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Updated On : June 26, 2025

Understanding Section 194C of the Income Tax Act: A Guide for Contractors and Payers

Section 194C of the Income Tax Act, 1961, plays a crucial role in the Indian taxation system by mandating Tax Deducted at Source (TDS) on payments made to resident contractors and sub-contractors. This provision aims to ensure timely collection of income tax and broaden the tax base. For both contractors receiving payments and individuals/entities making them, a clear understanding of Section 194C is essential to ensure compliance and avoid penalties. For all TDS-related topics, visit our TDS India Guide.

What is Section 194C?

At its core, Section 194C requires a "specified person" to deduct tax at source when making payments to a resident contractor or sub-contractor for carrying out any "work" in pursuance of a contract. This deduction applies at the time of credit of such sum to the payee's account or at the time of payment, whichever is earlier.

Who is a "Specified Person" for TDS Deduction?

The obligation to deduct TDS under Section 194C falls upon various entities, including:

The Central or State Government
Any local authority
Any statutory corporation
Any company
Any co-operative society
Any authority constituted for housing, planning, development, or improvement of cities/towns/villages
Any society registered under the Societies Registration Act, 1860, or similar laws
Any trust
Any university or deemed university
Any firm
A foreign state government or foreign enterprise
An individual, Hindu Undivided Family (HUF), Association of Persons (AOP), or Body of Individuals (BOI) whose total sales, gross receipts, or turnover from business or profession exceeded ₹1 crore (for business) or ₹50 lakhs (for profession) in the preceding financial year

Important Note: Individuals and HUFs are generally exempt from deducting TDS under Section 194C if the payment is made for personal purposes.

What Constitutes "Work" under Section 194C?

The term "work" under this section has a broad definition and includes:

Advertising
Broadcasting and telecasting (including program production)
Carriage of goods and passengers by any mode of transport (other than railways)
Catering
Manufacturing or supplying a product according to the customer's specifications, using materials provided by the customer
Supply of labour for carrying out any work

However, it does not include manufacturing or supplying goods using materials purchased from someone other than the customer. Learn more about similar provisions at TDS on Professional Fees.

When is TDS under Section 194C Applicable?

TDS under Section 194C is triggered when the payment to a contractor or sub-contractor exceeds certain monetary thresholds:

Single Payment: If a single payment to a contractor exceeds ₹30,000, TDS must be deducted.
Aggregate Payments: Even if individual payments are below ₹30,000, if the total amount paid or credited to a contractor in a financial year exceeds ₹1,00,000, TDS becomes applicable on all such payments.

TDS Rates under Section 194C

The applicable TDS rates depend on the nature of the payee:

1% for payments made or credited to an individual or a Hindu Undivided Family (HUF)
2% for payments made or credited to any other person (e.g., companies, firms, co-operative societies)

Crucial Point: If the contractor or sub-contractor does not furnish their Permanent Account Number (PAN) to the deductor, the TDS rate will be a higher rate of 20% as per Section 206AA.

Time of Deduction and Deposit of TDS

TDS must be deducted at the earlier of the following two events:

At the time of crediting the sum to the contractor's account (even if it's a suspense account)
At the time of payment in cash, by cheque, draft, or any other mode

The deducted TDS must be deposited with the government within the prescribed deadlines:

For Government Deductors: On the same day (for payments made without challan) or within 7 days from the end of the month in which the deduction is made (for payments through book adjustment)
For Non-Government Deductors:
- For amounts credited/paid in the month of March: On or before April 30th of the immediately following financial year
- For amounts credited/paid in any other month: Within 7 days from the end of the month in which the deduction is made

Exemptions from TDS under Section 194C

Certain payments are exempt from TDS under Section 194C:

Payments where the single contract value does not exceed ₹30,000
Payments where the aggregate contract value in a financial year does not exceed ₹1,00,000
Payments made by an individual or HUF for personal purposes
Payments made to a contractor engaged in the business of plying, hiring, or leasing goods carriages, provided they own 10 or fewer goods carriages at any time during the previous year and furnish a declaration along with their PAN

