---
title: "Section 194C TDS: Rates, Threshold Limit & Composite Contract"
description: "Understand Section 194C TDS on contractors and sub-contractors, applicable rates, threshold limit, when TDS is not deductible, and how to calculate TDS under 19"
canonical: "https://busy.in/tds/section-194c-contractors-subcontractors/"
author: "Susheel Kumar"
published: "2025-08-04T10:36:31.000Z"
category: "TDS"
---

-   Section 194C applies to payments made to **resident contractors and sub-contractors** for carrying out work.
-   From **1 April 2026**, contractor TDS under the Income-tax Act, 2025 is covered under **Section 393(1) \[Table: Sl. No. 6(i)\]**.
-   The TDS rate remains **1%** for individual or HUF contractors and **2%** for other resident contractors.
-   No TDS is required if a single payment does not exceed **₹30,000** and total payments to the same contractor in the financial year do not exceed **₹1,00,000**.
-   If PAN is not furnished, TDS may apply at **20%** under Section 206AA.
-   For FY 2026-27, non-salary TDS reporting is through **Form No. 140, earlier Form 26Q**, and the TDS certificate is **Form No. 131, earlier Form 16A**.

This guide explains who has to deduct TDS, which contractor payments are covered, how thresholds work, when exemptions apply, and what changes from FY 2026-27.

# TDS on Contractor Payments under Section 194C and Section 393(1)

## **Latest FY 2026-27 Update**

For payments or credits made up to **31 March 2026**, the old Income-tax Act, 1961, section reference continues to apply. For [**contractor payments credited or paid**](https://busy.in/gst/tds-return-and-payment-important-due-dates-you-should-know/) on or after **1 April 2026**, the relevant provision is **Section 393(1)** under the Income-tax Act, 2025.

## **Who Must Deduct TDS on Contractor Payments?**

TDS on contractor payments has to be deducted by specified payers, such as government bodies, companies, firms, LLPs, co-operative societies, trusts, societies, universities, local authorities, and certain other notified or covered entities.

Individuals, HUFs, AOPs, and BOIs are required to deduct TDS only if their turnover or gross receipts exceeded **₹1 crore in business** or **₹50 lakh in profession** in the immediately preceding tax year. The contractor must be a **resident**. Payments to [**non-resident contractors**](https://busy.in/gst/the-difference-between-gst-and-income-tax-what-you-need-to-know/) are not covered under this contractor TDS provision and need to be checked separately under non-resident TDS rules.

## **What Counts as “Work” for Contractor TDS?**

The Income-tax Act, 2025 specifically covers payments to resident contractors for carrying out work, including supply of labour, under [Section 393(1)](https://www.incometaxindia.gov.in/w/section-393-5) \[Table: Sl. No. 6(i)\]. The definition of work is given under the interpretation section.

| Type of Work | Examples |
| --- | --- |
| Advertising work | Ad production, campaign execution, media-related execution work |
| Broadcasting or telecasting | Programme production, telecast-related work |
| Carriage of goods | Transport, logistics, goods carriage, courier-type contracts |
| Carriage of passengers | Contract buses, hired passenger transport, except railway carriage |
| Catering | Office catering, event catering, institutional food supply |
| Manufacturing or supply to specification | Goods made as per customer specification using material supplied by the customer or its associate |
| Supply of labour | Contract labour, manpower supply, labour deployment |

## **TDS Rates under Section 194C and Section 393(1)**

The 1% and 2% rates given in the table below continue under Section 393(1) from FY 2026-27. If the payee does not provide PAN, Section 206AA requires deduction at the [**higher applicable rate**](https://busy.in/gst/important-things-to-know-about-tax-collected-at-source-tcs/) , which can result in 20% TDS.

| Contractor Type | TDS Rate |
| --- | --- |
| Individual or HUF contractor | 1% |
| Company, firm, LLP, AOP, BOI, co-operative society, or other resident entity | 2% |
| Contractor does not furnish PAN | Higher rate under Section 206AA, generally 20% if higher |
| Eligible small goods carriage operator with PAN and declaration | Nil |

## **Threshold Limit for Contractor TDS**

Only once the single-payment limit or annual aggregate limit is crossed, should the TDS be deducted on the payment that triggers the threshold and on [**future covered payments**](https://busy.in/accounting/working-capital-management-techniques-importance-and-ratios/) . Otherwise, TDS is not required if both conditions are satisfied:

-   The amount paid or credited under a single contract does not exceed **₹30,000**
-   The total amount paid or credited to the same contractor during the financial year does not exceed **₹1,00,000**

