Updated on November 28, 2024 01:17:13 PM

Overview

Section 194C of the Income Tax Act in India deals with the TDS (Tax Deducted at Source) on payments made to resident contractors and subcontractors. Under a labor contract, one party agrees to provide labor services to the other party in exchange for payment. On such payments to labor contractors or subcontractors, TDS is deducted at applicable rates defined under Section 194C, TDS on Labour Contractor.

Read this article to know all the details about TDS on Labour contracts under Section 194C.

What is Section 194C | TDS On Labour Contractor?

Under Section 194C of the Income Tax Act 1961, the Tax Deducted at Source (TDS) on Labour Contractors refers to the provision that legally binds the contract between two parties where one party agrees to provide specific labor services to other parties who take this labor in exchange for payment.

TDS on Labour Contractor u/s 194C covers contracts for rendering all labor services excluding contracts for rendering professional labor services like lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., which cannot be regarded as contracts for carrying out any “work” u/s 194C. Therefore, no deduction of TDS is to be made from payments related to such contracts under this section. Contracts for rendering professional services will be covered under Section 194J, TDS on professional and technical services.

Applicability of TDS u/s 194C for Labour Contract

The TDS on Labour Contractor u/s 194C should be deducted at source for labor contracts by any person (other than Individuals, HUF, AOP, BOI) responsible for paying any sum to a resident contractor or subcontractor in pursuit of a contractual agreement for carrying out any work including supply of labor between the contractor and the:

  • Central government, or
  • State government, or
  • Any statutory corporation, or
  • Any company, or
  • Any cooperative society, or
  • Any society registered under the Societies Registration Act, or
  • Any statutory authority dealing with housing accommodation or for the purpose of planning, development, improvement of cities, towns, or villages or both, etc., or
  • Any trust, or
  • Any firm, or
  • Any university established or incorporated by or under the Central or State Government.
  • Any individual or HUF whose gross sales, total receipts, and profession carried out by them exceed Rs 1 crore in the case of business and Rs. 50 lakh in the case of profession.

Individuals / HUF / AOP / BOI are required to deduct TDS on Labour contracts (excluding contracts for professional services) under Section 194C if the turnover of the previous financial year exceeds ₹ 1 crore in case of business or gross receipts exceed ₹ 50 Lakhs in case of profession.

Section 194C, TDS on Labour Contractors is not applicable to contracts for rendering professional labor services. Contracts for rendering professional services will be covered u/s 194J | TDS on professional and technical services.

Definition of Work as Per the Income Tax Act of 1961

Under Section 194C of the Income Tax Act of 1961,
work includes:

  • Advertising
  • Broadcasting and telecasting, including production of programs for such broadcasting and telecasting.
  • Catering
  • Carriage of goods and passengers by any mode of transport (except railways)
  • Manufacturing and supplying a product according to the requirement and specification of a customer by using material purchased from such customer or its associate being a person related to the customer in such a manner as defined u/s 40A(2)(b).

Note: There are different scenarios in relation to job work about the applicability of TDS deduction u/s 194C. TDS on Job Work is applicable based on different scenarios. To get a better understanding about the applicability of TDS on Labour Contractors u/s 194C on job work, refer to the tables given below which cover all the different scenarios in relation to job work.


Case scenario 1

Work Work is related to “manufacturing or supplying a product according to the requirement or specification of a customer”
Raw material Raw material purchased from a person, other than such customer or associate of such customer
Type of contract This is a contract for sale
Applicability of TDS TDS will not be deducted on the above mentioned contract u/s 194C | TDS on Labour contractor

Case scenario 2

Work Work is related to “manufacturing or supplying a product according to the requirement or specification of a customer”
Raw material Raw material purchased from such customer or its associate
Type of contract This is a contract for Labour
Applicability of TDS TDS will be deducted on the above mentioned contract u/s 194C | TDS on Labour contractor

Threshold Limit for TDS on Labour Contractor | 194C

Here is the threshold limit for deduction of TDS u/s 194C | TDS on Labour contractor
Threshold limit:

  • No such deduction will be required if the payment made to the contractor doesn’t exceed ₹ 30,000 in a single transaction. It's important to note that the ₹ 30,000 limit is to be seen as per contract basis.
  • No such deduction would be made from payment made to contractors if the aggregate amount does not exceed ₹ 1,00,000 per annum during the current financial year.
  • Therefore TDS on Labour contractor u/s 194C is required to be deducted when payment made to contractor or sub-contractor exceeds the threshold limit of ₹ 30,000 in a single transaction or aggregate amount paid exceeds ₹ 1,00,000 in the current financial year.

