Section 194C of Income Tax Act, 1961, is a critical provision governing the deduction of Tax Deducted at Source (TDS) on payments made to contractors and sub-contractors for carrying out any work, including the supply of labor. This section ensures that tax is collected at the source to prevent tax evasion and facilitate timely tax collection. Below is a comprehensive analysis, covering all aspects relevant to its implementation and compliance as of 2025.
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What is Section 194C of Income Tax Act, 1961?
Section 194C ensures tax is collected at source on payments to contractors, helping prevent tax evasion. It’s important for businesses and contractors to understand to avoid penalties. This section applies to payments by entities like governments, companies, and firms to resident contractors for work, but not for personal use by individuals or HUFs below certain turnover thresholds.
Purpose of Section 194C of Income Tax Act
The primary purpose of Section 194C is to ensure that tax is deducted at the time of payment to contractors and sub-contractors, thereby ensuring a steady flow of tax revenue to the government. It is particularly significant for entities making large payments under contracts, as it mandates compliance with tax laws to avoid penalties and interest. This provision holds immense importance for companies, individuals and contractors, ensuring effective tax compliance and avoiding legal repercussions.
Applicability
Section 194C of Income Tax Act applies to payments made by "specified persons" to resident contractors or sub-contractors. The specified persons include:
Central or State Government
Local authorities
Statutory corporations established under Central, State, or Provincial Acts
Companies
Cooperative societies
Trusts
Universities established or incorporated by or under a Central, State, or Provincial Act
Registered societies under the Societies Registration Act, 1860, or corresponding laws
Firms
Associations of Persons (AOPs), Bodies of Individuals (BOIs), or Hindu Undivided Families (HUFs) liable for audit under Section 44AB, i.e., with turnover exceeding ₹1 crore for business or ₹50 lakh for profession in the preceding financial year.
Individuals and HUFs are exempt from deducting TDS under this section if their total sales, gross receipts, or turnover from business or profession does not exceed the aforementioned thresholds, provided the payment is for personal use and not in the course of business.
Definition of Work and Contract
The term "work" under Section 194C(7)(iv) includes a broad range of activities, such as:
Advertising
Broadcasting or telecasting, including production of programs for broadcasting or telecasting
Carriage of goods or passengers by any mode other than railways
Catering
Manufacturing or supplying a product according to the customer's specifications using raw materials purchased from the customer (excludes contracts where the contractor uses their own materials).
A contractor is defined as a person who has a contract with a specified entity to carry out any work, including supply of labor. A sub-contractor is an entity or person who contracts with the contractor to perform part or all of the work or supply labor under the contractor’s agreement. Notably, Section 194C does not apply to contracts for the sale of goods unless work is involved, distinguishing it from mere supply contracts.
Conditions for TDS Deduction
TDS under Section 194C must be deducted if the following conditions are met:
The payment is made to a resident contractor or sub-contractor, as defined under Section 6 of the Income Tax Act.
The payment is for carrying out any work, including supply of labor.
The amount of consideration in the contract meets either of the following thresholds:
Single payment or credit exceeds ₹30,000, or
The aggregate of such payments or credits in a financial year exceeds ₹1,00,000.
Exemptions and Special Cases
Certain payments are exempt from TDS deduction under Section 194C, including:
Single payments or credits that do not exceed ₹30,000.
Aggregate payments or credits in a financial year that do not exceed ₹1,00,000.
Payments made by individuals or HUFs for personal expenses, not in the course of business or profession.
Payments to contractors for plying, hiring, or leasing goods carriages, provided the contractor owns 10 or fewer goods carriages and furnishes a declaration to that effect along with their Permanent Account Number (PAN).
Special considerations include:
For government contracts, TDS is typically deducted at 2%.
No TDS certificate is required if the contractor is a resident and the contract value does not exceed ₹1 crore.
Lower TDS rates can be obtained by contractors or sub-contractors by applying to the Assessing Officer (AO) for a certificate, which must be furnished to the deductor for benefits.
Read Section 194 of Income Tax Act, 1961.
