Tax compliance plays a crucial role when it comes to contracts and service agreements and one such tax rule is TDS under section 194C, which covers payments made to contractors and sub-contractors. In this blog, we will explore how TDS operates, which helps prevent penalties and ensures smooth operations.
Section 194C of the Income Tax Act deals with tax deduction on payments made to contractors and sub-contractors for carrying out any work. This includes contracts for construction, manufacturing, supply of labour, or any other specified service. When a specified person makes such payments, TDS must be deducted before the payment is released.
This section helps the government track large contractual payments and ensures tax is collected in advance from service providers.
The TDS 194C rate depends on the type of recipient:
The rate is applied on the total payment (excluding GST, if shown separately).
Yes, the section includes TDS for subcontractors as well. If a main contractor hires another party to carry out part of the work, TDS has to be deducted by the main contractor when paying the subcontractor. The same TDS rates apply here, too.
The 194C TDS applicability is valid when:
Both written and oral contracts are covered under this section.
Here’s what’s covered under TDS on payments to contractors:
Even if the payment is made in installments, TDS must be deducted at each stage.
There are certain cases where TDS under section 194C is not required:
Always verify if the exemption criteria apply before skipping deduction.
TDS is applicable only when payments cross the following limits:
If either of these limits is crossed, TDS must be deducted on the entire amount, not just the amount exceeding the limit.
To calculate TDS:
For example, if you pay ₹1,50,000 to a firm, TDS = ₹1,50,000 × 2% = ₹3,000
Here’s how to stay compliant:
This filing process ensures transparency and avoids any notices or penalties.
In some cases, contracts may involve both the supply of goods and services, such as turnkey projects. If the contract is composite, and the value of labour or service can’t be separated, then TDS is deducted on the entire amount. However, if invoices break down goods and labour clearly, then TDS is applied only on the labour portion.
Understanding the nature of the contract is key to determining the right deduction method.