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Home » Section 194C: TDS on Payments to Contractors & Sub-Contractors – Rates, Limits & Compliance Guide

Section 194C: TDS on Payments to Contractors & Sub-Contractors – Rates, Limits & Compliance Guide

Section 194C of the Income Tax Act governs TDS on payments made to contractors and sub-contractors. This provision ensures tax compliance by businesses while streamlining contractor payments under defined thresholds and rates.

Section 194C: TDS on Payments to Contractors & Sub-Contractors – Rates, Limits & Compliance Guide

Applicability of TDS under Section 194C

Section 194C of the Income Tax Act, 1961, deals with TDS (Tax Deducted at Source) on payments to contractors and sub-contractors. It ensures that whenever payments are made for carrying out any work or supply of labour, the payer deducts tax before releasing the amount.

TDS under Section 194C applies when a resident contractor is engaged through a contract by various entities, such as:

  • Central or State Government
  • Local authorities or statutory corporations
  • Companies, co-operative societies, or registered societies
  • Trusts and universities established by law
  • Firms, foreign enterprises, or associations established outside India
  • Individuals, HUFs, AOPs, or BOIs, if their previous year turnover exceeds:
    • ₹1 crore (business), or
    • ₹50 lakh (profession)

In simple terms, any specified person making a payment to a contractor or sub-contractor must deduct TDS, provided the payment meets the prescribed threshold and conditions under Section 194C.

Time of Deduction under Section 194C

TDS under Section 194C must be deducted at the time of payment or credit to the contractor’s account, whichever is earlier. Even if the amount is credited to a “Suspense Account” or any other account in the books, it will be treated as a credit to the contractor, and TDS must be deducted.

However, no TDS is required when an individual or HUF makes payments to a contractor for personal purposes only

Rate of TDS under Section 194C

The rate of TDS on payments to contractors and sub-contractors under Section 194C depends on the type of payee. The rates are:

  • 1% – If the contractor or sub-contractor is an Individual or HUF
  • 2% – For others (company, firm, cooperative society, etc.)
  • Nil – For contractors or sub-contractors engaged in the transport business, provided they furnish their PAN

These rates apply equally to both contractors and sub-contractors.

Threshold Limit for TDS under Section 194C

TDS under Section 194C is not required if the payment to a contractor or sub-contractor does not exceed ₹30,000 for a single transaction.

However, to avoid splitting of contracts into smaller amounts, the law provides that TDS will apply if:

  • The payment in a single contract exceeds ₹30,000, or
  • The aggregate payments during a financial year exceed ₹1,00,000

This means that even if individual payments are below ₹30,000, TDS must be deducted once the total payments in a year cross ₹1,00,000.

Example – TDS Applicability under Section 194C

Let’s understand the threshold limit rule with an example:

Case:

ABC Ltd. makes the following payments to Mr. X (Contractor) during the P.Y. 2024-25:

  • ₹20,000 on 01-05-2024
  • ₹25,000 on 01-08-2024
  • ₹28,000 on 01-12-2024
  • ₹30,000 due on 01-03-2025

Analysis:

  • Each of the first three payments is below ₹30,000, so no TDS applies individually.
  • However, the aggregate payment before 01-03-2025 is ₹73,000 (20,000 + 25,000 + 28,000).
  • With the last payment of ₹30,000, the total goes up to ₹1,03,000, which exceeds the annual threshold of ₹1,00,000.

Conclusion:

ABC Ltd. is liable to deduct TDS on the entire ₹1,03,000 under Section 194C, since the yearly limit is crossed.

Definition of “Work” under Section 194C

For the purpose of TDS, the term work under Section 194C covers a wide range of activities. It includes:

  • Advertising
  • Broadcasting and telecasting, including programme production
  • Carriage of goods or passengers by any transport mode other than railways
  • Catering services
  • Manufacturing or supplying products as per customer specifications, where the material is provided by the customer or their associate (as defined in Section 40A(2)(b))

What is not considered as “work”?

  •  If the contractor manufactures or supplies products using material purchased independently (not from the customer or associate), it is treated as a sale contract, not “work”.
  • Contracts that are purely for manufacture/supply without any construction activity are not included.

Special Points:

  • If the customer provides material and it is shown separately in the invoice, TDS will apply only on the service portion (excluding material cost).
  • If the invoice does not mention the material cost separately, TDS will be deducted on the entire invoice value.
  • With effect from 01.10.2024, “work” shall also exclude payments covered under Section 194J(1) (professional or technical services).

Non-Applicability of TDS under Section 194C

TDS under Section 194C is not applicable on payments made to a contractor engaged in the business of plying, hiring, or leasing goods carriages, provided the contractor furnishes a valid PAN to the deductor.

This exemption is available only for payments that are specifically in the nature of transport charges, and it applies only if the contractor satisfies all the following conditions:

  • The contractor owns goods carriages.
  • The contractor is in the business of plying, hiring, or leasing such goods carriages.
  • The contractor provides his PAN to the deductor.

Meaning of Goods Carriage

A goods carriage refers to:

  • Any motor vehicle built or adapted solely for carrying goods, or
  • Any motor vehicle used for carrying goods, even if not originally constructed for that purpose.

Note: The term motor vehicle does not include:

  • Vehicles with less than four wheels and engine capacity not exceeding 25cc
  • Vehicles running on rails
  • Vehicles used only inside a factory or enclosed premises

Important Points on Section 194C

When applying TDS provisions under Section 194C, the following key points must be noted:

1. Applicability – TDS applies only to works contracts and labour contracts, not to contracts for the sale of goods.

2. Exclusion for Professional Services – Payments to professionals like lawyers, doctors, engineers, accountants, consultants, or architects are not covered under Section 194C. Such payments are governed by Section 194J (Fees for Professional Services).

3. Time of Deduction – TDS must be deducted at the time of credit or payment, whichever is earlier, whether paid in cash, cheque, draft, or any other mode.

Example – Concessions for Transport Operators under Section 40A(3) and Section 194C

Transport operators enjoy certain special concessions under the Income Tax Act relating to cash payments and TDS deduction.

Concession under Section 40A(3):

Normally, any expenditure paid in cash exceeding ₹10,000 in a day is disallowed.

However, for transport operators, this limit is relaxed to ₹35,000 per day.

This means payments up to ₹35,000 per day can be made in cash (or non-account payee modes) without attracting disallowance under Section 40A(3).

Concession under Section 194C:

While TDS on contractors is generally:

  • 1% for payments to Individuals/HUFs, and
  • 2% for others,

No TDS is required on payments to transport contractors if all the following conditions are met:

1. The contractor owns 10 or fewer goods carriages at any time during the year.

2. He is engaged in the business of plying, hiring, or leasing goods carriages.

3. He furnishes a declaration along with PAN to the deductor.

These provisions provide much-needed relief to small and medium transport operators by easing both cash payment rules and TDS compliance.

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