Compliance and Penalties

Proper compliance with Section 194C is crucial. This includes:

PAN Verification: Always verify the PAN of the contractor
Timely Deduction and Deposit: Deduct and deposit TDS within the stipulated deadlines
Filing TDS Returns: Quarterly TDS returns (Form 26Q) must be filed by the prescribed due dates
Issuing TDS Certificates: Issue Form 16A (TDS Certificate) to the contractor within the specified timeframe

Failure to comply with these provisions can lead to significant penalties, including:

Interest: Interest at 1% per month for failure to deduct TDS and 1.5% per month for failure to deposit deducted TDS
Penalties under Section 234E: A late fee of ₹200 per day for delay in filing TDS returns, capped at the TDS amount
Penalty under Section 271C: A penalty equal to the amount of tax that was not deducted or not paid
Disallowance of Expenditure: Non-deduction or non-deposit of TDS can lead to disallowance of the expenditure under Section 40(a)(ia) of the Income Tax Act

Additional Best Practices

Reconcile Form 26AS with contractor claims
Use automated software for large-volume TDS management
Keep digital proof of payment, deduction, and returns for record keeping and audit trail
Consult experts for complex contract structuring to reduce compliance burden

Conclusion

Section 194C is a vital component of India's tax framework. Understanding its nuances is paramount for both businesses engaging contractors and contractors receiving payments. Adhering to the prescribed rules regarding applicability, rates, thresholds, and timelines for deduction and deposit of TDS is essential to ensure seamless financial operations and avoid potential legal and financial repercussions. For specific scenarios or complex contractual arrangements, it is always advisable to consult with a tax professional.

Explore tools and guides to help you stay compliant:

💬 Frequently Asked Questions on Section 194C - TDS on Contractors

What is Section 194C of the Income Tax Act?

Section 194C mandates deduction of TDS on payments made to contractors or subcontractors for carrying out any work, including supply of labor.

Who is liable to deduct TDS under Section 194C?

Any individual, HUF (subject to tax audit), firm, company, AOP, BOI, or government entity making contractual payments is required to deduct TDS.

What is the TDS rate under Section 194C?

TDS is deducted at 1% if payment is made to an individual/HUF contractor and 2% in other cases (like company, firm, etc.).

Is there any threshold limit under Section 194C?

Yes. No TDS is required if a single payment does not exceed ₹30,000 or aggregate payments in a financial year do not exceed ₹1,00,000.

What is the meaning of 'contract' under Section 194C?

It includes written or oral contracts for carrying out any work, including supply of labor for works like advertising, broadcasting, catering, etc.

Is GST included for TDS calculation under Section 194C?

If GST is shown separately in the invoice, TDS is deducted on the base amount excluding GST, as per CBDT Circular No. 23/2017.

When should TDS be deducted under Section 194C?

TDS must be deducted at the time of credit of payment to the contractor’s account or at the time of actual payment, whichever is earlier.

What is the due date for depositing TDS under Section 194C?

TDS deducted must be deposited by the 7th of the following month. For March, the due date is 30th April.

Are any payments exempt under Section 194C?

Payments made by individuals/HUFs not under tax audit, payments for personal purposes, and payments below threshold are exempt.

What is the penalty for non-deduction or late payment of TDS?

Interest at 1% per month for non-deduction and 1.5% for late deposit. Also, disallowance of expenditure under Section 40(a)(ia) may apply.

Can TDS under Section 194C be adjusted later?

Yes, any excess TDS deducted can be adjusted in subsequent payments or refunded by filing correction statements in TDS returns.

Is TDS applicable on advance payments under Section 194C?

Yes. TDS must be deducted even on advance payments made towards contract work.

How is subcontractor payment treated under Section 194C?

If the contractor sublets the work, the contractor must deduct TDS while making payment to the subcontractor.

Are transporters liable for TDS under Section 194C?

No TDS is required if the transporter owns 10 or fewer goods carriages and provides a PAN. Otherwise, TDS applies.

Can Form 15G/15H be submitted to avoid TDS under 194C?

No. These forms are not applicable for payments under Section 194C. TDS must be deducted if applicable.

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