Section 194C: TDS On Payment To Contractor & Subcontractor

Introduction

Section 194C guides the Tax to be deducted at source (TDS) when making payments to a contractor or subcontractor. This means that the government receives a share of taxes from the income earned by the contractors and subcontractors. For types of services, TDS deductions have to be made at the rate of 1% in the case of individuals and HUFs and at the rate of 2% for others. Also, no TDS is applicable if a single contract amounts to ₹30,000 (this threshold limit is increased to ₹50,000 from 1st April 2025) and the aggregate of the contract in the previous year is up to ₹1,00,000. In this article, we have provided you with the entire details on the Section 194C tax deduction at source made to contractors and subcontractors.

What is Section 194C—TDS on Payment to Contractor and Subcontractor?

Section 194C guides the tax to be deducted at source (TDS) when making payments to a contractor or subcontractor. This tax has to be deducted at source when paying any sum to a contractor or subcontractor on a work when an amount exceeds Rs 30,000 (₹50,000 from 1st April 2025) on a single transaction or an aggregate of ₹1,00,000 in a financial year.

Applicability of TDS Under Section 194C Of Income Tax Act 1961

• Payment is made to the resident contractor or subcontractor defined under Section 6 of the Income Tax Act.
• Payment is made to carry out any work, which includes supply of labour.
• Payment is made by the specified person as mentioned above in a contractual agreement with the contractor.
• The amount of consideration of the contract in respect of which the payment is made should not be less than ₹30,000, or the aggregate amount should not exceed ₹1,00,000 per annum.
• Cold storage charges, which include providing refrigeration facilities as well as storage facilities, are also subject to TDS u/s 194C as a contract charge only and not u/s 194-I (rent).

Non‑Applicability of TDS u/s 194C

• Payment to a transporter contractor (u/s 44AE) owning not more than 10 vehicles (declaration plus PAN).
• Contracts for rendering professional services cover u/s 194J; hence no TDS u/s 194C.
• Payment exclusively for personal purposes of an Individual/HUF.
• Payee is an Individual/HUF with turnover below ₹1 cr (business) or ₹50 lakhs (profession) in the previous year.

Definition of Work u/s 194C

Under Section 194C, “work” includes:

• Advertising, broadcasting, telecasting (including program production).
• Catering services.
• Carriage of goods/passengers by any mode (other than railways).
• Manufacturing and supplying per customer specifications with customer‑supplied material.

Note: For job work, TDS applies on invoice value excluding material value if bifurcation is given; otherwise on the entire invoice.

Rate of TDS u/s 194C

If PAN is not furnished, TDS rate is 20% for all assessees.

Threshold Limit for Deduction of TDS u/s 194C

• No deduction if single payment ≤ ₹30,000 (₹50,000 from 1st April 2025).
• No deduction if aggregate payments ≤ ₹1,00,000 in a financial year.
• If limits exceeded, TDS at 1% or 2% applies per section.

Definition of Goods Carriage

Any motor vehicle constructed/adapted solely for carriage of goods, or any other motor vehicle when used for carriage of goods. Excludes vehicles with <4 wheels or ≤25 cc engine, rail vehicles, or enclosed‑premise vehicles.

Time of Deduction u/s 194C

TDS is deducted at the earlier of credit to contractor’s account or payment (cash/cheque/draft/other mode).

Time of Deposition u/s 194C

• Government payments: same day.
• Others: if credited in March, by April 30; otherwise within 7 days from month‑end of deduction.

Important Points to be Kept in Mind While Deducting TDS u/s 194C

• Applicable to “work”/“labour” contracts, not sale of goods.
• Professional services (lawyers, doctors, engineers, etc.) fall under Section 194J, not 194C.

Penalties u/s 194C

• Non‑deduction: Interest @ 1% per month until TDS is deducted.
• Deducted but not deposited: Interest @ 1.5% per month until deposition.
• Late Form 26Q filing: ₹200/day up to maximum TDS amount under Section 234E.

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Conclusion

The Income Tax Act, Section 194C, states that TDS is deducted at 1% for individuals and HUFs, and at 2% for others on payments made to resident contractors on amounts exceeding ₹30,000 (₹50,000 from 1st April 2025) per contract or ₹1,00,000 per annum. No TDS is required when a contractor furnishes a declaration plus PAN or for professional services under Section 44AE. Accurate filing with CA expertise is recommended.

Frequently Asked Questions