### **Example**

| Month | Payment | Running Total | TDS Required? | Reason |
| --- | --- | --- | --- | --- |
| April | ₹25,000 | ₹25,000 | No | Below single and annual limits |
| June | ₹28,000 | ₹53,000 | No | Still below both limits |
| August | ₹35,000 | ₹88,000 | Yes | Single payment exceeds ₹30,000 |
| October | ₹20,000 | ₹1,08,000 | Yes | Annual total exceeds ₹1,00,000 |

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## **When TDS Is Not Required**

-   Threshold-based exemption applies where the payment remains within the limits explained above.
-   If an individual or HUF makes a payment to a contractor for purely personal purposes, TDS is not required. For example, hiring a contractor for renovation of a personal residence may fall outside the TDS requirement, provided it is not connected to [**business or profession**](https://busy.in/gst/gst-compliance-rating-an-introduction/) .
-   No TDS is required on payments to a goods carriage operator if the transporter owns **10 or fewer goods carriages**, furnishes a declaration, and provides PAN. The payer must keep the declaration and [**furnish the required particulars**](https://busy.in/accounting/gst-compliant-bookkeeping-best-practices/) as prescribed.
-   If the contractor has a valid lower- or nil-deduction certificate, the payer should deduct TDS at the rate specified in the certificate instead of the normal 1% or 2%.
-   For non-resident contractors, check the applicable non-resident TDS provisions separately instead of applying contractor TDS automatically.

## **How to Calculate TDS on Contractor Payments**

**Formula: TDS = Amount subject to TDS x applicable TDS rate**

Example 1 - Payment to an individual contractor

A company pays ₹75,000 to an individual contractor for repair work.

TDS rate = 1%
TDS = ₹75,000 x 1% = ₹750
Net payment = ₹74,250

Example 2 - Payment to an LLP contractor

A business pays ₹2,00,000 to an LLP for a contract service.

TDS rate = 2%
TDS = ₹2,00,000 x 2% = ₹4,000
Net payment = ₹1,96,000

Example 3 - Manufacturing contract with material value shown separately

Where the contract is for manufacturing or supplying a product as per customer specification and the customer or its associate supplies the material, TDS is calculated on the [**invoice value excluding**](https://busy.in/accounting/e-invoicing-using-accounting-software/) the separately shown material value. If the material value is not separately mentioned, TDS applies to the whole invoice value.

| Particulars | Amount |
| --- | --- |
| Total invoice value | ₹3,00,000 |
| Material value separately mentioned | ₹1,20,000 |
| Amount subject to TDS | ₹1,80,000 |
| TDS at 2% | ₹3,600 |

## **TDS Deposit, Return Filing, and Certificate Due Dates**

For payments governed by the Income-tax Act, 2025, from FY 2026-27, the [**corresponding forms**](https://busy.in/gst/gst-returns-types-and-due-dates/) are Form No. 140, earlier Form 26Q, and Form No. 131, earlier Form 16A. For deductions governed by the old Income-tax Act, 1961, the old form names continue to apply.

### **TDS deposit due date**

| Deductor Type | Due Date |
| --- | --- |
| Non-government deductor - April to February deductions | 7th of the following month |
| Non-government deductor - March deductions | 30 April |
| Government deductor using book adjustment | Same day |

### **TDS return filing - Form No. 140**

For FY 2026-27, [**non-salary resident TDS**](https://busy.in/accounting/gst-return-filing-for-traders/) is reported in [**Form No. 140**](https://www.incometaxindia.gov.in/documents/d/guest/fn-140) **, earlier Form No. 26Q**.

| Quarter | Period | Due Date |
| --- | --- | --- |
| Q1 | April to June | 31 July |
| Q2 | July to September | 31 October |
| Q3 | October to December | 31 January |
| Q4 | January to March | 31 May |

### **TDS certificate - Form No. 131**

The TDS certificate for non-salary resident payments is [**Form No. 131**](https://www.incometaxindia.gov.in/documents/d/guest/form-131-faqs) **, earlier Form No. 16A**.

| Quarter | Certificate Due Date |
| --- | --- |
| Q1 | 15 August |
| Q2 | 15 November |
| Q3 | 15 February |
| Q4 | 15 June |

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## **Consequences of Not Deducting or Depositing TDS**

-   If TDS is not deducted, interest applies at **1% per month or** [**part of a month**](https://busy.in/gst/due-dates-gst-payment/) . If TDS is deducted but not deposited, interest applies at **1.5% per month or part of a month**.
-   A [**penalty equal to the amount**](https://busy.in/gst/what-are-the-different-offences-and-penalties-recognized-under-gst/) of tax not deducted or not paid may apply. This makes non-compliance costlier than the actual TDS amount.
-   Where TDS was required but not deducted or not deposited within the prescribed timeline, **30% of the expenditure** may be disallowed while computing [**business income**](https://busy.in/accounting/tax-accounting/) . Under the new Act framework, this is covered under the corresponding disallowance provision replacing old Section 40(a)(ia).

