TDS on Contractor Payments — Section 194C

No TDS is required if a single payment to the contractor does not exceed ₹30,000 AND the aggregate payments to the same contractor during the financial year do not exceed ₹1,00,000. Once either limit is crossed, TDS must be deducted on all payments to that contractor, including earlier bills already paid. The ₹1 lakh aggregate is tracked PAN-wise. Budget 2025 did not change these 194C thresholds.

No. Where GST is shown separately on the invoice, TDS under Section 194C is deducted only on the value of the work excluding the GST component (CBDT Circular 23/2017). If GST is not shown separately, TDS is deducted on the whole invoice value.

If a resident contractor does not furnish a valid PAN, TDS is deducted at 20% under Section 206AA — higher than the normal 1% or 2%. Section 206AB, which earlier imposed an even higher rate on non-filers of returns, was omitted with effect from 1 April 2025, so only the PAN-based 20% rate now applies.

Any person paying a resident contractor must deduct — companies, firms, LLPs, trusts, government, local authorities, co-operative societies, universities and hospitals. Individuals and HUFs need to deduct only if their books were subject to tax audit under Section 44AB in the immediately preceding financial year, and only on business (not personal) payments.

Only if the individual or HUF was liable to tax audit under Section 44AB in the immediately preceding year (turnover above the audit threshold — broadly ₹1 crore for business or ₹50 lakh for a profession). Below that, an individual or HUF is not required to deduct TDS under Section 194C. Even where liable, no deduction is required on payments made exclusively for personal use.

No. Section 206AB, which required checking whether a contractor had filed income-tax returns and deducting at a higher rate for non-filers, was omitted with effect from 1 April 2025. For FY 2025-26 you only need a valid PAN; a missing PAN triggers the 20% rate under Section 206AA.

TDS under Section 194C must be deducted at the time of credit to the contractor's account or at the time of actual payment, whichever is earlier. So TDS on an advance is deducted when the advance is paid — you cannot wait for final settlement. Deferring it can lead to expense disallowance under Section 40(a)(ia) and interest under Section 201.

TDS deducted must be deposited by the 7th of the following month (for March, by 30 April). The quarterly TDS return is Form 26Q, and the deductor must issue Form 16A to the contractor. Late deposit attracts interest at 1.5% per month under Section 201, and late filing attracts a ₹200/day fee under Section 234E.

Failure to deduct (or deposit) TDS on a contractor payment leads to 30% of the expense being disallowed under Section 40(a)(ia) in that year, plus interest at 1% per month for non-deduction and 1.5% for non-payment under Section 201, and the deductor is treated as an assessee-in-default. The disallowance can be reversed in the year the TDS is finally paid.

Yes. Sub-contractors are expressly covered under Section 194C, and the same rates apply — 1% for an individual/HUF sub-contractor and 2% for others. The ₹30,000 single-payment / ₹1,00,000 annual thresholds apply per sub-contractor as well.

Yes. Supply of labour or manpower (housekeeping, security, staffing) is a "work" contract, so payments to a labour-supply contractor attract TDS at 1% or 2% on the gross amount including service charges. This does not apply to your own employees — an employer-employee relationship is covered by TDS on salary under Section 192.

No TDS is required on payments to a transporter engaged in plying, hiring or leasing goods carriages who owns ten or fewer goods carriages at any time during the year, provided the transporter furnishes a valid PAN and a declaration to that effect. Otherwise, normal 194C rates (1% / 2%) apply, and 20% if no PAN is furnished. The exemption covers goods carriage only, not passenger transport or courier services.

Section 194C applies to contract "work" — construction, transport, catering, advertising, labour supply — at 1% or 2%. Section 194J applies to professional or technical services (legal, medical, engineering, consultancy, technical fees) at 2% or 10%. A single vendor can attract both; split the invoice so the works portion goes to 194C and the professional portion to 194J.

No. Section 194C covers manufacture or supply of a product to a customer's specification using material bought from that customer. The outright purchase of a standard, off-the-shelf product from the open market is a sale of goods, not a works contract, and is outside 194C. Large purchases of goods may instead attract Section 194Q (0.1% above ₹50 lakh).

The contractor-TDS provision is renumbered as Section 393 under the Income-tax Act, 2025, which applies from AY 2026-27. The rates (1% / 2%) and thresholds (₹30,000 single / ₹1,00,000 aggregate) are unchanged. For FY 2025-26 filings the familiar "194C" reference remains valid and is what most deductors continue to use.

No. Section 194C covers only payments to resident contractors and sub-contractors. Payments to a non-resident contractor are governed by Section 195, which has its own rates (often with surcharge and cess and subject to the relevant Double Taxation Avoidance Agreement).