TDS on a contractor payment is deducted under Section 194C. The rate is 1% when the contractor is an individual or HUF and 2% for all other contractors (company, firm, LLP, AOP/BOI). No TDS applies if a single payment is ₹30,000 or less AND total payments to that contractor in the financial year stay at or below ₹1,00,000 — cross either limit and TDS is due on all payments to that contractor. A transporter (≤10 goods carriages) who furnishes PAN and a declaration is exempt; a contractor without PAN is deducted at 20% under Section 206AA.
Contractor TDS Rates & Thresholds
The TDS rate and threshold for every contractor type under Section 194C for FY 2025-26. TDS is deducted on the invoice value excluding GST where GST is shown separately. See the full TDS rate chart 2025-26.
| Contractor / sub-contractor | TDS Rate | Single Payment | Annual (FY) |
|---|---|---|---|
| Individual / HUF contractor | 1% | ₹30,000 | ₹1,00,000 |
| Company / firm / LLP / AOP / BOI | 2% | ₹30,000 | ₹1,00,000 |
| Sub-contractor — individual / HUF | 1% | ₹30,000 | ₹1,00,000 |
| Sub-contractor — others | 2% | ₹30,000 | ₹1,00,000 |
| Transporter (≤10 carriages) with PAN & declaration | Nil | — | — |
| Contractor without PAN (s.206AA) | 20% | — | — |
Rates and thresholds are unchanged for FY 2025-26 — Budget 2025 did not revise Section 194C. No surcharge or cess on TDS for resident payees.
You may pay a contractor four bills of ₹28,000 each — all below ₹30,000. But the moment the FY total crosses ₹1,00,000, TDS becomes due on the entire ₹1,12,000, including the earlier bills already paid. Track payments PAN-wise across the year, not bill by bill.
Threshold, Timing & a Worked Example
No TDS is required under Section 194C only when both conditions hold — the single payment does not exceed ₹30,000 and the aggregate to that contractor in the financial year does not exceed ₹1,00,000. If either limit is breached, deduct TDS on all payments to that contractor (PAN).
- ₹30,000 — per single contract / payment
- ₹1,00,000 — aggregate to one contractor in the financial year
- TDS is deducted at credit or payment, whichever is earlier — so an advance to a contractor attracts TDS at the time of the advance.
1% Individual contractor — ₹2,00,000 bill
2% Company contractor — ₹2,00,000 bill
A common mistake is deferring TDS to final settlement. Because deduction is triggered at credit or payment — whichever is earlier — an advance to a contractor must have TDS deducted then. Missing this leads to 30% expense disallowance under Section 40(a)(ia) plus interest under Section 201.
Paying contractors and unsure when to deduct? Get your 194C compliance reviewed.
Talk to a TDS Expert →Who Must Deduct TDS on Contractor Payments?
Any person paying a resident contractor must deduct TDS — companies, firms, LLPs, trusts, government, local authorities and co-operative societies. For individuals and HUFs, deduction is required only if their books were subject to tax audit under Section 44AB in the preceding year. Individuals/HUFs also do not deduct on payments made purely for personal (non-business) purposes.
- Obtain TAN before deducting
- Deduct at credit or payment, whichever is earlier
- Deposit challan by the 7th of the next month
- File quarterly Form 26Q
- Issue Form 16A to the contractor
- Track ₹1 lakh aggregate PAN-wise
Section 206AB — the higher-rate deduction for contractors who had not filed their returns — was omitted with effect from 1 April 2025. You no longer need to run a return-filing compliance check on each contractor before deducting under 194C; only the Section 206AA higher rate (20%) for a missing PAN survives.
File your Form 26Q and issue Form 16A correctly and on time.
Get TDS Return Filing →What "Work" Is Covered — and What Is Not
Section 194C applies to any work carried out under a contract with a resident. Where the payment is for professional or technical services instead of "work", Section 194J applies; rent falls under Section 194I, and a payment to a non-resident falls under Section 195.
- Construction, repair or maintenance of buildings, roads, dams, bridges
- Advertising, broadcasting and telecasting contracts
- Carriage of goods and passengers (transport contracts)
- Catering services
- Manufacture or supply of a product to customer specification (using material from that customer)
- Supply of labour / manpower (housekeeping, security, staffing)
No TDS is due to a transporter engaged in plying, hiring or leasing goods carriages who owns ten or fewer goods carriages at any time in the year — but only if the transporter furnishes a valid PAN and a written declaration. Miss the PAN or the declaration and normal 1% / 2% rates apply (20% if PAN is missing).
Contractor "work"
- Construction, transport, catering, advertising
- Supply of labour / manpower
- Rate 1% (Ind/HUF) or 2% (others)
- Threshold ₹30,000 single / ₹1,00,000 FY
Professional / technical fees
- Legal, medical, engineering, consultancy
- Technical services & royalty
- Rate 2% (technical) or 10% (professional)
- Threshold ₹30,000 a year per payee
Under the Income-tax Act, 2025 (applicable from AY 2026-27), the contractor-TDS provision is renumbered as Section 393. The substance — 1% / 2% rates and the ₹30,000 / ₹1,00,000 thresholds — is unchanged. The familiar "194C" reference remains valid for FY 2025-26 and is what most deductors still use.
TDS on Contractor — Frequently Asked Questions
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