Section 194C of Income Tax Act, 1961 deals with the TDS that has to be deducted from specific payments made to resident contractors and sub-contractors. Generally, individuals paying the contractors or sub-contractors are entrusted with the responsibilities of deducting TDS.
As a result, both parties involved, i.e. a contractor and a payer (party or person) need to be aware of this Section of ITA to avoid the implications of not deducting the same. Also, contractors should find out about Nil or lower TDS provisions to protect their earnings from eroding.
What is Section 194C?
Section 194C of the Income Tax Act mandates that any person making payments to resident contractors or subcontractors for performing work, including labour supply, must deduct TDS. This requirement applies when the contract is with entities such as:
The central government
The state government
Statutory corporations
Any local authority
Cooperative societies
Societies registered under the Societies Registration Act, 1980, or similar laws in India
Corporations established under the central act, the state act, or provincial act
Companies
Trusts
Foreign governments, enterprises, or associations outside India
Authorities constituted under Indian law for housing needs, urban planning, or development
Universities or deemed universities
Firms
Individuals, HUFs, AOPs, or BOIs with total sales exceeding Rs. 1 crore or Rs. 50 lakh in the previous financial year
Who is a ‘Person’ Under Section 194C?
Under Section 194C, a ‘person’ can be described as an individual who enters into a contract to get work done against payment. In general, a person can denote any of these following –
- A company
- Trusts
- Firms
- A university
- A local authorised body
- The Central Government or the State Government
- A corporation
- A co-operative society
- A registered society
Other than these, an authority that has been incorporated to fulfil household requirements can be termed as a person under Section 194C of Income Tax Act.
What Constitutes as Work Under Section 194C?
As per Section 194C, ‘work’ may constitute any of these following –
- Advertising
- Broadcasting and telecasting
- Catering
- Carriage of passengers or goods by any transportation mode besides railways.
- Supplying or manufacturing goods as per the specifications or requirements shared by the customer. It includes goods that have been manufactured using the materials purchased from customers or their associates. However, it does not include supply or manufacturing of goods made using materials that are not purchased from the customer or its associates.
Also, Section 194C TDS elaborates that any person paying a resident individual to carry out a specific work as per an agreement in exchange of payment is liable to deduct TDS.
The Section also defines the contractor and states that it is an individual who agrees to become a part of a contract to carry out work or supply workforce. On the other hand, a sub-contractor is an individual who has decided to enter into a contract to either carry out a part or entire work. Also, a subcontractor may enter into a contract to supply the workforce to a given project.
What is the meaning of contractor and subcontractor?
Contractor means any person who enters into a contract with the central/state government; corporation; company; local authority, or a cooperative society to conduct any form of work (including the supply of manpower).
Subcontractor means a person who engages in a contractual agreement with the contractor to perform, or provide labor for the execution of all or a portion of the work undertaken by the contractor under a contract with any of the authorities, or to supply labor, in whole or in part, as specified in the contractor’s agreement with any of the authorities mentioned in this section.
- Conducting either all or part of the work, which the contractor has agreed to complete
- Supplying manpower for all or part of the work taken by the contractor.
Provisions for TDS Deductions Under Section 194C
- The concerned contractor should be a resident Indian as per Section 6 of the Income Tax Act’s guidelines.
- Payments made to contractors must be carried out by individuals mentioned in the provision of Sec 194C.
- Payment made should be to conduct any work that includes the supply of workforce.
- Concerned entities must pay as per the clauses mentioned in their contract that is agreeable to both the contractor and the payer. Notably, such a contract can either be in a written or oral format.
- At any time, the amount of payment between the two parties should not exceed Rs. 30,000.
- When the advance payment made to a contractor is more than Rs. 30000 the payer has to make sure that TDS is deducted from the paid amount.
- If at any time the payment made by the payer to the contractor exceeds Rs. 75000 in a fiscal year, the payer must ensure that TDS is deducted from the payment.
Deposit of TDS under Section 194C – Time Limit
This table below highlights the time limit when TDS has to be deposited –
| Category of payer | Date of deposit |
| The government or an entity who pays on behalf of the government. | The same day of payment. |
| When the payment is forwarded by an entity other than the government or on its behalf –
|
|
What is TDS on Contractor Rate Under Section 194C?