## **Section 194C vs Professional or Technical Service TDS**

One [**common TDS mistake**](https://busy.in/gst/common-errors-filing-gst-returns/) is treating every service invoice as contractor work. A contract for the execution of work is different from a professional or technical service. The correct section should be determined by the work's actual nature, not just the invoice description.

For example, routine [**manpower supply**](https://busy.in/accounting/accounts-payable-explained-meaning-process-and-how-to-manage-it-better/) , housekeeping, transport, catering, fabrication, or maintenance work may fall under contractor TDS. But legal advice, CA services, engineering design, technical consultancy, or specialised professional services may fall under professional or technical service TDS.

| Point of Difference | Contractor TDS | Professional or Technical Service TDS |
| --- | --- | --- |
| Old Act reference | Section 194C | Section 194J |
| New Act reference | Section 393(1) \[Table: Sl. No. 6(i)\] | Section 393(1) \[Table: Sl. No. 6(iii)\] |
| Nature | Execution of work | Professional advice, technical service, consultancy, royalty, or specified director payments |
| Typical examples | Transport, catering, contract labour, fabrication, repair, maintenance work | CA fees, legal fees, engineering design, technical consultancy, royalty, director fees |
| Rate | 1% for individual/HUF contractor, 2% for others | 2% for specified technical/call centre/film royalty cases, 10% for other covered cases |
| Threshold | ₹30,000 per payment or ₹1,00,000 aggregate | ₹50,000 for most covered categories; no threshold for director remuneration, fees, or commission |
| Practical test | Is the main work execution-based? | Is the main work based on professional judgment, technical expertise, consultancy, or specialised knowledge? |

**Note:** Under the Income-tax Act, 2025, these are not separate sections like 194C and 194J. They are separate entries under Section 393(1): contractor payments under Sl. No. 6(i), and professional or technical service payments under Sl. No. 6(iii).

## **Lower or Nil TDS Certificate**

A contractor whose actual [**tax liability**](https://busy.in/accounting/taxation-in-accounting-basics-types-of-taxes-and-compliance-essentials/) is expected to be lower than the standard TDS amount can apply for a lower or nil deduction certificate. For the old Act, this was commonly linked with **Form 13 under Section 197**. For the Income-tax Act, 2025, the corresponding form is [**Form No. 128**](https://www.incometaxindia.gov.in/documents/d/guest/form-128-faqs) **, earlier Form No. 13**, for a certificate under **Section 395(1)**.

The application is filed electronically through the prescribed portal, and should be made before the relevant transaction or deduction event. Once the contractor provides a valid certificate, deduct TDS at the rate mentioned in that certificate and keep a copy for [**audit records**](https://busy.in/accounting/gst-audit-preparation-using-software/) .

## **Practical Compliance Checklist**

| Stage | What to Check |
| --- | --- |
| Before onboarding a contractor | Collect PAN, legal status, address, GST details if applicable, and contractor category |
| Before payment | Check single-payment and annual aggregate thresholds |
| For transport vendors | Collect PAN and vehicle ownership declaration before applying nil TDS |
| For FY 2026-27 filings | Use Section 393(1) \[Table: Sl. No. 6(i)\] and verify the applicable Form 140 code from the latest utility |
| Monthly | Deposit TDS by the 7th of the next month, except March deductions |
| Quarterly | File Form No. 140 and issue Form No. 131 on time |
| Before year-end | Reconcile contractor ledgers, TDS deducted, challans, Form 140, and certificates |

## **Conclusion**

Contractor TDS is simple only when the basics are controlled properly: identify whether the payee is a resident contractor, check whether the payment is for covered work, apply the correct 1% or 2% rate, monitor the ₹30,000 and ₹1,00,000 thresholds, and deposit TDS on time.

For FY 2026-27, the main change is the shift from old Section 194C to **Section 393(1)** under the Income-tax Act, 2025. The rates and thresholds remain unchanged, but return filing references and forms have changed. Businesses should update their TDS or [**accounting software**](https://busy.in/accounting-software/) , avoid unverified payment codes, and use the latest official Form 140 utility before filing.

