Rs. 100- Rs. 10 crore
Start investing with Rs. 100 | Easy KYC | Expert-managed funds
How to Invest in SIP A Beginner's Guide
In summary
Section 194C was the provision used for TDS on contractor payments under the Income-tax Act, 1961. For payments or credits from 1 April 2026, the corresponding contractor TDS rule is Section 393(1), Table Sl. No. 6(i).
- Individual or HUF contractors attract 1% TDS.
- Other resident contractors attract 2% TDS.
- Single-payment limit is Rs. 30,000.
- Annual aggregate limit is Rs. 1 lakh.
- TDS applies on payment or credit earlier.
- Personal payments by individuals have an exemption.
The Income Tax Department's 2026 transition guidance states that taxpayers should use the new Section 393 reference for current transactions rather than old Section 194C.
What is Section 194C of the Income Tax Act?
Section 194C was the provision for deducting TDS from payments made to resident contractors for carrying out work under a contract.
It applied under the Income-tax Act, 1961 until 31 March 2026. From 1 April 2026, the Income-tax Act, 2025 replaced the old Act.
For current transactions, contractor payments are covered by Section 393(1), Table Sl. No. 6(i). The Income Tax Department specifically states that old section numbers such as 194C should not be quoted for transactions from 1 April 2026.
The basic idea remains the same. A person making a covered payment to a resident contractor must deduct part of the payment as TDS and deposit it with the government.
What are the current TDS rates for contractor payments?
The current contractor TDS rate depends on the type of contractor receiving the payment.
| Type of resident contractor | TDS rate |
| Individual or Hindu Undivided Family (HUF) | 1% |
| Company, firm, or other person | 2% |
These rates are prescribed under Section 393(1), Table Sl. No. 6(i) of the Income-tax Act, 2025.
No separate health and education cess is added to these normal TDS rates for payments to resident contractors.
When does TDS become applicable?
For the main contractor-payment rule, TDS applies once the payment crosses either of the prescribed limits.
The limits are:
- Single payment: More than Rs. 30,000
- Total payments during the tax year: More than Rs. 1 lakh
Once the applicable threshold is crossed, the deduction rules apply to the amount as provided under the law.
TDS must generally be deducted when the payment is credited to the contractor's account or when it is actually paid, whichever happens earlier.
Who has to deduct TDS on contractor payments?
The current law requires designated persons to deduct TDS when making covered payments to resident contractors.
Designated persons include:
- Central and State Governments
- Local authorities
- Companies
- Firms
- Co-operative societies
- Trusts
- Specified universities
- Certain statutory authorities
- Certain individuals, HUFs, associations of persons, or bodies of individuals whose earlier-year turnover crosses the prescribed limits
For the last group, the turnover test is generally more than Rs. 1 crore for business or more than Rs. 50 lakh for profession in the preceding tax year.
Individuals and HUFs paying a contractor only for personal purposes are excluded from this contractor TDS requirement.
What type of work is covered?
The contractor TDS rule covers payments made under a contract for carrying out specified work.
Under the current Income-tax Act, 2025, “work” includes activities such as:
- Advertising
- Broadcasting and telecasting
- Production of programmes for broadcasting
- Carrying goods or passengers other than by rail
- Catering
- Specified manufacturing or supply contracts
- Supply of manpower in covered cases
The Finance Act, 2026 expressly brought qualifying manpower supply within the meaning of “work” from 1 April 2026.
For specified manufacturing contracts, the treatment can depend on who supplies the material. Check the contract and invoice rather than assuming every purchase of customised goods attracts contractor TDS.
How do you calculate TDS on a contractor payment?
The calculation is simple once you know the correct rate.
Suppose Meera Enterprises pays Rs. 2 lakh to an individual resident contractor for covered work. Assume all conditions for TDS are satisfied.
The contractor is an individual, so the applicable rate is 1%.
TDS = Rs. 2,00,000 × 1% = Rs. 2,000
The amount paid to the contractor after TDS would be:
Rs. 2,00,000 − Rs. 2,000 = Rs. 1,98,000
The payer deposits Rs. 2,000 with the government as TDS.
If the same payment were made to a resident company or firm, the normal contractor rate would be 2%, subject to the applicable rules.
What happens if the contractor does not provide PAN?
A higher TDS rate can apply if the contractor does not provide a valid Permanent Account Number (PAN).
Under Section 397(2) of the Income-tax Act, 2025, TDS is generally deducted at the higher of:
- The rate given under the relevant provision
- The rate in force
- 20% in cases such as contractor payments
Therefore, a contractor who does not provide a valid PAN can face TDS at 20% rather than the normal 1% or 2% rate.
What is the difference between contractor and professional-service TDS?
Contractor payments and professional-service payments follow different parts of the current TDS table.
