TDS on Contractor Payments Under Section 194C
TDS under Section 194C applies at 1% or 2% on payments to contractors above ₹30,000 per bill or ₹1 lakh a year. Who deducts, what counts as work, and transporter relief.
Section 194C TDS applies to payments by specified payers to resident contractors and sub-contractors for carrying out work, including labour supply. For FY 2025-26 / AY 2026-27, deduct 1% where the contractor is an individual or HUF and 2% for other entities. Deduction generally arises when a single payment exceeds ₹30,000 or financial-year payments exceed ₹1,00,000. These rules remain governed by the Income-tax Act, 1961 for this year.
Who must deduct TDS under Section 194C?
Companies, firms, LLPs, trusts, government bodies, co-operative societies and other specified persons must deduct TDS on qualifying contractor payments.
Sec. 194C Income-tax Act also covers individuals and HUFs whose business turnover exceeded ₹1 crore, or professional gross receipts exceeded ₹50 lakh, in the immediately preceding financial year.
For FY 2025-26, examine FY 2024-25 figures. These are specific TDS eligibility thresholds, not simply a test of whether tax audit was required. An enhanced tax-audit threshold does not automatically remove the obligation to deduct contractor TDS.
Individuals and HUFs need not deduct under Sec. 194C Income-tax Act where payments are exclusively for personal purposes, such as constructing their own residence. However, Sec. 194M Income-tax Act may apply to otherwise uncovered individual or HUF payers when qualifying payments to a resident exceed ₹50 lakh in the financial year. Its rate for FY 2025-26 is 2%.
What counts as “work” under Section 194C?
Work includes ordinary execution contracts and specified activities, but not every purchase of goods or professional service.
The definition in Explanation (iv) to Sec. 194C Income-tax Act expressly includes:
- Advertising.
- Broadcasting and telecasting, including programme production.
- Carriage of goods or passengers, other than by railways.
- Catering.
- Manufacturing or supplying products to customer specifications using material purchased from that customer or its specified associate.
Labour and manpower supply are also expressly covered by Sec. 194C Income-tax Act. Construction, fabrication, cleaning and routine maintenance contracts commonly fall within its scope, depending on their substance.
Buying a ready-made product off the shelf is ordinarily a purchase of goods, not a work contract under this section.
For customer-specific manufacturing, purchases of material from a person related to the customer as specified in Sec. 40A(2)(b) Income-tax Act also matter. Using material purchased independently from unrelated suppliers generally places that manufacturing arrangement outside the extended definition.
Is TDS calculated on labour alone or the entire invoice?
TDS ordinarily applies to the contract amount, not merely the labour component, subject to specific material and GST exclusions.
A contractor using its own materials does not automatically make only labour charges taxable. For an ordinary construction or composite work contract, separating material and labour lines does not, by itself, exclude materials from the TDS base.
The special rule in Sec. 194C(3) Income-tax Act applies to qualifying customer-specification manufacturing contracts. Deduct on the invoice value excluding material value where separately stated; otherwise, deduct on the entire invoice value.
Separately identified GST on services is excluded from the TDS base under CBDT Circular No. 23/2017. Keep invoices and contractual records that clearly identify this component.
What rates, thresholds and deduction timing apply?
For FY 2025-26, the standard rates remain 1% or 2%, with deduction at credit or payment, whichever occurs earlier.
| Resident contractor | Standard rate | Without a valid PAN |
|---|---|---|
| Individual or HUF | 1% | Generally 20% |
| Firm, LLP, company or other entity | 2% | Generally 20% |
The higher PAN-related rate follows Sec. 206AA Income-tax Act. Surcharge and health and education cess are not added to these resident TDS rates.
| Threshold test | Deduction trigger |
|---|---|
| Single sum credited or paid | Exceeds ₹30,000 |
| Financial-year aggregate for that contractor | Exceeds ₹1,00,000 |
Exactly ₹30,000 or ₹1,00,000 does not exceed the relevant limit. However, both tests must be checked.
Once the annual threshold is crossed, TDS applies to the full qualifying aggregate, including earlier payments. If the annual aggregate is already likely to exceed ₹1,00,000, do not necessarily wait for the actual crossing.
Advances can trigger deduction. Credit to a suspense account also counts where it represents an amount payable to the contractor.
When can a goods transporter claim exemption?
An eligible goods transporter can receive payments without TDS by furnishing the required declaration and PAN.
