Section 194C of the Income Tax Act outlines the provisions for Tax Deducted at Source (TDS) on payments made to contractors and sub-contractors. TDS is a system where tax is deducted at the time of making specific payments in India, ensuring that taxes are collected in advance. In the context of Section 194C, it applies to payments made under contracts for work, including supply of labour for carrying out any work, between a contractor or sub-contractor and the payer.
For instance, businesses or organisations making payments to contractors for services must deduct TDS at the time of payment or credit, whichever is earlier. While the general TDS rate is 10%, Section 194C specifies different rates for contractors and sub-contractors. Typically, the TDS rate under this section is 1% for individual or Hindu Undivided Family (HUF) contractors and 2% for other entities, such as companies or partnerships.
Though TDS is deducted at the source, taxpayers can claim refunds if their overall tax liability is lower than the amount deducted. Individuals can claim this refund when filing their Income Tax Returns (ITR). Section 194C ensures timely tax collection while allowing flexibility for lower TDS rates in specified cases.
This article will help you understand everything about section 194C of the Income Tax Act of 1961 and how you can use this understanding to improve your taxation compliance.
What is Section 194C of the Income Tax Act?
Section 194C of the Income Tax Act, 1961 requires the government, local authorities, statutory corporations, etc., to deduct income tax at source at the rate of 2% (plus educational cess) on payments made to contractors for works contracts, labour contracts, and composite contracts. However, this provision does not apply to contracts for the sale of goods.
The Indian government has specified entities or contractees who are liable to deduct the TDS and deposit it with the government at the time of payment to contractors and sub-contractors. If they fall under any of the specified person categories, they are liable to deduct and deposit the TDS under section 194C. Furthermore, the section also defines contractors as individuals or entities that have agreed to enter into a contract to carry out specific work entirely or partly. Also, subcontractors may enter into a contract to supply the workforce for a specific project.
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Who is required to deduct TDS u/s 194C?
Here are the individuals and entities required to deduct TDS under section 194C:
- Central or state government
- Any local authority
- Corporations established under central, state, or provisional act
- Cooperative society
- Company
- Authority in India for city planning or house planning
- Society registered under the Society Registration Act of 1980
- University of a deemed university
- Trust
- Firm
- Any government of a foreign state, a foreign company, or anybody or association established outside India
- Any individual, BOI, HUF, or AOP with total sales from business or profession exceeding Rs. 1 crores in case of business and Rs. 50 lakh in the case of profession.
What does work mean under section 194C?
The term ‘work’ for which the payment is made to the contractors and sub-contractors means the following under section 194C of the Income Tax Act:
- Advertising
- Telecasting or broadcasting, including the production of programs
- Carriage of passengers or goods by any means of transport other than railways
- Catering services
- Manufacturing a good or product according to the specifications provided by a customer by utilising the material purchased from the customer or the customer’s associates. However, the goods or products made as per the customer’s specifications should not be made using materials purchased from any other source apart from the customers and their associates.
What is a sub-contractor under section 194C?
Under section 194C, a sub-contractor means the following person or entity:
- A person or entity that enters into a contract with a contractor to supply the workforce or labour for carrying out the whole or a part of the project undertaken by the contractor.
- A person or entity that provides the workforce or labour to the contractor who has taken a project to supply the workforce or labour to any of the persons or entities specified under this section.
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Conditions to be satisfied
Here are the conditions that must be satisfied for the payment to be eligible for TDS under section 194C of the Income Tax Act:
- The payment must be made to a contractor or a subcontractor who is an Indian resident, as defined in section 6 of the Income Tax Act 1961.
- The payment must be made by a specified person or contractee mentioned under section 194C.
- The payment is made to compensate for any work, including the supply of labour.
- The amount of payment made to contractors and sub-contractors should not be less than Rs. 30,000.
- The payment should be made or credited by the contractor for a contract undertaken with the specified bodies.
What is the rate of TDS?
The following table outlines the TDS rates applicable to payments or credits made to Resident Individuals and HUFs, as well as other Resident Persons and Transporters, from 14th May 2020 to 31st March 2021. Please note that no surcharge, education cess, or secondary higher education cess (SHEC) will be added, and TDS will be deducted at the basic rates mentioned below:
Recipient category |
With PAN |
Without PAN |
Resident Individual or HUF |
1% (0.75% for 14 May 2020 to 31 March 2021) |
20% |
Any Resident Person (other than Individual or HUF) |
2% (1.5% for 14 May 2020 to 31 March 2021) |
20% |
Transporters |
NIL (NIL for 14 May 2020 to 31 March 2021) |
20% |
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When does TDS under section 194C need to be deducted?
Here are the situations when a contractor is liable to deduct TDS from the payments made to contractors and sub-contractors under section 194C:
- At the time of crediting the amount to the bank account of the contractor or sub-contractor.
- At the time of paying the sum in cash to the contractor or sub-contractor.
