Navigating India's tax laws can be overwhelming, especially when it comes to TDS deductions. Section 194C of the Income Tax Act governs tax deductions on payments made to contractors and subcontractors. Every business owner and individual dealing with contractors must understand these provisions to ensure compliance and avoid penalties.
Section 194C of the Income Tax Act is important for both the person making the payment (payer) and the contractor receiving it. This section states that TDS (Tax Deducted at Source) must be deducted when payments are made for work done under a contract. If this rule is ignored, both parties may face tax penalties. Contractors should also know about the option to apply for a lower or nil TDS deduction, which helps protect their earnings. Being aware of these details ensures that tax obligations are followed correctly, avoiding problems later with the Income Tax Department.
Section 194C specifies when and how much tax should be deducted at source when making payments to contractors. While managing these tax obligations, many entrepreneurs also juggle other financial commitments like home purchases. Fortunately, solutions like Bajaj Housing Finance Home Loan offer flexible options with interest rates starting from 7.49%* p.a and loan amounts up to Rs. 15 Crore*, making property investment more accessible while you manage your business tax obligations. You may already be eligible – enter your mobile number and OTP to check your loan offer instantly.
This article will provide a comprehensive breakdown of Section 194C, helping you understand your tax obligations while making contractor payments.
What is Section 194C?
Section 194C of the Income Tax Act requires TDS to be deducted when payment is made to a resident contractor or sub-contractor for work done under a contract. The deduction must be made at the time of payment or when the amount is credited to the contractor’s account, whichever happens first.
This section applies to payments made for work contracts, including supply of labour. The entities required to deduct TDS can include:
Central or State Government
Local Authorities
Statutory Corporations
Corporations formed by any Central/State/Provincial Act
Companies
Co-operative Societies
Housing or urban development authorities
Societies registered under the Societies Registration Act, 1980
Trusts
Universities or deemed universities
Firms
Foreign governments or foreign enterprises
Any individual, HUF, AOP or BOI with turnover exceeding Rs. 1 crore (business) or Rs. 50 lakhs (profession) in the previous financial year
The purpose of Section 194C is to ensure timely collection of tax on contractual payments and to promote transparency in reporting such transactions. The rate and applicability vary based on the status of the payer and the amount involved.
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What is the meaning of 'work' under Section 194C?
Under Section 194C, 'work' encompasses various activities performed under a contract. The definition is quite broad and includes:
Manufacturing or supplying a product according to customer requirements
Advertising and publicity services
Broadcasting and telecasting services
Carriage of goods and passengers by any mode except railways
Civil construction including buildings, bridges, dams, or canals
Section 194C also covers labour contracts and manpower supply agreements. The broad definition ensures most contractual relationships fall under its purview.\
Who is a ‘Person’ under Section 194C?
In the context of Section 194C, a ‘person’ refers to any individual or entity that enters into a contract for services in exchange for payment. As per the Income Tax Act, this includes a broad range of organisations and individuals:
Companies
Trusts
Partnership firms
Universities and deemed universities
Local authorities
The Central Government or State Government
Statutory corporations
Co-operative societies
Registered societies
Additionally, any authority created under Indian law to provide services for housing or town development is also considered a 'person' under this section.
Individuals and Hindu Undivided Families (HUFs) are also included under Section 194C, but only if their total turnover exceeds Rs. 1 crore for business or Rs. 50 lakhs for a profession in the previous financial year. These individuals must deduct TDS on payments made under contracts.
The term ‘person’ is used in a legal sense here and covers not just natural individuals, but various legal entities. It’s important for all such persons to understand their obligations under Section 194C to ensure correct TDS deductions and avoid penalties.
Are sub-contractors also covered under Section 194C?
Yes, Section 194C explicitly covers both contractors and sub-contractors. This means:
When a main contractor receives payment, TDS is deducted by the client
When the main contractor pays sub-contractors, TDS must be deducted again
The chain of TDS deduction continues at each level of the contracting hierarchy
This cascading effect ensures tax compliance throughout the contracting chain. While managing these business obligations, securing your personal assets is equally important. Bajaj Housing Finance offers home loans with approval in just 48 hours*. Check your loan offers now to see how you can benefit from our hassle-free application process. You may already qualify, simply verify with your mobile number and OTP.
Conditions to be satisfied
For Section 194C to apply, certain conditions must be met:
The payment must be made to a resident contractor or sub-contractor
The payment must be for carrying out any "work" as defined in the Act
The payer must fall under specified categories including government entities, companies, firms, or individuals subject to tax audit
The payment should exceed the threshold limits prescribed
These conditions establish the framework for TDS application on contractor payments. Understanding them helps avoid unnecessary deductions or compliance failures.
When does TDS under Section 194C need to be deducted?
Section 194C requires TDS deduction at specific times:
At the time of credit to the contractor's account in the books
At the time of payment, whichever is earlier
For payments exceeding Rs. 30,000 for a single transaction
For aggregate payments exceeding Rs. 1,00,000 during a financial year
The timing of deduction is crucial for compliance. Just as timely home loan EMI payments secure your property, timely TDS compliance secures your business from penalties.
Under what circumstances TDS u/s 194C is not deductible?
There are certain situations in which TDS under Section 194C is not required to be deducted. These include:
If the payment made under a single contract does not exceed Rs. 30,000.
If the total of all payments made to a contractor during the financial year is not more than Rs. 1,00,000.
If the individual or HUF making the payment is doing so for personal purposes, such as getting their own house painted or vehicle repaired.
When the contractor is in the business of plying, hiring, or leasing goods carriages and qualifies for presumptive taxation under Section 44AE of the Income Tax Act. In such cases, the contractor must also own 10 or fewer goods vehicles and provide a declaration along with their PAN to the payer.