For current transactions:
| Payment type | Current provision | General rate |
| Contractor payment | Section 393(1), Table 6(i) | 1% or 2% |
| Professional service | Section 393(1), Table 6(iii) | Generally 10% |
| Certain technical services | Section 393(1), Table 6(iii) | 2% |
Under the old Income-tax Act, 1961, contractor payments were commonly referred to as Section 194C, while professional and technical fees were generally covered by Section 194J.
The nature of the work matters more than the description written on an invoice
How do you pay and report contractor TDS online?
TDS can be deposited through the Income Tax Department's e-Pay Tax facility.
For current Tax Year 2026-27 transactions, use the Income-tax Act, 2025 framework and the correct Section 393 reference rather than old Section 194C. The e-Filing portal now supports payments under both the old and new Acts.
After depositing TDS, non-salary payments to residents are reported through Form 140, which was earlier known as Form 26Q.
The current quarterly filing dates are:
| Quarter | Due date |
| April to June | 31 July |
| July to September | 31 October |
| October to December | 31 January |
| January to March | 31 May |
The Income Tax Department confirmed these Form 140 dates in 2026.
Conclusion
Section 194C governed TDS on contractor payments under the Income-tax Act, 1961. From 1 April 2026, the same type of contractor payment is covered under Section 393 of the Income-tax Act, 2025.
Before making a payment, check the contractor's status, the nature of work, the payment amount, applicable threshold, and PAN. Using the correct current section and TDS rate can help avoid short deduction, incorrect reporting, and later compliance issues.
Last reviewed: October, 2026
Mutual funds are subject to market risk. Please read the scheme-related documents carefully before investing.
Explore Investment Tools
Articles and Insights
Frequently Asked Questions
Contractor TDS rules
Calculation and special situations
What is section 194C pertaining to TDS?
Section 194C was the provision under the Income-tax Act, 1961 for deducting TDS on payments to resident contractors for carrying out work under a contract. From 1 April 2026, its current equivalent is Section 393(1), Table Sl. No. 6(i) of the Income-tax Act, 2025. The normal rates are 1% for individual or HUF contractors and 2% for other resident contractors.
What is the difference between sections 194C and 194J?
Under the old law, Section 194C mainly dealt with contractor payments, while Section 194J dealt with professional and technical services. Under the Income-tax Act, 2025, these payments are now covered within Section 393. Contractor payments appear in Table Sl. No. 6(i), while professional and technical services appear mainly in Table Sl. No. 6(iii). The applicable TDS rates can therefore differ.
How do you pay TDS online under Section 194C?
For current payments, use the Income Tax Department's e-Pay Tax service and select the applicable details under the Income-tax Act, 2025. The current contractor rule is reported using the Section 393 reference rather than old Section 194C. After payment, covered non-salary TDS transactions are reported through Form 140, which replaced the earlier Form 26Q for current filings.
How do you calculate TDS under Section 194C with an example?
Suppose a business pays Rs. 80,000 to an individual resident contractor for covered work. Since the single payment exceeds Rs. 30,000, TDS applies. At the 1% rate, the deduction is Rs. 800. The contractor receives Rs. 79,200, while Rs. 800 is deposited as TDS. For a company or firm contractor, the normal rate is 2%.
Is TDS deductible on sales promotion expenses?
It depends on the actual service provided, not simply on the label “sales promotion”. If the payment is for advertising or another activity covered as contractual work, contractor TDS can apply. If it is for professional services, another TDS rule may apply. A pure purchase of goods may have different treatment. Check the agreement, invoice, and actual nature of the payment.
Does Section 194C apply to payments made to a contractor for personal work?
For current transactions, an individual or HUF is generally not required to deduct contractor TDS under this rule when the payment is made exclusively for personal purposes. For example, a personal home repair contract can fall within this exclusion. The position can change where the payment relates to business or professional activity, so the purpose of the contract matters.
What happens if the contractor does not provide PAN?
If a contractor does not provide a valid PAN, a higher TDS rate can apply. Under the current Income-tax Act, 2025, contractor payments can generally face deduction at 20% where the PAN rule applies, instead of the normal 1% or 2% rate. This is subject to the conditions and exceptions provided under Section 397.
Disclaimer
Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319
BFL does NOT:
(i) provide investment advisory services in any manner or form.
(ii) carry customized/personalized suitability assessment.
(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.
In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.
Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.
Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.
Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.
Disclaimer
Bajaj Finance Limited ("BFL") is an NBFC offering loans, deposits and third-party wealth management products.
The information BFL contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed.
This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.
Disclaimer
Mutual Fund SIP calculator may provide potential investors an approximate estimate on the maturity amount of the monthly SIP, purely based on mathematical calculation of the projected annual return rate selected by investor. However, such calculation does not factor the actual performance by the Asset Management Company (AMC) and should not be treated as any advice or assurance about the actual return of investment. Mutual Funds do not have a fixed rate of return and it is not possible to predict the rate of return. Please note that the SIP calculator are for illustrations only and do not represent actual returns which may vary depending on various factors including but not limited to actual performance, expense ratio, taxation, exit load (if any), etc.