This table highlights –
| Particular | 194C TDS Rate |
| Payment to entities other than a HUF or individual | 2% |
| Payment to HUF or individuals | 1% |
Notably, if the contractor fails to furnish PAN, the deductor has to deduct TDS at the rate of 20%. Also, TDS will not be deducted on credits or payments made to transporters.
When are the exemptions to TDS payments under Section 194C?
TDS under Section 194C is not required to be deducted in the following cases:
- The amount of payment made to the contractor in a single contract does not exceed Rs.30,000.If the aggregate amount of such contracts in a financial year exceeds Rs.1,00,000, TDS will be deducted.
- When any amount is paid to the contractor by an individual or HUF for carrying out work in the nature of personal use.
- When payment is made to a goods transport agency (in the business of plying, hiring, or leasing goods) that owns 10 or fewer carriages at any time during the previous year, the contractor must also submit a declaration of the above along with PAN.
- If payment is made to a non-resident contractor or sub-contractor.
Deduction in case of composite contract –
- If materials are supplied by the government
- If the contractor is engaged in constructing a building or a dam
- If the contractor has entered into a contract to provide labor only.
Documents Required for the Deduction of TDS Under Section 194C
Essential Documents:
- Contractor’s PAN Card: This is absolutely crucial. You need to verify the contractor’s PAN details before making any payment. If the PAN is unavailable, the TDS rate jumps to 20%, so ensuring you have this information is vital.
- Contract or Agreement (Optional): While a written contract isn’t strictly mandatory, having one simplifies things. It clearly outlines the scope of work, payment terms, and any other relevant details. Even a verbal agreement can trigger TDS liability, but documentation makes it easier to manage the process.
- Invoice: This details the amount paid to the contractor for the specific work done. It should be clear, accurate, and issued by the contractor.
- Challan: This is the form used to deposit the deducted TDS amount to the government treasury. While not strictly required for deduction itself, it’s an important part of complying with your tax obligations.
- TDS Certificate: Once you deduct TDS, you’ll need to issue a TDS certificate (Form 16A) to the contractor. This document details the amount paid, TDS deducted, and other relevant information.
How to calculate TDS under section 194C?
- n cases involving a contract with a composite supply of goods and services, consider the invoice value excluding the cost of goods. Ensure that the invoice clearly specifies the value of goods. If the invoice lacks this information, TDS should be deducted from the total invoice value.
- Commission and brokerage on fixed deposits are not covered by section 194C.
- Payments to clearing and forwarding agents for the carriage of goods fall under the purview of section 194C.
- Payments to airlines or travel agents for ticket purchases are not included, unless the bus, aircraft, or other mode of travel is chartered, in which case section 194C applies.
- Payments to electricians or contractors for electrician services are covered by section 194C.
TDS is calculated on invoice value. Let’s understand with an example :
Example: A Ltd makes the below payments to Mr. A, a contractor during FY 2022-23
- Rs. 25,000 on 01-06-2022
- Rs. 30,000 on 05-08-2022
- Rs. 25,000 on 12-08-2022
- Rs. 28,000 on 20-12-2022
In the above, a single payment does not exceed Rs. 30,000 so no TDS is required to be deducted at that time but while making payment on 20-12-2022, aggregate payment in a financial year exceeds Rs. 1,00,000/- hence TDS will be deducted.
| Date | Amount | TDS Applicability |
|---|---|---|
| 01-06-2022 | 25,000 | No TDS (Single or aggregate payment not exceeding the threshold) |
| 05-08-2022 | 30,000 | No TDS (Single or aggregate payment not exceeding threshold) |
| 12-08-2022 | 25,000 | No TDS (Single or aggregate payment not exceeding the threshold) |
| 20-12-2022 | 28,000 | TDS is required to be deducted since aggregate payment becomes Rs. 1,08,000/- which is more than Rs. 1 lakh |
194C TDS calculation
| Particulars | Amount |
|---|---|
| Total payment | 1,08,000 |
| TDS @ 1% | 1080 |
| Net payment on 20-12-2022 (28,000-1,080) | 26,920 |
FAQs
When is TDS applicable to the contractors?
There is no need to withhold TDS from a contractor payment if it is less than or equal to Rs.30,000. TDS must be deducted under Section 194C if the total of all such payments made or to be made within a financial year exceeds Rs. 1,00,000.
What is Section 194C?
The TDS provision is governed by Section 194C and is applied to anyone paying a resident contractor for services rendered to a “specified person.”