Section 194C of the Income Tax Act

  • Author :
  • TATA AIG Team
  • Published on :
  • 01/01/2024

The tax deducted at source (TDS) is specified on income or payment such as salary, rent, professional fees and more. Businesses, entities or individuals are supposed to declare TDS under specified categories as per the income tax rules. These categories are specified in various sections of the Income Tax Act.

Section 194C of the Income Tax Act talks about TDS from payment for work done by the resident contractor and subcontractor.

However, there are various intricacies attached to the TDS deduction rules for contractors and subcontractors under Section 194C.

Here, we will delve deeper into section 194c of the Income Tax Act.

What is Section 194C of the Income Tax Act?

Section 194C of ITA is applicable to all businesses, organisations and individuals that are paying contractors and subcontractors. It means a "person" who is making payment for "work" to the concerned payee, which is “contractors or subcontractors“, is responsible for deducting TDS.

Understanding of Person Under Section 194C

As per section 194C, the person can be an entity, business or individual who has a signed contract with the contractor for specified work in exchange for payment.

The following entities can be a person under section 194C:

Local authority

Company

Corporation

Trust

University

Central government

State government

Firm

Cooperative society

Registered society

Understanding of Work Under Section 194C

As per the Section 194C, the work is defined as the activity performed by the contractor in exchange for money. These works are broadly classified into various categories such as:

Advertising

Catering

Broadcasting and Telecasting

Telecommunication

Carriage of passengers and goods

Contract manufacturing

Understanding of Contractor & Subcontractor Under Section 194C

The contractor is the person who enters into a contract with a person who can be the state government, central government and more to carry out the work in exchange for payment. A subcontractor is a person who enters into a contract with the contractor to carry out the whole or partial work or supply the workforce to complete the work in exchange for payment.

Provisions for TDS Deductions Under Section 194C

Section 194C of the Income Tax Act is applicable to work and labour contracts. It doesn't focus on the contract that is for the sale or supply of goods. Below are the following provisions for TDS under section 194c.

As per the guidelines of Section 6 of ITA, the contractor should be a resident of India.

The payment transferred to the contractor must be from a person specified in Section 194C clause.

The payment transferred or made is solely for the purpose of conducting work or supplying workforce for conducting the work.

The payment made for work must be in accordance with the stipulation of a signed contract that is signed between the contractor and the payer. However, the contract in question can be in written or oral format.

The payment amount should not exceed ₹30,000 at any point between the two parties.

If, in any case, the total amount of the payment made to the contractor by the person exceeds ₹75000 in a financial year. Then, the payer or person's duty is to make sure that the TDS should be carried out from the total payment.

If, in any case, the total amount of advance payment made to the contractor by the payer exceeds the amount of ₹30000. Then, the payer has to ensure that TDS should be deducted from the paid amount.

If, at first, the total payment is below the ₹30000 amount but later it exceeds the amount, then the payer must ensure that the TDS should be deducted from the payment with respect to the previous payment as well.

Section 194C TDS Rates Limit

Below is the tabular representation of the Section 194C TDS rate.

Nature Of Payment TDS Rate -If PAN Card Available TDS Rate -If PAN Card Not Available TDS Rates from 15.5.2020 to 31.3.2021
Payment or Credit to HUF or Resident Individual 0.01 0.2 0.0075
Payment or Credit to Resident Person Other Than HUF or individual 0.02 0.2 0.015
Payment or Credit to Transporters Nil 0.2 Nil

Time Limit For TDS Deposits As Per Section 194C

There is a due date for TDS deposits for taxpayers, which is mentioned below:

Payment Type Due Date
Payment made by the government or entity on behalf of the government. The same day of the payment.
When the payment is made by an entity other than the government in March On or before 30th April
When the payment is made by an entity other than the government in months other than March. Within 7 days prior to the completion of the month in which TDS is deducted.

Issuance of TDS Certificate Under Section 194C

As per rule 31 of the income tax, businesses or entities who have to deduct TDS on payments or credits other than salary have to issue a TDS certificate quarterly in form 16A. Below is the table to understand when to issue the TDS certificate as per the category.

Quarterly Period Date of Issuance for Non -Non-Government Payers Date of Issuance for Government Payers
April to June 45503 45519
July to September 45595 45611
October to December 45321 45337
January to March 45442 45442

Exception Under Section 194C of the Income Tax Act

There are some exceptions to TDS under Section 194C while making payments to contractors, which are:

In the case of composite contract

In case the party supplies the material to the contractor.

TDS Deduction In case of composite contract

In the case of the composite, the TDS deduction depends on the circumstances such as:

If the government supplies the material for work, the TDS deduction, in that case, will be based on the terms of the contract and the conduct of the parties involved.

If the government or specified entity has agreed to provide material for the construction of a dam or building and the contractor has undertaken work to construct it. The payer will deduct TDS on gross payments without excluding the cost of materials.

Suppose the government or specified entity supplies material for work, and the contractor agrees to offer labour for the work. In that case, the amount payable to the contractor depends on the labour provided and does not cover the material cost.

TDS Deduction In case the party supplies the material to the contractor

In this case, when the materials are supplied to the contractor, then no TDS is applied. However, for the payment made in cash or kind to the contractor or subcontractor, then tax deduction is applicable.

When Can TDS Not Deduct Under Section 194C?

There are certain cases when TDS on labour contractor payment or any other payment is not deducted. These cases are:

When the amount of payment does not exceed the ₹30000 limit.

If all the payment made by the payer during the financial year for service or work is below ₹1 lakh.

If the contractor offers the declaration with a pan to the deductor.

The payment made or credited to contractors for business like goods carriage, hiring, plying, and more. However, in that case, the contractor should have owned or carried less than 10 goods carriage in previous years.

Consequences of Not Complying with Section 194C

If by any chance the payer forgets or misses the TDS on contractor payment, then it can really have serious consequences, which are:

Levy of Interest- The payer or specified person needs to pay the interest or fine for violating the TDS deductions rules for contractors. The income tax authority will decide the amount of the fine and the fine can vary depending on the contract nature and payment amount.

Disallowance of expenses- Other than this, the specified person will not be eligible to claim deductions of expenses from the PGBP(Profits and gains of business or profession) income. In that case, the amount of disallowed expenses will be 30% of the payment. Further, if the TDS is reported or deposited, then the expenses will be allowed in the TDS payment year.

Necessary Document for Deduction of TDS Under Section 194C

The documents that are necessary for TDS deductions are:

Agreement or contract between parties

Invoices or receipt of work

Pan Card

Challan

TDS certificate

Conclusion

Section 194C is essential for individuals or entities that hire contractors or subcontractors for the work or services. It is the section of income tax that helps in understanding the implications of TDS on the payment made. By understanding the TDS conditions under section 194C, businesses and entities can avoid interest payments and fines.

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FAQS

Which ITR form is applicable for 194C?

For filing the statement under section 194C, form 26Q is required.

What is the limit of 194C per transaction?

Under Section 194C of ITA, the threshold limit for the deduction is ₹30000 per contract or ₹100000 during a financial year.

Is it necessary to have a written contract agreement under Section 194C?

It is not mandatory or required to have a written contract under the Section 194C. The TDS will be deducted if the agreement is in verbal format.

Disclaimer / TnC

Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.

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