Section 194C TDS on Contractor

Section 194C of Income Tax Act governs tax deduction at source (TDS) on payments made to contractors and sub-contractors. Businesses, firms, or individuals making specified payments for work contracts must deduct TDS on payment to contractors under Section 194C. This provision ensures tax compliance and prevents tax evasion by contractors.

Both contractors and sub-contractors fall under 194C TDS Section, which makes them liable for tax deductions on payments received. A contractor is any person or entity engaged in executing a contract for work, labour or services. A sub-contractor is a person hired by the main contractor to complete a portion of the work.

Also Read: All About TDS

Scope of Applicability: Who is Liable to Deduct TDS?

Entities required to deduct TDS under Section 194C of Income Tax Act are as follows:
Government agencies, local authorities, and corporations

• Companies, firms, and cooperative societies
• Individuals or HUFs are subject to tax audit under Section 44AB

If payments exceed the specified threshold, the payer must deduct TDS before making payments to the contractor.

Few Examples of Contracts Covered Under Section 194C of Income Tax

• Construction contracts (roads, buildings, bridges)
• Supply and manufacturing contracts (when materials are supplied by the payer)
• Transport contracts (excluding individuals owning ten or fewer goods carriages)
• Advertising contracts (marketing, promotions and hoardings)

Understanding these contracts helps businesses comply with Section 194C and avoid penalties.

Also Read: Section 194M of Income Tax Act

Section 194C of Income Tax Act applies to various contracts where payments are made for work, labour supply, or services. The key types include the following:

• Work Contracts: Payments for construction, repair, renovation or maintenance of buildings, roads or bridges fall under the 194C TDS Section.
• Supply of Labour: Businesses hiring labour through contractors for factory work, security services or maintenance must deduct TDS under Section 194C of Income Tax Act.
• Transport Contracts: Section 194C TDS on transport contractors applies when businesses hire transporters for goods movement. However, Section 194C TDS on transport contractors limit exempts transporters owning up to ten goods carriages if they provide their PAN.
• Advertising Contracts: Payments made to advertising agencies for print, television, radio or digital advertisements require TDS deduction under this section.

Exclusions Under Section 194C

Certain payments are excluded from the 194C TDS Section. Some of them are mentioned below:

• Personal Payments: Payments for personal purposes do not require TDS deduction.
• Manufacturing Contracts: If a contractor supplies a finished product using their own materials, TDS is not applicable.
• Small Transport Contractors with Valid PAN: Businesses often ask, "What is the limit of 194C TDS on contractors?" Transporters owning up to ten vehicles and providing PAN are exempt from TDS deduction.

Understanding the TDS on payment to contractors under Section 194C helps businesses comply with tax regulations and avoid penalties.

Read More: TDS Rates

TDS on payment to contractors under Section 194C varies based on the recipient’s category. The rates are as follows:

• Individual / HUF Contractors: TDS is deducted at 1% if the payment is made to an individual or a Hindu Undivided Family (HUF).
• Other Entities (Companies, Firms, etc.): Payments made to companies, partnerships, or any other entities attract a 2% TDS deduction.

Exemptions and Threshold Limits

TDS under Section 194C of Income Tax Act is deducted if the payment exceeds the following:

• ₹30,000 for a single contract
• ₹1,00,000 in aggregate during a financial year

If the payment is below these limits, no TDS is required. Businesses often ask, “What is the limitation of 194C?” The limitation is that TDS applies only to specified contract payments, excluding manufacturing contracts or personal transactions.

Impact of PAN Availability on TDS Deduction Rates

If the contractor fails to provide a PAN, TDS is deducted at 20% instead of the applicable 1% or 2% rates. PAN submission ensures a lower TDS deduction and smoother compliance.

Additional Considerations

• TDS on Internet Charges Under Section 194C: If a contract exists for providing internet services, TDS applies under 194C unless covered under 194J for technical services.

Understanding these rates helps businesses comply with TDS on payment to contractors under Section 194C and avoid penalties.

The following entities must deduct TDS on payment to contractors under Section 194C:

• Government departments and local authorities
• Companies and partnership firms
• Cooperative societies and trusts
• Individuals or HUFs are subject to tax audit under Section 44AB

When is TDS Deduction Not Required?

TDS under Section 194C of Income Tax Act is not required in the following cases:

• The payment to a contractor does not exceed ₹30,000 per contract or ₹1,00,000 annually.
• The contractor is a small transporter that owns up to 10 goods and carriages and provides a valid PAN.
• The payer is an individual or HUF not covered under tax audit.

Tax Deducted at Source (TDS) must be deposited to the government by the 7th of the month following the deduction. For March deductions, non-government deductors have until April 30th, while government deductors must deposit by April 7th. Quarterly TDS returns are due on July 31st, October 31st, January 31st, and May 31st for the respective quarters.

Filing TDS Returns Using Form 26Q

Form 26Q is designated for reporting TDS on payments other than salaries, such as interest, rent and professional fees. Deductors are required to file this form quarterly under Section 194C, with details of TDS deducted and deposited. The process involves:

• Data Collection: Compile information on all non-salary payments and corresponding TDS deductions for the quarter.
• Challan Information: Ensure TDS payments are made using Challan ITNS 281, with records of challan numbers, BSR codes and payment dates.
• Form Preparation: Utilise the Return Preparation Utility (RPU) from the Income Tax Department or compatible software to accurately input data.
• Validation: Use the File Validation Utility (FVU) to check the return for errors.
• Submission: Submit the validated Form 26Q through TIN-Facilitation Centres or the online portal by the due dates:

Q1 (April-June): July 31st

Q2 (July-September): October 31st

Q3 (October-December): January 31st

Q4 (January-March): May 31st

Issuing TDS Certificates (Form 16A) to Contractors

Form 16A certifies the TDS deducted on non-salary payments under Section 194C of Income Tax Act. Deductors must issue this certificate quarterly to contractors. The steps include:

• Access TRACES Portal: Log in using deductor credentials on the TRACES website.
• Download Form 16A: Go to 'Downloads', select 'Form 16A', and specify the financial year and quarter.
• Verification: Complete verification via Digital Signature Certificate (DSC) or by providing PAN and challan details.
• Get the Certificate: Download, sign (digitally or manually), and provide the certificate to the contractor within 15 days from the TDS return filing due date.

Correcting TDS Filing Errors

To rectify errors in TDS filings:

• Identify Errors: Review submitted TDS statements to detect discrepancies like incorrect PAN or challan details.
• Request Correction: Log in to the TRACES portal and submit a correction request under 'Defaults'.
• Make Corrections: Once approved, update the erroneous details.
• Validate and Submit: Validate the corrected return using the FVU and resubmit it.
• Acknowledge Receipt: Keep the acknowledgement for future reference.

Also Read: How to File TDS Return: Step-by-Step Process of TDS Filing

Understanding Section 194C TDS on contractors is necessary for businesses to maintain tax compliance and avoid penalties. Follow the correct deduction rates, threshold limits and filing procedures to ensure smooth transactions with contractors.

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Also Read: Section 80D: Deductions for Medical & Health Insurance.