TDS Section 194-O e-commerce operator threshold revised: the ₹10 lakh seller exemption and new MCC mapping

The Central Board of Direct Taxes issued Notification 38/2026 dated May 19, 2026, revising the operational thresholds and merchant coverage under Section 194-O of the Income-Tax Act. The May 2026 revision is the most substantial change to the section since its introduction and addresses two persistent operational issues: the low seller exemption threshold and the ambiguity around newer digital-marketplace categories.

The seller exemption threshold rises from ₹5 lakh to ₹10 lakh aggregate annual gross sales facilitated through the e-commerce operator, effective July 1, 2026. Sellers who are individuals or Hindu Undivided Families with annual sales up to ₹10 lakh through the platform are exempt from TDS deduction by the operator, provided they furnish PAN. The threshold revision aligns the Section 194-O exemption with the GST registration threshold and reduces the administrative burden on small sellers.

The TDS rate structure is also revised. For FY 2026-27 (April 1, 2026 to March 31, 2027), the TDS rate on covered transactions is reduced from 1 percent to 0.75 percent as a transition measure to accompany the threshold revision. From April 1, 2027 onwards, the rate reverts to the standard 1 percent. The Section 194-Q buyer-side TDS rate (0.1 percent) on purchase of goods is not affected by this notification, and the relationship between 194-O and 194-Q continues to be governed by Circular 13 of 2021 (where both apply, 194-O takes precedence).

The merchant category expansion is the substantively significant operational change. The notification adds four new categories: quick-commerce dark stores (Blinkit, Instamart, Zepto), B2B procurement platforms (Amazon Business, Udaan), digital service marketplaces (Upwork India, Fiverr India, SaaS marketplaces), and online educational content platforms (Coursera India, Udemy India). Pure information services without a transaction layer remain outside Section 194-O scope.

The operational implementation for affected platforms requires three immediate workstreams. First, the platform's TDS system must be reconfigured to apply the ₹10 lakh seller exemption threshold from July 1, 2026, with the threshold tracking required on a per-seller cumulative basis across the financial year. Second, the 0.75 percent transition rate must be applied for FY 2026-27, with the 1 percent rate restored from April 1, 2027. Third, the newly covered merchant categories must implement Section 194-O TDS from July 1, 2026.

For sellers, the threshold revision is generally beneficial. Sellers with annual platform sales between ₹5 lakh and ₹10 lakh, who were earlier subject to TDS withholding on every transaction above the lower threshold, are now exempt provided they furnish PAN. The Form 26AS and Form 26QF reconciliation burden reduces correspondingly.

KAMRIT's Direct Tax desk handles Section 194-O compliance for e-commerce operators including the threshold revision implementation, the new MCC category mapping, and the Form 26QF quarterly TDS return filing under the revised framework.