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

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 are not covered under this contractor TDS provision and need to be checked separately under non-resident TDS rules.

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 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) [Table: Sl. No. 6(i)]. The definition of work is given under the interpretation section.

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 , which can result in 20% TDS.

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 . 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

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 . 
• 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 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 the separately shown material value. If the material value is not separately mentioned, TDS applies to the whole invoice value.

TDS Deposit, Return Filing, and Certificate Due Dates

For payments governed by the Income-tax Act, 2025, from FY 2026-27, the corresponding forms 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

TDS return filing - Form No. 140

For FY 2026-27, non-salary resident TDS is reported in Form No. 140 , earlier Form No. 26Q.

TDS certificate - Form No. 131

The TDS certificate for non-salary resident payments is Form No. 131 , earlier Form No. 16A. 

Consequences of Not Deducting or Depositing TDS

• If TDS is not deducted, interest applies at 1% per month or part of a month . 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 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 . 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 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 , 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.

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 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 , 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 .

Practical Compliance Checklist

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 , avoid unverified payment codes, and use the latest official Form 140 utility before filing.