Updated on November 28, 2024 01:17:13 PM
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.
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.
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:
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.
Under Section 194C of the Income Tax Act of 1961, work includes:
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.
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 |
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 |
Here is the threshold limit for deduction of TDS u/s 194C | TDS on Labour contractor Threshold limit:
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.
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%.
Here are the documents required for TDS on Labour Contractors:
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 ARs 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
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
Under Section 194C, TDS on Labour contractor is required to be deducted:
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.
Under the following circumstances, TDS on Labour contractors u/s 194C is not applicable:
Following are the important points to be kept in mind while deducting TDS u/s 194C:-
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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.
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.