Section 194C - Guide on TDS on Payment to Contractor

Section 194C of the Income Tax Act governs the withholding of taxes on payments made to contractors or subcontractors. This article comprehensively covers the provisions and implications of Section 194C.

What is Section 194C?

As per section 194C, TDS needs to be deducted for amount to be paid for a contract. The contract is usually entered between the following kinds of entities.

• 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.

What is the Meaning of ‘Work’ Under Section 194C?

The expression, “work” in this section would include-

• Advertising
• Broadcasting and telecasting
• Transportation of goods and passengers, other than railways
• Catering
• Creating a product as per the specifications of the customer, using materials provided by customer (Similar to Job work).

Note : If the products are produced according to customer's specifications, but the customer does not provide the materials for that product, then it cannot be categorized as a contract.

Supply of pure-labor contracts for any of the purpose above are also covered under the ambit of this section.

Are Sub-Contractors also Covered Under Section 194C?

• A contractor can allocate the work to be carried out by him by entering into a sub contract with another person.
• Under this section, sub contracts are also covered. Therefore, persons who are liable to pay amount under a sub contract should also deduct TDS u/s 194C.

Conditions to be Satisfied

• Payment is made to a resident contractor or sub-contractor.
• Payment is made by a specified person as mentioned above.
• 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 be atleast 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

whichever is earlier. 

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.

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, and
• Where the aggregate of the amounts of sums paid or to be 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 deduction shall be made for a contractor who is involved in plying, hiring and leasing of goods carriages who is eligible for presumptive taxation under section 44AE.

Threshold Limit for Deduction of Tax at Source Under Section 194C 

• No deduction will be required to be made if the payment for the contract does not exceed Rs.30,000. 
• TDS would be deducted if the payments for the contractors exceeds Rs.30,000 in a single payment or 1,00,000 in the aggregate during the financial year.
• If a single payment to a contractor does not exceed Rs.30,000, TDS will also be deducted under Sec 194C, in which the total payment credited or paid to the contractor during the financial year exceeds Rs.1,00,000.

What is the Rate of TDS?

TDS needs to be deducted at 1% for payments made to individual and HUF contractors. For entities other than individuals and HUF, 2% payment is deducted. A table describing the rate of TDS to be deducted under section 194C is given below. 

Note:- No Surcharge, Education Cess, and SHEC shall be added. Hence, TDS shall be deductible at basic rates.

TDS at a Lower Rate

• Where the AO is satisfied that the total income of contractor or sub-contractor justifies the TDS deduction at any lower rate or no deduction at all, the AO shall give lower deduction certificate as may be appropriate. 
• The contractor or sub-contractor can then furnish the lower rate or nil TDS certificate to the deductor based on which the payer will deduct TDS for the particular contractor.

Time Limit Within for Deposit of Tax

• 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 deducting 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. The certificate is to be issued by the following dates:

It is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system and downloading the same from the TIN website with a unique TDS certificate number. The certificate so issued can be authenticated either by using the digital signature or manual signature.

TDS on Composite Contract

Lets understand TDS deduction under a composite contract.

• Where materials are part of the supply, the question is whether deduction will be made for total payment to the contractor or the net payment, i.e., gross payment minus deductions, if any.
• TDS will have to be decided in the light of the terms of the particular contract and the conduct of parties thereto.
• For example, where the contractor has undertaken to construct a building or a dam, contractor 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 total payment without reducing cost of materials. 
• Where the contractor has undertaken only to provide the labor for the work, without providing for any materials for the contract, TDS deducted would be only on the total amount minus materials given. 

It is to be noted that the material value should be separately mentioned on the invoice. If the value of the material is not mentioned separately in the invoice, then the TDS shall be deducted from the whole of the invoice.

Related Articles 

• Section 194M – TDS on payment to resident contractors and professionals
• TDS on Professional Fees
• TDS/TCS on non filing of Income Tax Return
• TDS on Rent
• TDS Rate Chart
• How to file TDS on the Sale of Property