Section 194C states that any person responsible for paying any sum to the resident contractor or sub-contractors for carrying out any work (including the supply of labor), in pursuance of a contract between the contractor and the following:
- The Central Government or any State Government
- Any local authority
- Any Statutory Corporation
- Any corporation established by or under a Central, State or Provisional Act
- Any company
- Any co-operative society
- Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both
- Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India
- Any trust
- Any university or deemed university
- Any firm
- Any Government of a foreign state or foreign enterprise or any association or body established outside India
- Any person who is an individual, HUF, AOP or BOI, who has total sales from the business or profession exceeds 1 crore or 50 lakhs during the previous Financial year respectivley.
Section 194C
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.
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.
Provisions for TDS Deductions Under Section 194C
Concerned entities can deduct TDS under Section 194C of Income Tax Act only under these following conditions –
- 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.
Other than these, if there is a situation where the contractor’s payment does not exceed Rs. 30000 at first but subsequently exceeds it, the payer has to deduct TDS accordingly.
Notably, TDS is deducted when payment is credited to the payee’s account, in cash or by the issuance of a cheque or any other mode (whichever is earlier).
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.
What is the TDS rate that needs to be deducted u/s 194C?
The rate of tax deduction u/s 194C is-
- – 1% (when payment is given to Individual/HUF) or
- – 2% (when given to others).
Nil for payment made to transporters
And the time of deduction is earlier of
- – The credit of income to the account of the payee (receiver) or
- – Actual payment (in cash, cheque, draft, or other modes)
| Section 194C TDS Rate Chart | ||||
|---|---|---|---|---|
| Sl. No | Nature of Payment | TDS Rate if PAN available | TDS Rates from 14.05.2020 to 31.03.2021 | TDS Rate if PAN not available |
| 1 | Payment / Credit to resident individual or HUF | 1% | 0.75% | 20% |
| 2 | Payment/Credit to any resident person other than individual / HUF | 2% | 1.5% | 20% |
| 3 | Payment/ credit to Transporters | NIL | NIL | 20% |
*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. Also, the contractor has to submit a declaration of the above along with PAN.
What is the limit for tax deduction u/s 194C?
TDS shall be deducted u/s 194C in the following cases:
| Particulars | Amount |
|---|---|
| Single payment of a contract | Exceeds Rs. 30,000 |
| Aggregate payment of a contract | Exceeds Rs. 1,00,000 |
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.
FAQs
Is it mandatory to have a written contract to attract the TDS under Section 194C?
No. It is not always mandatory to have a written contract to attract sec 194C. Even if agreed verbally, TDS can be deducted.
Should the TDS under 194C be deducted on the gross amount or net amount including GST?
TDS should be deducted from the invoice value excluding all the other taxes like GST.