Note: However, even if the contractor payments don’t exceed the threshold limit of ₹ 30,000 in a single transaction, still TDS on Labour Contractor u/s 194C is required to be deducted if the aggregate amount credited or paid to contractor exceeds the threshold of ₹ 1,00,000 in the current financial year.

Rate of TDS u/s 194C

The rate of TDS payment to a contractor is 1% u/s 194C when an individual or HUF is a payee. When TDS is deducted from the payment made to other persons (other than HUF or individual), it is 2%.

The rates that are applicable under Section 194C are as follows:

Particulars TDS Rate
Individual/HUF contractor/subcontractor 1%
Other than HUF contractor/subcontractor 2%
Contractor in transport business (if PAN is furnished) Nil
Sub-contractor in transport business (if PAN is furnished) Nil

Note: If a payee is unable to provide a PAN number at the time of deduction of TDS, then the rate will rise to 20%.

Documents Required for TDS on Labour Contractors

Here are the documents required for TDS on Labour Contractors:

  1. PAN Card of the Labour Contractors
  2. Contract agreement
  3. Invoice/Bill
  4. Payment proof
  5. TDS Certificate (Form 16A)

Example of TDS Calculation on Labour Contracts

Consider a hypothetical question:


Suppose Company A has hired Contractor B (individual) for providing labor to build a warehouse. The total payment agreed upon by the contractor is Rs. 1,40,000. The payment will be made in two parts: one is Rs. 60,000 and the other is Rs. 80,000. The contractor B is an individual, so they are liable to deduct the TDS @ 1% as per Section 194C of the Income Tax Act of 1961.


Answer:

Case I: In case of 1% TDS rate on individual or HUF or Hindu Undivided Family


First installment by Company A:

The amount payable to the contractor at the first installment of Rs. 60,000 needs to deduct TDS at the rate of 1% as per Section 194C.


TDS amount:

The Rs. 60,000 TDS amount rate is calculated at the rate of 1% (as per the rate of HUF or individual u/s 194C).

1% of Rs. 60,000 = Rs. 600

When TDS is deducted from the first installment = Rs (60,000-600) = Rs. 59,400


In the second installment by Company A

Rs 80,000, TDS amount rate is calculated at the rate of 1% (as per the rate HUF or individual u/s 194C).

1% of Rs. 80,000 = Rs. 800

When TDS is deducted from the second installment = Rs (80,000-800) = Rs. 79,200

Total TDS deduction = Rs. (800 + 600) = Rs. 1400

Total amount paid to contractor before deducting TDS: Rs. 1,40,000

Total amount paid to contractor after deduction of TDS: Rs. (1,40,000-1400) = Rs. 1,38,600


On the other hand, if the company hired a resident contractor or subcontractor other than an individual or HUF (Hindu Undivided Family), then the TDS would be deducted @2% on the amount payable.


Case 2: In case of 2% TDS other than individual, HUF or Hindu Undivided Family


First installment by Company A

The amount payable to the contractor at the first installment of Rs. 60,000 needs to deduct TDS at the rate of 2% as per Section 194C of Tax Act 1961.


Therefore,
The Rs. 60,000 TDS amount rate is calculated at the rate of 2% (other than rate HUF or individual u/s 194C).

2% of Rs. 60,000 = Rs. 1200

When TDS is deducted from the first installment = Rs (60,000-1200) = Rs. 58,800


In the second installment by Company A

Rs 80,000, TDS amount rate is calculated at the rate of 2% (other than HUF or individual u/s 194C).