In these cases, the person making the payment is not required to deduct any TDS. However, it is still advised to maintain proper documentation in case the Income Tax Department seeks clarification during assessment.
Section 194C also does not apply to personal payments unrelated to business or profession. When planning personal investments like home purchases, check your eligibility for a Bajaj Housing Finance Home Loan with flexible tenure up to 32 years*. You may already be eligible, find out by entering your mobile number and OTP.
Provisions for TDS deductions under Section 194C
TDS under Section 194C can only be deducted if certain conditions are met:
The contractor must be a resident Indian, as defined under Section 6 of the Income Tax Act.
The person making the payment must fall under the categories mentioned in Section 194C.
The contract must be for work, including supply of labour.
A contract may be written or oral, but both parties must agree to the terms.
If the payment under a contract exceeds Rs. 30,000 at any time, TDS must be deducted.
If the total payment to a contractor during a financial year exceeds Rs. 75,000, TDS must be deducted even if individual payments are less than Rs. 30,000.
If an advance of more than Rs. 30,000 is paid to the contractor, TDS must be deducted on that advance.
Even if the first payment is under Rs. 30,000 but later payments push the total above the threshold, TDS must be deducted accordingly.
TDS must be deducted at the time of payment or credit, whichever happens first, regardless of the payment mode (cash, cheque, or digital).
Deposit of TDS under Section 194C – Time limit
The following table shows the deadlines for depositing TDS under Section 194C:
Payer Type |
Payment Month |
Deadline for TDS Deposit |
Government or payment on its behalf |
Any month |
Same day of payment |
Other than government |
March |
On or before 30th April |
Other than government |
All other months |
Within 7 days from month-end |
Timely deposit of TDS is necessary to avoid interest and penalty charges.
Threshold limit for deduction of tax at source under Section 194C
The threshold limits under Section 194C are:
Rs. 30,000 for a single payment to a contractor
Rs. 1,00,000 for aggregate payments during a financial year
These limits help reduce compliance burden for small transactions. TDS must be deducted only when payments exceed these thresholds.
The threshold calculation is done separately for each contractor. Proper record-keeping helps track aggregate payments to avoid compliance issues.
What is the rate of TDS?
Section 194C prescribes different TDS rates based on the recipient's status:
Recipient Type |
TDS Rate |
Individual/HUF |
1% |
Other entities (companies, firms, etc.) |
2% |
Contractors without PAN |
20% |
Applying the correct rate is essential to avoid excess deduction or shortfall.
TDS at a lower rate
In certain situations, contractors can receive payments with TDS at lower rates:
A contractor or sub-contractor can apply to the Assessing Officer (AO) for a certificate to deduct TDS at a lower rate or not at all. If the AO is satisfied that their total income justifies this, they will issue a certificate. Once the contractor receives the certificate, it can be submitted to the payer, who must then deduct TDS at the lower rate mentioned. This helps contractors retain more of their income if their overall tax liability is less than the standard TDS rate.
The certificate specifies the applicable lower rate or even nil deduction in some cases. This provision helps businesses manage their working capital effectively, similar to how Bajaj Housing Finance Home Loan balance transfer facility helps homeowners optimise their EMIs. Check your loan offers today to see if you qualify for better terms. You may already be eligible, find out by entering your mobile number and OTP.
Time limit within for deposit of tax
It is important to deposit TDS on time under Section 194C to avoid penalties or interest charges. The timeline for depositing the tax depends on who is making the payment and when it is made. Below are the deadlines based on different situations:
If the payment is made by or on behalf of the Government:
The tax deducted must be deposited on the same day the payment is made, without any delay.If the payment is made by any other person (non-government deductors):
When the deduction is made in the month of March:
TDS must be deposited on or before 30th April.When the deduction is made in any month other than March:
TDS must be deposited within 7 days from the end of the month in which the tax was deducted.
Note: The person making the payment (also known as the payer) is responsible for deducting and depositing the TDS.
Failing to deposit TDS within the above deadlines can lead to interest being charged under Section 201(1A), at the rate of 1.5% per month or part of a month until the tax is deposited. To avoid unnecessary financial stress, it's best to deposit TDS promptly.
Issue of TDS certificate
After deducting TDS under Section 194C, the payer must issue a TDS certificate to the contractor. This certificate is issued in Form 16A, and it must be provided within 15 days from the due date of filing the quarterly TDS return. The certificate shows the amount paid and the tax deducted at source, helping the contractor claim credit when filing their income tax return.
These TDS certificates must be generated from the TRACES portal using the deductor’s TAN (Tax Deduction and Collection Account Number). The process is digital and ensures each certificate carries a unique TDS certificate number.
The certificate can either be digitally signed or manually signed by the deductor.
Quarter |
Due Date for Issuing Form 16A |
April – June |
15th August |
July – September |
15th November |
October – December |
15th February |
January – March |
15th June |
Failing to issue Form 16A within the deadline may attract penalties under the Income Tax Act.
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TDS on composite contract
Composite contracts involving both material and services require special attention:
When a contract includes both material and service elements, TDS is deducted on the total payment unless the material value is separately mentioned.
If the value of materials is clearly separated on the invoice, then TDS is applied only to the labour/service portion.
In contracts like building construction where the contractor provides both materials and services at fixed prices, TDS is deducted on the full payment.
For contracts where the contractor only supplies labour, and all materials are provided by the payer, TDS is applied only on the labour cost, provided it is separately stated.
Understanding the nature of your contract helps determine the correct TDS application.
Conclusion
Understanding Section 194C is essential for proper tax compliance when dealing with contractors. The provision establishes clear guidelines on when to deduct TDS, applicable rates, and compliance procedures. By following these guidelines, businesses can avoid penalties and contribute to the nation's tax collection efficiently.
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