Under Sec. 194C(6) Income-tax Act, the transporter must be engaged in plying, hiring or leasing goods carriages and must not own more than 10 goods carriages at any time during the financial year.
Obtain a declaration confirming eligibility together with PAN. This is not a blanket exemption for every logistics business or passenger transporter.
Report these payments in Form 26Q, even though no tax is deducted, as required by Sec. 194C(7) Income-tax Act read with Rule 31A Income-tax Rules.
How does the ₹1 lakh threshold work in practice?
When previously unanticipated payments take the annual aggregate above ₹1 lakh, deduct on the accumulated qualifying amount.
A Bengaluru restaurant engages a catering partnership for separate events and pays:
| Month | Catering charges | Running total |
|---|---|---|
| April | ₹25,000 | ₹25,000 |
| June | ₹28,000 | ₹53,000 |
| August | ₹22,000 | ₹75,000 |
| October | ₹40,000 | ₹1,15,000 |
Assume no annual commitment initially made payments above ₹1 lakh likely, the firm supplies PAN, and these figures exclude separately stated GST.
Before October, neither threshold is crossed. In October, both the single-payment and annual limits are exceeded.
- TDS: ₹1,15,000 × 2% = ₹2,300.
- October balance paid: ₹40,000 − ₹2,300 = ₹37,700, plus separately billed GST, if applicable.
- Amount deposited as TDS: ₹2,300.
TDS is not an additional catering cost: it is withheld from the contractor’s entitlement and credited against its income-tax liability.
How is Section 194C different from Section 194J?
Section 194C covers work contracts, while Section 194J covers specified professional, technical and related payments.
| Point | Sec. 194C Income-tax Act | Sec. 194J Income-tax Act |
|---|---|---|
| Typical scope | Work contracts and labour supply | Professional services, technical services and specified other payments |
| Standard rates | 1% or 2% | 10% or 2%, depending on category |
| FY 2025-26 threshold | ₹30,000 single sum or ₹1 lakh annual aggregate | Generally ₹50,000 annually for each specified category |
The ₹50,000 threshold under Sec. 194J Income-tax Act applies from 1 April 2025. It does not apply to covered director remuneration, fees or commission.
Routine manpower deployment may attract Section 194C; specialised professional engagement may attract Section 194J. Examine deliverables rather than the invoice heading. Read our 194J guide.
What deadlines and consequences should businesses track?
Deductors must deposit TDS, file quarterly statements and issue certificates on time to avoid separate default consequences.
For ordinary non-government deductors, deposit by the 7th of the following month, except March deductions, which are due by 30 April. Form 26Q deadlines are ordinarily 31 July, 31 October, 31 January and 31 May. Issue Form 16A within 15 days of the applicable statement due date.
| Default | Consequence |
|---|---|
| Failure or delay in deduction | 1% interest per month or part under Sec. 201(1A) Income-tax Act |
| Delay in depositing deducted tax | 1.5% interest per month or part under Sec. 201(1A) Income-tax Act |
| Qualifying resident-payment default | 30% expense disallowance under Sec. 40(a)(ia) Income-tax Act, subject to statutory conditions and relief |
| Late TDS statement | ₹200 daily fee under Sec. 234E Income-tax Act, capped at the deductible tax |
Interest runs for the statutory default period, not simply the number of days delayed. Additional penalties may apply.
How SP & SC helps
SP & SC helps businesses classify contracts, monitor vendor thresholds, deposit TDS and file quarterly Form 26Q.
Our TDS return filing service also supports reconciliations and correction statements. Fees are a fixed quote after reviewing the case, confirmed before work begins. Contact SP & SC or WhatsApp +91 90356 74566 to share your documents.
Frequently asked questions
These answers summarise common Section 194C issues for FY 2025-26.
What is the TDS rate under Section 194C?
It is 1% for resident individuals and HUFs, and 2% for other resident contractors, subject to applicable exceptions.
Is TDS deducted on GST?
Separately identified GST on services is generally excluded from the deduction base.
Does manpower supply attract Section 194C?
Yes. Labour and manpower supply ordinarily fall within Section 194C.
Is every transporter exempt?
No. The goods-carriage ownership condition, declaration and PAN requirements must be satisfied.
Must I deduct when a bill is exactly ₹30,000?
Not solely because of that bill. Check whether the annual aggregate exceeds, or is likely to exceed, ₹1,00,000.
Written by
SP & SC Editorial
Editorial team at SP & SC Legal and Taxation Services — practising advocates, chartered accountants, and company secretaries publishing hands-on guidance from live client files.
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