Section 194C: TDS On Work Contractor

Overview

Under Section 194C, TDS on work contractor is a contractual agreement in which the business entity hired for carrying out the responsibility to perform certain tasks and jobs. On crossing the extent limit of threshold Rs. 30,000 at the single payment, the payer needs to deduct the TDS at the given rate, which is given @!% and @2% for individual or HUF and other than individuals, respectively. The applicability of TDS is deducted when carrying out certain activities but it doesn’t include professional services that are contracted, like lawyers, doctors, architects, accountants, etc.

Want to know more about the TDS on work contractors? In this article, we will provide you with complete insights on how to deduct TDS on a labor contract under Section 194C of the Income Tax Act of 1961.

What is Section 194C: TDS on Work Contractor?

Under Section 194C, TDS on work contractor is the deduction of tax deduction at source from the payment made to the contractor on the work done by the resident contractor or subcontractor. This TDS needs to be deducted when a person is responsible for paying any sum made to the contractor for carrying out any work in pursuance of the contract.

Applicability of TDS u/s 194C

The TDS should be deducted at source for work contract if any person is responsible for paying sum to a resident contractor or subcontractor in pursuit of contractual agreement between contract and the:

• the central government, or
• the 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 him exceed Rs 1 crore in the case of business and Rs. 50 lakh in the case of profession.

Definition of Work as Per the Income Tax Act 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 customer in such a manner as defined u/s 40A(2)(b).

Note: Work would include manufacturing or supplying the product or material to the requirement and specification of the customer by using material purchased from such customer. or associate. If the specification of the material isn’t included in the whole invoice and is mentioned combinationally, then tax shall be deducted on the whole invoice value.

Rate of TDS on Work Contractor 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 the other person (other than HUF or individual), it is 2%.

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

Note: The TDS rate will rise to 20% if a payee or resident contractor and subcontractor is unable to provide a PAN number at the time of deduction of TDS.

Documents Required for TDS on Service Contractors

Here are the documents required for TDS on service contractors:

• PAN Card of the service contractors
• Contract agreement
• Invoice/ Bill
• Payment proof
• TDS Certificate (Form 16A)

Non-Applicability of TDS u/s 194C for Work contract

The non-applicability of TDS u/s 194C for work contract is given when payment to a sum to be credited or paid during the previous year to the account of the contractor, if he can fulfill the following conditions:

• owns ten or less goods carriage at any time during the previous year
• has furnished a declaration to this effect along with the PAN card.
• engaged in the business of plying, hiring or leasing goods carriages.

The aforementioned relaxation is only applicable to the payment in the nature of transport charges (whether paid by the business of transport or otherwise) given under 194C(6).

This section is not applicable for the payment made to non-resident contractors and subcontractors.

Threshold Limit of TDS u/s 194C for Work Contractor

Here is the threshold limit for deduction for TDS u/s 194C for work contract:

Threshold Limit:

• No such deduction will be required if the payment made to the contractor doesn’t exceed Rs. 30,000 in a single transaction.
• No such deduction would be made when a payment exceeds the aggregate of Rs. 1,00,000 during the financial year.
• Exceeding the respective limits, such as Rs. 30,000 and Rs. 1,00,000 in a single or during the financial year, then TDS would be deducted at 1% or 2% as per the given condition.

Note: However, even if the contractor doesn’t exceed Rs. 30,000 in a single payment, if the aggregate transactions counted more than Rs. 1,00,000 during the financial year, then TDS would be applicable as per the rates given, that is, 1% or 2%.

Example of TDS Calculation on Work Contracts

Consider a hypothetical illustration with examples:

Suppose ABC Company has hired ABC Builders (an individual contractor) to construct an office building. The total contract value is Rs. 3,50,000. The company decided to make payment in two installments: one is Rs. 2,00,000 and the second installment is Rs. 1,50,000.

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

First installment by Company A

The amount payable to the contractor at the first installment of Rs. 2,00,000 needs to deduct TDS at the rate of 1% as per Section 194C of the Tax Act 1961.

TDS amount:

TDS amount: The Rs. 2,00,000 TDS amount rate is calculated at the rate of 1% (as per the rate of HUF or individual u/s 194C).
1% of Rs. 2,00,000 = Rs. 2,000
When TDS is deducted from the first installment = Rs (2,00,000-2,000) = Rs. 1,98,000

In the second installment by Company A

Rs 1,50,000, TDS amount rate is calculated rate at the rate of 1% (as per the rate HUF or individual u/s 194C).
1% of Rs. 1,50,000 = Rs. 1,500
When TDS is deducted from the second installment = Rs (1,50,000-1,500) = Rs. 1,48,500
Total TDS deduction = Rs. (2,000+1,500) = Rs. 3,500
Total amount paid to contractor before deducting TDS: Rs. 1,40,000
Total amount paid to contractor after deduction of TDS: Rs. (3,50,000-3,500) = Rs. 3,46,500

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 the Income Tax Act 1961.

Therefore,
Rs. 2,00,000 TDS amount rate is calculated at the rate of 2% (other than rate HUF or individual u/s 194C).
2% of Rs. 2,00,000 = Rs. 4,000
When TDS is deducted from the first installment = Rs (2,00,000-4,000) = Rs. 1,96,000

In the second installment by Company A

Rs 1,50,000, the TDS amount rate is calculated at the rate of 2% (other than HUF or individual u/s 194C).
2% of Rs. 1,50,000 = Rs. 3,000
Therefore,
When TDS is deducted from the second installment = Rs (1,50,000-3,000) = Rs. 1,47,000
Total TDS deduction = Rs. (3,000 + 4,000) = Rs. 7,000
Total amount paid to contractor before deducting TDS = Rs. 3,50,000
Total amount paid to contractor after deduction of TDS = Rs. (3,50,000-7,000) = Rs. 2,43,000

Time of Deduction and Deposit u/s 194C

Here are the details for time for deduction and deposit of TDS u/s 194C:

• Time of Deduction:

The tax at source would be deducted under Section 194C in the condition when a time of payment of such sum is about to be credited to the account of the contractor. Before making any payment of the amount made to the contractor, TDS must be deducted if the threshold limit exceeds Rs. 30,000 and Rs. 1,00,000 at a single transaction and during the financial year.

• Time of Deposit:

The TDS deduction should be deposited with the government authority every 7th of the following month in which TDS was deducted.

Penalties and Fines u/s 194C

• The non-compliance under Section 194C of the Income Tax Act may lead to interest, fines, and even penalties.
• Overlooking the need to deduct and deposit the TDS on the service contractors within the stipulated time limit can result of @1% interest charge and @1.5% interest charge, respectively.
• Penalties may range from Rs, 10,000 to Rs. 1,00,000

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

Following are the important points to be kept in mind while deducting TDS u/s 194C for residential work contractors and subcontractors:

• This section is only applicable to ‘work contract’ or ‘labor contract’ and does not cover the contract on ‘sale or goods'.
• There is no such contract that is regarded as the ‘contract’ for carrying out any work u/s 194C when contract for rendering professional services such as lawyers, physicians, surgeons, engineers, architects, accountants, etc. In other words, such professional services are not included to deduct tax at source at the amount payable to any contractor.

Why Choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services 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 directly refers to residential contractors and subcontractors, which either can be labor contractors or work contractors or both but not contract on ‘sale of goods’. Exceeding the threshold limit under Section 194C, you need to be aware of TDS rate and calculation, which should be deducted carefully at the rate of @1% or 2% TDS rate on Rs. 30,000 on single transactions or of Rs. 1,00,000.

Frequently Asked Questions