Updated on November 28, 2024 01:22:32 PM
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.
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.
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:
Under Section 194C of the Income Tax Act of 1961, work includes:
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.
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:
Particulars | TDS Rate |
---|---|
Individual HUF contractor/subcontractor | 1% |
Other than HUF contractor/subcontractor | 2% |
Contractor in transport business (if PAN is furnished) | Nil |
Subcontractor in transport business (if PAN is furnished) | Nil |
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.
Here are the documents required for TDS on service contractors:
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:
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.
Here is the threshold limit for deduction for TDS u/s 194C for work contract:
Threshold Limit:
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%.
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
Here are the details for time for deduction and deposit of TDS u/s 194C:
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.
The TDS deduction should be deposited with the government authority every 7th of the following month in which TDS was deducted.
Following are the important points to be kept in mind while deducting TDS u/s 194C for residential work contractors and subcontractors:
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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.
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.
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 work 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.
No deduction of TDS is applicable when the threshold limit doesn’t cross the limit of Rs. 30,000 on a single payment and the aggregate limit of Rs. 1,00,000 in a given financial year.