TDS Rates and Calculation
The rates of TDS under Section 194C, as applicable in 2025, are as follows:
Nature of Payment | TDS Rate (PAN Available) | TDS Rate (PAN Not Available) |
Payment to Individual or HUF | 1% | 20% |
Payment to Any Other Person | 2% | 20% |
Payment to Transporters | NIL (if conditions met) | 20% |
Note: The rates of 0.75% for individuals/HUFs and 1.5% for others, applicable from May 14, 2020, to March 31, 2021, are no longer in effect as of 2025. No surcharge, education cess, or secondary and higher education cess is added to these rates.
TDS is calculated on the invoice value, excluding material or goods costs if separately mentioned; otherwise, it is calculated on the total amount. For composite contracts, TDS is deducted on the gross amount if materials are supplied, or on the labor component only if ownership of materials remains with the payer.
Timing and Procedure for TDS Deduction
TDS must be deducted at the earlier of:
Crediting the amount to the contractor’s account, or
Making the payment in cash, by cheque, draft, or any other mode.
Crediting to a "Suspense Account" or similar is also considered crediting to the contractor’s account, triggering TDS if payable to a resident contractor or sub-contractor.
The deductor must report the details in Form 16A (TDS certificate) and Form 26Q (quarterly TDS statement) as per Rules 31 and 31A of the Income Tax Rules, 1962. The due dates for filing TDS returns and issuing certificates are as follows:
Quarter | Due Date for TDS Return (Form 26Q) | Due Date for TDS Certificate (Form 16A) |
April - June (Q1) | 31st July | 15th August |
July - September (Q2) | 31st October | 15th November |
October - December (Q3) | 31st January | 15th February |
January - March (Q4) | 30th April | 15th June |
TDS Deposit
TDS must be deposited through a challan at the Reserve Bank of India (RBI), State Bank of India (SBI), or other authorized public sector banks within the prescribed period:
For government entities: Same day of payment.
For non-government entities:
Payments made in March: By 30th April.
Other months: Within 7 days from the end of the month.
Documents Required
To comply with Section 194C, the following documents are typically required:
Contractor’s PAN card (mandatory; failure to provide results in 20% TDS).
Contract or agreement (not mandatory; verbal contracts also attract TDS).
Invoice, challan (evidence of TDS deposit), and TDS certificate (Form 16A).
Consequences of Non-Compliance
Failure to comply with Section 194C can lead to significant penalties and interest:
Disallowance: Under Section 40(a)(ia), expenses are disallowed if TDS is not deducted or paid by the due date (Section 139(1)).
Interest: Under Section 201(1A):
1% per month if TDS is not deducted.
1.5% per month if TDS is deducted but not deposited, from the due date until actual deduction or deposit.
Penalty: Under Section 234E, a penalty of ₹200 per day is levied for late filing of Form 26Q, with the maximum not exceeding the total TDS amount due. Additionally, penalties ranging from ₹10,000 to ₹1,00,000 may be imposed for non-deduction or late deposit.
Summary
Section 194C of Income Tax Act, 1961 ensures tax compliance in contractual payments, with clear thresholds, rates and procedures. Entities must ensure timely deduction, deposit, and reporting to avoid legal and financial repercussions. Contractors and sub-contractors should provide necessary documents, such as PAN, to benefit from standard TDS rates and avoid higher deductions.
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Section 194C of Income Tax Act, 1961: FAQs
Q1. What is the TDS limit for 194C?
TDS applies if a single payment exceeds ₹30,000 or the annual aggregate exceeds ₹1,00,000.
Q2. How to calculate TDS on 194C with an example?
For an individual contractor, payment of ₹2,00,000 at 1% TDS:
TDS = ₹2,00,000 × 1% = ₹2,000.
Net payable = ₹1,98,000.
Q3. What is the difference between 194C and 194J?
Section 194C applies to payments for contractual work (e.g., labor, catering). Section 194J applies to professional/technical services (e.g., consultancy, legal services).
Q4. What is the limit of a 194C transporter?
No TDS on payments to transporters owning 10 or fewer goods carriages, provided they submit PAN and a declaration.
Q5. What is TDS formula?
TDS = Payment Amount × Applicable Rate (1% for individuals/HUFs, 2% for others; 20% if no PAN). Excludes GST/materials if separately invoiced.