- By issuing a cheque or using any other mode of payment, whichever is earlier.
- If the sum is credited to any account, whether it is called a ‘Suspense account’ or by any other name in the accounting books of the person making the payment, the payment is liable for deducting TDS under section 194C. Hence, even if the payment is transferred to a different account but is payable to any resident contractor or sub-contractor, the provisions of section 194C will apply.
What is the limit for tax deduction under section 194C?
Here is a detailed table describing the limit of tax deduction under section 194C:
| Particulars | Amount |
| Single payment for a contract | Exceeding Rs. 30,000 |
| Aggregate payment for a contract | Exceeding Rs. 1,00,000 |
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What are the exemptions to TDS payments under section 194C?
There are certain exemptions under section 194C for TDS. These are the following:
- No TDS is liable to be deducted by the contractee if the amount of a single payment made to the contractors and sub-contractors is less than Rs. 30,000.
- No TDS is liable to be deducted by the contractee if the amount of aggregate payment made to the contractors and sub-contractors is less than Rs. 1 lakh.
- No TDS is liable if the payment has been made to a goods transport company operating in the business of hiring, plying, or leasing goods. The goods transport company must own 10 or fewer carriages at any time during the previous year. The contractor must submit a declaration of the above conditions along with PAN.
- NO TDS is liable if the payment has been made to a non-resident contractor or sub-contractor.
Deduction in cases of composite contracts:
- If materials have been supplied by the government.
- If the contract has undertaken a project for the construction of a dam.
- If the contractor has undertaken a project to supply only labour.
Under what circumstances TDS u/s 194C is not deductible?
No Tax Deducted at Source (TDS) is required in the following scenarios:
1. Single payment or annual aggregate:
- Individual payments: If the sum paid or credited per contract does not exceed Rs. 30,000.
- Annual total: If the cumulative total of such payments or credits during the financial year does not exceed Rs. 1,00,000.
2. Personal use by Individuals or Hindu Undivided Families (HUFs):
- No TDS is applicable on payments or credits to contractors for personal use.
3. Small-scale goods carriage operators:
- No TDS is required on payments or credits to contractors engaged in the business of plying, hiring, or leasing goods carriages.
- This exemption applies if the contractor owns ten or fewer goods carriages during the financial year.
- The contractor must provide their Permanent Account Number (PAN) and a declaration to this effect to the payer.
Issue of TDS certificate
A TDS (Tax Deducted at Source) certificate is issued to the individual or entity from whose income TDS has been deducted. It serves as proof that the deductor has successfully deposited the tax with the government on behalf of the taxpayer. This certificate is crucial as it details the amount of tax deducted and the corresponding income on which the deduction was made.
The deductor must issue the TDS certificate within a specified time frame to the deductee, and it helps the recipient claim credit for the deducted amount when filing their Income Tax Return (ITR). There are two types of TDS certificates: Form 16 and Form 16A. Form 16 is issued for TDS deducted on salaries, while Form 16A is for non-salary payments like payments to contractors, interest, or professional fees.
Form Type |
Applicable for |
Issued By |
Frequency |
Form 16 |
TDS on salary |
Employer |
Annually |
Form 16A |
TDS on non-salary payments |
Deductor (payer) |
Quarterly |
Timely issuance of TDS certificates ensures smooth tax filing and transparency for taxpayers, allowing them to claim refunds or adjust their tax liabilities accurately.
TDS at a lower rate
TDS at a lower rate can be applied when an individual or entity believes that their total income justifies a lower tax deduction. In such cases, they can apply to the Assessing Officer by submitting Form 13 under Section 197 of the Income Tax Act. If approved, the Assessing Officer issues a certificate authorising the deductor to withhold tax at a reduced rate or not at all. This provision helps taxpayers avoid excess deductions and maintain better cash flow by reducing the need to claim refunds during the tax filing process.
Documents required for the deduction of TDS under section 194C
Here are the documents required for the deduction of TDS under section 194C:
- Contractor’s PAN card: Verifying the contractor’s PAN card is important. If the contractor’s PAN is not available, the TDS rate is applicable at a higher rate of 20%.
- Contract or agreement: Although optional, it is wise to have a detailed contract or agreement with the contractor or sub-contractor, as it helps to outline the scope of work and the payment details.
- Invoice: This includes all the details about the actual amount paid to contractors and sub-contractors. This is issued by the contractor or sub-contractor.
- Challan: This is the actual form used for TDS deduction for depositing it with the Indian government. Although optional, it can be an important document for tax compliance.
- TDS certificate: Once TDS is deducted from the payment, it is mandatory to issue a TDS certificate to the contractor or sub-contractor. This document includes details such as payment amount, TDS rate, TDS deducted, and other information.
How to calculate TDS under section 194C?
Here is the process of calculating TDS under section 194C:
- If the contract is a composite supply of goods and services, TDS is calculated on the value, excluding the cost of goods and services. If the invoice does not include the value of goods, TDS must be deducted from the total value of the invoice.
