Section 194C: TDS On Labour Contract

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.

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:

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.

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.

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

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