## About the author

**Susheel Kumar**

I am a Chartered Accountant with over 20 years of experience and a finance content writer. I focus on educating people about finance and taxation. I have written many blog posts on finance, taxation, trading, and investment on the BUSY website. My goal is to increase financial understanding by making complex concepts easier to grasp and to support educational programs in India.

## Frequently asked questions

### Is Section 194C still relevant after 1 April 2026?

Yes, but mainly as the old Act reference. For FY 2026-27 onward, businesses should map contractor payments to Section 393(1) \[Table: Sl. No. 6(i)\] while reviewing past records or older payments under Section 194C.

### Which section reference should be used for contractor TDS from FY 2026-27?

For contractor payments credited or paid from 1 April 2026 onward, use Section 393(1) \[Table: Sl. No. 6(i)\] under the Income-tax Act, 2025. Avoid using an unverified numeric payment code unless it is confirmed from the latest official Form 140 or RPU utility.

### Is TDS required if each invoice is below ₹30,000 but the annual total crosses ₹1,00,000?

Yes. The annual aggregate threshold also matters. Once total payments to the same contractor cross ₹1,00,000 in the financial year, TDS should be deducted on the payment that causes the crossing and on later covered payments.

### What happens if the contractor gives PAN after payment?

If PAN was not available at the time of deduction, the higher rate under Section 206AA may apply. Collect PAN before processing the first payment to avoid excess deduction, disputes, and correction work.

### Does contractor TDS apply to payments made to sub-contractors?

Yes. Payments to sub-contractors are also covered. The person making the payment to the sub-contractor must check the threshold, rate, PAN, and deduction requirement independently.

### Can nil TDS be applied to all transporters?

No. Nil TDS is available only for eligible goods carriage operators who own 10 or fewer goods carriages and provide PAN plus the required declaration. Without proper documentation, applying nil TDS is risky.

### Is housekeeping or security manpower supply covered as contractor work?

In many cases, yes, because supply of labour is covered as contractor work. However, review the contract carefully. If the invoice is for specialised professional or technical advisory services, a different TDS category may apply.

### Which form is used for contractor TDS returns from FY 2026-27?

For resident non-salary TDS, including contractor payments, use Form No. 140, earlier Form 26Q. Businesses should confirm the correct section mapping in the latest filing utility before submitting the return.

### Which certificate should be issued to contractors?

Use Form No. 131, earlier Form 16A. It helps contractors match the deducted TDS with their tax credit records.

### Can a lower TDS certificate be used after TDS has already been deducted?

Practically, the certificate should be obtained and shared before deduction. The official Form 128 FAQ says the application should be made before the transaction or deduction event, and cannot be processed once the transaction involving TDS/TCS is completed.

## Related articles

- [Form 13 Is Now Form 128: Lower or Nil TDS Certificate Guide](https://busy.in/tds/form-13-is-now-form-128-lower-or-nil-tds-certificate-guide/)
- [Impact of Non-Compliance on TDS Certificate Issuance: 2025 Update](https://busy.in/tds/impact-of-non-compliance-on-tds-certificate-issuance-2025-update/)
- [Section 194R: TDS on Business Perks, Freebies, and Benefits](https://busy.in/tds/section-194r-tds-on-business-perks-freebies-and-benefits/)
- [Section 194M: TDS Rules for High-Value Payments by Individuals & HUFs](https://busy.in/tds/section-194m-tds-rules-for-high-value-payments-by-individuals--hufs/)
- [Form 12BA: Complete Guide to Salary Perquisites, Applicability, and Tax Implications](https://busy.in/tds/form-12ba-complete-guide-to-salary-perquisites-applicability-and-tax-implications/)
- [Section 194K: TDS on Mutual Fund Dividend and IDCW Income](https://busy.in/tds/section-194k-tds-on-mutual-fund-distributions-demystified/)
- [Income Tax Notice: Key Triggers in TDS Assessments and How Businesses Can Prepare](https://busy.in/tds/income-tax-notice-key-triggers-in-tds-assessments-and-how-businesses-can-prepare/)
- [Importance of TDS in Cash Flow Management for Businesses](https://busy.in/tds/importance-of-tds-in-cash-flow-management-for-businesses/)
- [Section 194DA: Complete Guide to TDS on Insurance Policy Maturity Payouts](https://busy.in/tds/section-194da-complete-guide-to-tds-on-insurance-policy-maturity-payouts/)
- [TDS on Software Purchase in India: A Complete Guide for Businesses](https://busy.in/tds/tds-on-software-purchase-in-india-a-complete-guide-for-businesses/)