- Brokerage or commissions on fixed deposits are excluded from section 194C.
- Payments to forwarding and clearing agencies for carriage of goods are liable for TDS deduction under this section.
- Section 194 does not include the payments made to travel agents or airlines for ticket purchases unless the mode of travel is chartered.
- TDS is deductible on payments made to electricians or contractors for electrical services under section 194C.
Here is an example for a better understanding:
You paid Rs. 2,00,000 to a contractor for undertaking a specific project. The applicable tax rate would be 1% (for individuals/HUF) or 2% (for others). Let’s assume that the contractor is an individual, and 1% TDS is applicable.
You can calculate the TDS amount as:
TDS amount: Invoice value x TDS rate / 100
TDS amount: Rs. 2,00,000 x 1 / 100 = Rs. 2,000
TDS amount: Rs. 2,000
Net payable amount to the contractor: Rs. 2,00,000 - Rs. 2,000 = Rs. 1,98,000
TDS payable to the Indian government: Rs. 2,000
How to calculate TDS in case of composite work u/s 194C?
Under section 194C of the Income Tax Act, TDS on composite contracts (which include both the supply of materials and provision of services) is calculated on the entire invoice value if the contract is not clearly divided between the cost of materials and the cost of services. If the contract specifies the value of materials and services separately, TDS only applies to the service portion.
Here is an example:
You paid Rs. 3,00,000 to a contractor for undertaking a specific project, where it is clearly specified that the value of materials is Rs. 1,80,000, and the remaining Rs. 1,20,000 is the value of services. The applicable tax rate would be 1% (for individuals/HUF) or 2% (for others). Let’s assume that the contractor is an individual, and 1% TDS is applicable.
You can calculate the TDS amount as:
TDS amount: Value of services x TDS rate / 100
TDS amount: Rs. 1,20,000 x 1 / 100 = Rs. 2,000
TDS amount: Rs. 1,200
Net payable amount to the contractor: Rs. 3,00,000 - Rs. 1,200 = Rs. 2,98,800
TDS payable to the Indian government: Rs. 1,200
Deposit of TDS under Section 194C – Time limit
Category of payer |
Date of deposit |
The government or an entity acting on its behalf |
The same day of payment |
When payment is forwarded by an entity other than the government or on its behalf |
|
When payment is made in March |
On or before the 30th of April |
Other months |
Within a week from the end of the specific month in which TDS is deducted |
Some special considerations by the government on 194C applicability
Here are some of the special considerations by the government on 194C applicability:
Payment to travel agents
NO TDS is to be deducted if the payment has been made to travel agents or airlines for purchasing tickets. However, TDS is applicable under section 194C if the mode of transport is chartered.
Payment for couriers
TDS is deductible under section 194C for payments made to couriers involving the carriage of goods.
Payment for serving food in restaurants
Under section 194C, no TDS is deductible on the payment made for serving food in a restaurant involving the normal course of business.
TDS deduction on GST amount
If an invoice clearly states a GST amount separately, then TDS is applicable on the amount, excluding the GST amount.
What is the time limit to deposit TDS u/s 194C?
Here are the time limits to deposit TDS under section 194C:
- If the payment has been made by or on behalf of the Indian government to a contractor or sub-contractor, the TDS must be processed on the same day.
- If the payment is made by any entity other than the Indian government and the amount is credited in March, the time limit to deposit the TDS is on or before April 30th.
- If the payment is made by an entity other than the Indian government and the amount is credited in a month other than March, the TDS must be deposited within 7 days from the end of the month in which the payment is completed.
What is the time limit to file TDS return u/s 194C?
You must file a quarterly TDS return in Form 26Q after depositing the TDS. Here are the time limits to file a TDS return under section 194C:
| Month | Due date |
| April - June | 31st July |
| July-September | 31st October |
| October-December | 31st January |
| January - March | 30th April |
What are the consequences of non-compliance with section 194C?
The payer is obligated to submit the TDS return on a quarterly basis using Form 26Q, which provides details of the TDS deducted, deposited, and other necessary information. Failure to comply with the requirements of Section 194C can result in penalties and late filing fees.
- Late Filing Fees: If the payer fails to deduct or deposit the TDS amount with the government on time, they will incur a late filing fee of Rs. 200 for each day the delay continues. However, the total late fee cannot exceed the amount of TDS due.
- Penalty: If the TDS return is not filed within the prescribed due dates, a penalty ranging from Rs. 10,000 to Rs. 1,00,000 will be imposed.
Conclusion
Section 194C of the Income Tax Act is an important section that defines the TDS rates and its provisions for payments made to contractors and sub-contractors. Although the general TDS rate is 10%, the section allows for a lower TDS deduction of 1% (for individuals/HUF) or 2% (for others). However, as the contractee should be a specific individual or entity with a difference in the TDS rate, it is important that you understand all the factors included in section 194C.
