TDS Under Section 194C for Contractors and Sub-contractors
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.
Overview of Section 194C
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.
TDS Rate Under Section 194C for Contractors
The TDS 194C rate depends on the type of recipient:
- 1% TDS if payment is made to an individual or HUF (Hindu Undivided Family)
- 2% TDS if payment is made to others like firms, companies, or LLPs
The rate is applied on the total payment (excluding GST, if shown separately).
Are Sub-Contractors Also Covered Under Section 194C?
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.
Applicability of TDS Under Section 194C
The 194C TDS applicability is valid when:
- The payer is the government, a local authority, a company, a partnership firm, a cooperative society, a trust, or any business with turnover above the audit limit.
- The contract is for carrying out any work or for the supply of labour
- The payment crosses the threshold limit prescribed
Both written and oral contracts are covered under this section.
TDS on Payments to Contractors and Sub-contractors
Here’s what’s covered under TDS on payments to contractors:
- Payments for construction work (buildings, roads, bridges)
- Transportation (other than railways)
- Supply of manpower or contract labor
- Manufacturing of goods using materials provided by the payer
- Repairs and maintenance services under a contract
Even if the payment is made in installments, TDS must be deducted at each stage.
When TDS u/s 194C is Not Deductible?
There are certain cases where TDS under section 194C is not required:
- If the total payment under a single contract is below ₹30,000
- If the total amount paid to a contractor in a financial year is less than ₹1,00,000
- If the contract is personal and not for business purposes
- If the payee furnishes a certificate for non-deduction of TDS to the Assessing Officer
Always verify if the exemption criteria apply before skipping deduction.
Threshold Limit for Deduction of Tax at Source Under Section 194C
TDS is applicable only when payments cross the following limits:
- ₹30,000 for a single contract
- ₹1,00,000 in aggregate during the financial year
If either of these limits is crossed, TDS must be deducted on the entire amount, not just the amount exceeding the limit.
How to Calculate TDS Under Section 194C
To calculate TDS:
- Check if the payment exceeds threshold limits
- Identify the category of payee (individual, firm, company, etc.)
- Apply 1% or 2% TDS rate as applicable
- Exclude GST amount (if separately mentioned in the invoice)
- Multiply the rate by the amount paid to get the TDS amount
For example, if you pay ₹1,50,000 to a firm, TDS = ₹1,50,000 × 2% = ₹3,000
TDS Filing and Deduction Process Under 194C
Here’s how to stay compliant:
- Deduct TDS at the time of credit or payment, whichever is earlier
- Deposit TDS to the government using Challan ITNS-281 within 7 days of the following month
- File quarterly TDS returns in Form 26Q
- Issue TDS certificates to contractors in Form 16A
This filing process ensures transparency and avoids any notices or penalties.
Know TDS for Composite Contract
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.
Frequently Asked Questions (FAQs)
-
Section 194C applies to payments made to contractors and sub-contractors for executing work. Businesses, government bodies, and entities crossing audit limits are required to deduct TDS under this section.
-
The TDS rate is 1% for individuals or HUFs and 2% for others such as firms and companies.
-
Yes, sub-contractors receiving payments from contractors are also covered. The contractor must deduct TDS before making the payment.
-
TDS is not deductible if the payment is below ₹30,000 for a single contract or ₹1,00,000 in a year. Also, no deduction is needed for personal (non-business) contracts.
