A Guide to TDS on Contract Payments Under Section 194C
TDS (Tax Deducted at Source) is a system where tax is deducted at the time of making certain payments. It helps in early tax collection and reduces tax evasion. It ensures tax collection at the income source. Section 194C of the Income Tax Act, 1961, deals with TDS on contract payments.
TDS on payments to contractors is a common compliance area for businesses and professionals. Section 194C of the Income Tax Act, 1961, governs this requirement. It ensures tax is deducted at the source when making payments for any contractual work. Whether you’re hiring a contractor for construction, transport, catering, or job work, this section could apply. Understanding its rules is key to avoiding penalties and staying tax compliant.
This blog explains Section 194C in detail. You will learn about applicability, rates, exemptions, and compliance. Whether you are a contractor, subcontractor, or payer, this guide will help you.
What is Section 194C?
Section 194C mandates TDS on payments made for contracts. It applies to individuals, HUFs, firms, companies, and other entities. The payer must deduct TDS if the payment exceeds specified limits.
This section covers both work contracts and service contracts. It ensures tax compliance in business transactions.
What is “work” under Section 194C?
The term “work” includes:
- Advertising
- Broadcasting and telecasting
- Catering
- Carriage of goods or passengers
- Manufacturing or supplying a product using material supplied by the payer
- Civil works
- Repair and maintenance
- Fabrication or job work
Even supply of labour is considered work.
If the contractor is just supplying goods with own material, it’s not a contract under 194C.
Who is Liable to Deduct TDS Under Section 194C?
The following entities must deduct TDS under Section 194C:
- Individuals & HUFs – If their books are audited under Section 44AB.
- Companies & LLPs – Regardless of turnover.
- Partnership Firms – If liable for tax audit.
- Trusts & Associations – If their accounts are audited.
Government departments and local authorities must also deduct TDS.
Types of Contracts Covered
- Work Contracts – Construction, manufacturing, repairs, etc.
- Service Contracts – Advertising, professional services, transport, etc.
When is TDS Deducted Under Section 194C?
TDS must be deducted at the earlier of the following:
- At the time of credit of the amount to the contractor’s account
- At the time of payment, whether in cash or by cheque or by any other mode
Even if amount is credited to a “suspense account”, TDS has to be deducted.
Threshold limit
TDS under Section 194C applies when:
- A contract is given for work or services.
- The payment exceeds ₹30,000 per transaction or ₹1 lakh annually (per payee).
Who is the recipient under 194C?
TDS is deducted if payment is made to a resident contractor or sub-contractor.
If the contractor is a non-resident, Section 194C does not apply. Instead, Section 195 will apply for non-residents.
TDS Rates Under Section 194C
The TDS rates are as follows:
| Payee Type | TDS Rate (If PAN Provided) | TDS Rate (If PAN Not Provided) |
|---|---|---|
| Individual/HUF/Firm/Company | 1% | 20% |
| Sub-contractor (if paid by contractor) | 2% | 20% |
Example of TDS Deduction
- Case 1: A company pays ₹50,000 for a construction contract.
- TDS @1% = ₹500 (if PAN is provided).
- TDS @20% = ₹10,000 (if PAN is missing).
- Case 2: A contractor pays a sub-contractor ₹40,000.
- TDS @2% = ₹800 (if PAN is provided).
- TDS @20% = ₹8,000 (if PAN is missing).
Exemptions from TDS Under Section 194C
Not all contract payments attract TDS. Exemptions include:
- Payments to Individuals/HUFs for Personal Use – Not for business purposes.
- Freelancers Covered Under Section 194J – Professional services taxed differently.
- Transport Operators (Owners of Goods Vehicles) – If PAN is provided and declaration is submitted.
- Payments Below Threshold – Single payment ≤ ₹30,000 or annual payments ≤ ₹1 lakh.
How to Deduct TDS Under Section 194C?
Follow these steps for TDS compliance:
- Verify PAN of Payee – Ensure the contractor provides a valid PAN.
- Deduct TDS at Applicable Rate – 1% or 2% based on the contract type.
- Deposit TDS to Government – Use Challan 281 by the 7th of the next month.
- File TDS Returns (Quarterly) – Submit Form 26Q via TRACES.
- Issue TDS Certificate (Form 16A) – Provide it to the payee within 15 days from due date.
Penalties for Non-Compliance
Failure to deduct or deposit TDS attracts penalties:
- Late Deduction Interest – 1% per month until deduction.
- Late Payment Interest – 1.5% per month until deposit.
- Disallowance of Expenses – If TDS not deducted, expense may be denied as deduction.
- Penalty Under Section 271H – ₹10,000 to ₹1 lakh for late filing.
Difference Between Section 194C and 194J
Many confuse Section 194C with 194J. Here’s the difference:
| Parameter | Section 194C (Contracts) | Section 194J (Professional Fees) |
|---|---|---|
| Nature of Payment | Work or service contracts | Professional/technical services |
| TDS Rate (Individual/Company) | 1% or 2% | 10% |
| Threshold Limit | ₹30,000 (single) / ₹1 lakh (yearly) | ₹30,000 (single) |
Recent Updates in Section 194C
- Budget 2024 Changes – No major rate changes, but stricter PAN compliance.
- E-invoicing Impact – Contractors must ensure proper invoicing for TDS claims.
- Higher Penalties – Non-filing of TDS returns now attracts higher fines.
Best Practices for Contractors & Payers
- Maintain Proper Contracts – Clearly define work scope to avoid disputes.
- Track Payment Thresholds – Avoid TDS if payments are below ₹30,000.
- Verify PAN Early – Prevent 20% TDS for non-PAN cases.
- Use Digital Tools – TDS software helps in timely deductions and filings.
Conclusion
Section 194C ensures tax compliance in contract payments. Understanding TDS rates, exemptions, and filing processes is crucial. Both payers and contractors must follow the rules to avoid penalties.
Stay updated with tax laws. Consult a CA if unsure about TDS deductions. Proper compliance saves time and money.
FAQs on TDS Under Section 194C
Q1. Is TDS applicable for small contract pa
Q1. Is TDS applicable for small contract payments?
A1. No, if payment is ≤ ₹30,000 per transaction or ≤ ₹1 lakh annually.
Q2. What if the contractor does not provide PAN?
A2. TDS will be deducted at 20%, higher than the normal 1-2%.
Q3. Can TDS under 194C be adjusted against final tax liability?
A3. Yes, the contractor can claim credit while filing ITR.
Q4. Is subcontractor payment covered under 194C?
A4. Yes, TDS @2% applies to subcontractors.
Q5. When is Form 16A issued?
A5. Within 15 days from the due date of filing TDS returns.
By following these guidelines, businesses can ensure smooth TDS compliance under Section 194C. Stay informed, stay compliant!