above ten lakh rupees (the same unresolved point). If the remittance were for another purpose, the rate is 20%. If the amount remitted is a loan from a financial institution for the purpose of pursuing education, sub-section (4)(b) says no collection is made.
Overseas tour, serial number 8. A travel company (invented) sells an overseas tour package for Rs. 4,00,000: tax = 2% of Rs. 4,00,000 = Rs. 8,000, unless sub-section (5) applies because the buyer is liable to deduct tax at source under another provision and has deducted it.
Toll plaza, serial number 9. A licensor (invented), not a public sector company, receives Rs. 5,00,000 from a licensee for the use of a toll plaza for business: tax = 2% of Rs. 5,00,000 = Rs. 10,000.
Need help with TCS?
If you sell goods listed in the Table, remit funds as an authorised dealer, or grant the use of a parking lot, toll plaza, mine or quarry, our team can help you decide whether you must collect tax and how to treat the declaration and the ten lakh rupee limits. Please contact us through the page for TCS compliance.
Key takeaways
- Nine receipts, with the collector in column C: seller (serial numbers 1 to 6 and 8), authorised dealer (serial number 7) and licensor or lessor (serial number 9).
- 2% on liquor, tendu leaves, timber and forest produce, scrap, coal, lignite and iron ore, overseas tour packages, and parking lot, toll plaza, mine or quarry use.
- 1% on a motor vehicle or notified goods where the consideration exceeds ten lakh rupees.
- Liberalised Remittance Scheme: 2% for education or medical treatment, 20% otherwise, for amounts exceeding ten lakh rupees.
- Rates for serial numbers 1, 2, 4, 5 and 8 and for 7(a) were substituted by the Finance Act, 2026 with effect from 1 April 2026.
- A manufacturer's declaration, the education-loan exception and the buyer-deducted exception can switch off collection.
Read next
- Section 393: tax to be deducted at source (overview)
- Section 393(5) to (11): declaration and other rules
- Sections 390 and 391: deduction or collection at source and direct payment
- Section 395: certificates for lower deduction
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.