TDS on Contract Payments (Section 194C) – Complete Guide with Examples
Introduction
Section 194C of the Income Tax Act, 1961 deals with Tax Deducted at Source (TDS) on contract payments. It applies when a person (payer) makes payments to a contractor or subcontractor for work done under a contract. Understanding who needs to deduct TDS, applicable rates, and exemptions is essential for businesses and professionals.
📌 What is Section 194C?
Section 194C mandates TDS deduction on payments made to contractors/subcontractors by:
✅ Individuals & entities covered under tax audit
✅ Government organizations, companies, cooperative societies, trusts, etc.
🔹 Work covered under Section 194C includes:
✔ Construction, repairs, renovation
✔ Advertising
✔ Transport services (excluding railway)
✔ Manufacturing under contract (if materials are supplied by the customer)
📌 Example
➡️ ABC Ltd. hires XYZ Constructions for office renovation at ₹5,00,000.
➡️ ABC Ltd. must deduct TDS at 2% before making the payment.
➡️ ABC Ltd. will deposit the deducted TDS with the government.
📌 Who is Required to Deduct TDS Under Section 194C?
TDS under Section 194C applies to:
🔹 Individuals or HUFs – Only if covered under tax audit
🔹 Companies, partnership firms, trusts, co-operative societies
🔹 Government bodies & local authorities
📌 Exemption:
❌ If the total payment to the contractor does not exceed ₹30,000 in a single transaction or ₹1,00,000 in a financial year, TDS is not required.
📌 TDS Rates Under Section 194C
| Type of Payee | TDS Rate |
|---|---|
| Individual / HUF Contractor | 1% |
| Other Contractors (Companies, Firms, etc.) | 2% |
| Transporter (with valid PAN) | No TDS |
📌 Important Notes:
🔹 If the contractor does not provide a PAN, TDS is deducted at 20%.
🔹 If a transport contractor (owning 10 or fewer vehicles) provides PAN, no TDS is deducted.
📌 When to Deduct TDS Under Section 194C?
TDS should be deducted at the time of payment or credit to the contractor’s account, whichever is earlier.
📌 Example:
➡️ ABC Ltd. hires a contractor on 1st April and agrees to pay ₹1,20,000.
➡️ The contractor submits the invoice on 15th June.
➡️ ABC Ltd. makes the payment on 30th June.
✅ TDS must be deducted on 15th June (the earlier of the two dates).
📌 Due Date for Depositing TDS Under Section 194C
| Type of Deductor | Due Date for TDS Deposit |
|---|---|
| Government Deductor | Same day |
| Other Deductors | 7th of the following month |
| For March TDS | 30th April |
📌 Example:
➡️ If a business deducts TDS on 15th May, it must deposit the TDS by 7th June.
📌 How to Deposit TDS and File TDS Returns?
1️⃣ Deposit TDS Online: Use the Challan ITNS 281 on the TIN-NSDL website.
2️⃣ File TDS Returns: Submit Form 26Q for non-salary payments every quarter.
3️⃣ Issue TDS Certificate (Form 16A): Provide to contractors within 15 days of filing TDS return.
📌 Example:
➡️ If a company deducts ₹5,000 as TDS in June, it must deposit it by 7th July and file Form 26Q for Q1 by 31st July.
📌 Penalty for Non-Compliance with Section 194C
🔴 Interest on Late TDS Deposit
✔ 1% per month if TDS is not deducted
✔ 1.5% per month if TDS is deducted but not deposited
🔴 Penalty for Non-Payment
✔ TDS amount may be disallowed as an expense under Section 40(a)(ia)
📌 FAQs on Section 194C
❓ Q1. Is GST included while calculating TDS under Section 194C?
✅ No, TDS is deducted only on the contract value, excluding GST amount.
❓ Q2. Is TDS required for freelancers & consultants?
✅ No, freelancers come under Section 194J (TDS on Professional Fees), not 194C.
❓ Q3. Can TDS be refunded if deducted wrongly?
✅ Yes, the contractor can claim a refund while filing ITR.
📌 Conclusion
Section 194C ensures tax compliance in contractual payments. Businesses must deduct, deposit, and file TDS correctly to avoid penalties. Understanding exemptions, rates, and due dates helps in smooth compliance.
🚀 Stay compliant & avoid penalties – Always deduct TDS as per Section 194C!