2% of Rs. 80,000 = Rs. 1600

When TDS is deducted from the second installment = Rs (80,000-1600) = Rs. 78,400

Total TDS deduction = Rs. (1200 + 1600) = Rs. 2800

Total amount paid to contractor before deducting TDS: Rs. 1,40,000

Total amount paid to contractor after deduction of TDS: Rs. (1,40,000-2800) = Rs. 1,37,200

Time of TDS Deduction for TDS on Labour Contractor

Under Section 194C, TDS on Labour contractor is required to be deducted:

  • At the time of credit of such sum to the account of the contractor; or
  • At the time of payment of such sum to the contractor in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.

Time to Deposit TDS on Labour Contractor

TDS on Labour contractors, once deducted, is required to be deposited to the central government. The time to deposit TDS is as follows:

When TDS is deducted When to deposit TDS
April - February On or before 7th of next month
March On or before 30th April

If TDS is deducted on behalf of the Government, it is deposited on the same day.


Example: Tax on Labour contracts deducted on 15th December needs to be deposited on or before 7th January. Tax on Labour contracts deducted on 21st March needs to be deposited on or before 30th April.

Non-applicability of TDS on Labour Contractor u/s 194C

Under the following circumstances, TDS on Labour contractors u/s 194C is not applicable:

  1. Transport contractor | 194C(6):
    • Owns 10 or less than 10 goods carriages during the previous year
    • hasfurnishes a declaration to this effect along with the PAN details
    • engaged in the business of plying, hiring, or leasing goods carriages.
  2. TDS is not required if the sum paid or credited to the contractor by Individuals & HUF is incurred exclusively for personal purposes.
  3. TDS is not required for contracts covered under Section 194J (Professional services).
  4. No TDS if a single contract amounts to ₹30,000 or if the aggregate amount of contracts during the financial year is up to ₹1,00,000.

Penalties and Fines for TDS on Labour Contractor u/s 194C

  • TDS not deducted: Interest @1% per month is charged till the date TDS is deducted.
  • TDS deducted but not deposited: Interest @1.5% per month is charged from the date of deduction till the date of deposition.

Some Important points to remember while Deducting TDS on Labour contractor u/s 194C

Following are the important points to be kept in mind while deducting TDS u/s 194C:-

  1. This section is only applicable to ‘work contract’ or ‘labor contract’ and does not cover the contract on ‘sale or goods'.
  2. There is no such contract that is regarded as the ‘contract’ for carrying out any work u/s 194C when contract for rendering professional Labour s such as lawyers, physicians, surgeons, engineers, architects, accountants, etc. In other words, such professional Labour s are not included to deduct tax at source at the amount payable to any contractor.
  3. If the transportation charges are paid to a third party transporter, then TDS shall be made u/s 194C.
  4. Cold storage charges which involve providing of refrigeration facility as well as storage facility shall also be subject to TDS u/s 194C, TDS on Labour contractors as a contract charge only, and not u/s 194I, TDS on rent and building. Therefore, TDS is required to be deducted from Labour s of cold storage facility only under section 194C | TDS on Labour contractors.

Why Choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting Labour s in filing your TDS. Here are the reasons why we are known for our Labour s to our clients on filing TDS:

  • Assist in suggesting the right documents for TDS filing
  • Providing valuable insights on sections of TDS computations
  • Prescribe forms as per the necessity
  • Helps in accurate computations for TDS computations and returns
  • Tailored advice and guidelines for TDS filing

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

Under the Income Tax Act of 1961, Section 194C | TDS on Labour contractors directly refers to residential contractors and subcontractors, where contracts either can be labor contracts or work contracts or both; but not contracts for ‘sale of goods’. This section ensures that tax from such income is appropriately deducted and deposited with the government. Compliance with this section is essential for both payers and recipients to avoid penalties and interest.

Frequently Asked Questions

Yes, TDS is applicable as per the Labour law of the Income Tax Act 1961. The TDS rate is deducted on the basis of Section 194C and is deducted as per the TDS labor charges given as per the provision.

Yes, you can get a refund on TDS by filing an ITR for TDS payments made to a contractor.

The person paying the TDS on labor contractors for carrying out the work on a contractual basis is liable to deduct TDS on contractors.

Form 26Q is applicable for filing the income statement for Section 194C of the Income Tax Act 1961.

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