Section 194C - ClearTDS Guide on TDS on Payment to Contractor
Updated on: Feb 1st, 2023 - 5:50:43 AM
14 min read
Persons to whom payments of any amount in relation to contractors or sub-contractors are made.
What is Section 194C?
Section 194C states that any person responsible for paying any sum to the resident contractor 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 corporation established by or under a Central, State or Provisional Act
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 university or deemed university
What is the meaning of work for the purpose of Section 194C?
The expression, “work” in this section would include-
Broadcasting and telecasting including production of programs for such broadcasting or telecasting
Carriage of goods and passengers by any mode of transportation, other than railways
Manufacturing or supplying of a product according to the requirement or specification of a customer by using the materials purchased from such customer or its associate as defined in section 40A(2), But does not include manufacturing or supplying of a product according to the requirements or specifications of a customer by using the materials purchased from a person, other than such a customer.
What is a Sub-Contractor as per Section 194C?
A “sub-contractor” would mean any person:
Who enters into a contract with the contractor for carrying out, or
For the supply of labor for carrying out the whole or part of the work undertaken by the contractor under a contract with any of the authorities or
For the supply of, whether wholly or partly, any labor which the contractor has undertaken to supply in terms of his contract with any of the authorities mentioned under this section.
What is TDS to Sub-Contractor?
As per the provisions of Income Tax Act, any person (being a contractor and not being an individual or a Hindu Undivided Family):
responsible for paying any sum to any resident
in pursuance of a contract with the sub-contractor for carrying out, or for the supply of labor for carrying out, the whole or any part of the work undertaken by the contractor or for supplying whether wholly or partly any labor which the contractor has undertaken to supply shall,
at the time of credit of such sum to the account of the sub-contractor or
at the time of payment thereof in cash or
by the issue of a cheque or draft or by any other mode, whichever is earlier
deduct the amount equal to 1 % of the sum as income-tax on income comprised therein. The rate is 0.75% for transactions from 14 May 2020 until 31 March 2021.
Get an expert at affordable price
For ITR, GST returns, Company Registration, Trademark Registration, GST Registration
Where is the Payment made to Sub-contractors, what Conditions must be Satisfied?
Payment is made to a sub-contractor who is resident within the meaning of Section 6 of the Income Tax Act, 1961
Payment is made by a resident contractor, not being an individual or a HUF
Payment is made to carry out any work, including the supply of labor
The amount of consideration of the contract in respect to which payment is made should not be less than Rs. 30,000
The sum should be credited or paid by the contractor in respect of a contract undertaken by him with the specified bodies
When does TDS under Section 194C need to be deducted?
The person responsible for making payment to resident contractor/sub-contractor should deduct TDS,
either at the time of crediting such sum to the account to the payee or
at the time of payment thereof in cash or
by an issue of a cheque or by any other mode, whichever is earlier. Where any sum is credited to any account, whether called “Suspense account” or by any other name, in the books of account of the person liable to pay such amount, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. Thus, the tax has to be deducted even if the amount payable to the resident contractor/subcontractor is transferred to the suspense account by the payer in his books.
What is the rate of TDS?
Nature of Payment
TDS Rate if PAN available
TDS Rates from 14.05.2020 to 31.03.2021
TDS Rate if PAN not available
Payment / Credit to resident individual or HUF
Payment/Credit to any resident person other than individual / HUF
Payment/ credit to Transporters
Note:- No Surcharge, Education Cess, and SHEC shall be added. Hence, TDS shall be deductible at basic rates.
What are the Exceptions to TDS on Payment to Contractor?
Deduction of TDS in case of composite contract
Where materials are supplied by the government, the question is whether deduction will be made with reference to gross payment to the contractor or the net payment, i.e., gross payment minus deductions, if any,
On account of materials supplied by the government, will have to be decided in the light of the terms of the particular contract and the conduct of parties thereto.
Where the contractor has undertaken to construct a building or a dam, and the government or other specified person has undertaken to supply all or any of the materials necessary for the work at the stipulated prices, the deduction will be related to the gross payment without excluding any adjustments on account of the cost of materials.
Where the contractor has undertaken only to provide the labour for the work, the ownership of the materials supplied remaining at all times with the government or another specified person, the sum payable to the contractor in respect of the contract will only be the amount paid for such labour or services and will, thus, not include the price of the materials supplied by the government or other specified persons. Thus, the rate of TDS from payments made by the government or other specified persons to any contractor will be 2% or 1% of the gross payment or, as the case may be, the net payment, depending on the terms of the contract. The rate is 1.5% or 0.75% for transactions from 14 May 2020 until 31 March 2021.
Deduction, when the party supplies materials to the contractor
When materials are supplied no deduction is possible. Consequently, no TDS is required to be made. However, when payment is made either in cash or in kind to contractor/sub-contractor tax is required to be deducted.
Under what circumstances TDS u/s 194C is not deductible?
No tax is required to be deducted in the following cases:
Where the sum paid or credited in pursuance of any contract does not exceed Rs. 30,000, or
Where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year does not exceed Rs. 1,00,000 the person responsible for paying such sums will not deduct TDS under this section
Individual or HUF not to deduct tax if the payment or amount credited to the contractor is for personal use
No individual or HUF shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for the personal purpose of such individual or any member of HUF
No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his PAN, to the person paying or crediting such amount
Time Limit within which Tax is to be Deposited
Where the payment is made by or on behalf of the Government – On the same day.
Where the payment is made in any other case than the government
If the amount is credited in the month of March – On or before April 30th
In other months – Within 7 days from the end of the month in which the deduction is made.
Note: The payer is the person responsible for TDS.
Issue of TDS certificate
In case of payments other than salary, TDS certificates are to be issued on a quarterly basis in Form No.16A. As per rule 31, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form No. 16A. The certificate is to be issued by the following dates:
Due date for Non-Government deductor
Due date for Government deductor
April to June
July to September
October to December
January to March
As per CBDT Circular No. 1/2012, dated 9-4-2012, it is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate from the TIN website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1-4-2012. The certificate so issued can be authenticated either by using the digital signature or manual signature.
TDS at a Lower Rate
According to Section 194C where the AO is satisfied that the total income of contractor or sub-contractor justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the AO shall, on application made by the contractor or sub-contractor in this behalf give to him such certificate as may be appropriate. The contractor or sub-contractor can then furnish the lower rate or nil TDS certificate to the deductor.
Frequently Asked Questions
What is Section 194C?
Section 194C governs the TDS provision applicable to any person making payment to a resident contractor for carrying out work between a resident contractor and ‘specified person’ ( central or state government, local authority, company, etc)
When is TDS applicable to contractors?
If the payment made to the contractor is not more than Rs.30,000, no TDS is required to be deducted on payment to the contractor. However, if the total of all such payments made or to be made during a financial year exceeds Rs.1,00,000; TDS shall be deducted under Section 194C
What is the rate of TDS under Section 194C- TDS on contractors?
The payer is required to deduct TDS at 1% in case the payment is made to an individual or HUF, and 2% if the payment is made to any other person.
At what time is TDS deducted under Section 194C?
TDS under Section 194C is required to be deducted within earlier of following dates – – at the time of credit of the sum to Contractor – at the time of payment in cash/cheque/draft or any other mode
Is it mandatory to have a written contract to attract TDS u/s 194C?
No, this section does not require a written contract. Even if agreement is verbal, TDS should be deducted.
File TDS return with ClearTax
File your client’s or business’ TDS returns and generate Form-16s online
Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.
Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.
CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.
Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.
Cleartax is a product by Defmacro Software Pvt. Ltd.