Section 194C: TDS on Contractor Payments, Rates, Limits & Applicability (FY 2025-26)

Section 194C of the Income Tax Act, 1961 governs that the tax should be deducted while making payment to a contractor or sub-contractor. All the people who are under any contractual agreement for rendering services is required to deduct tax at the source at the prescribed rate under the Section 194C.

In this guide, Tmwala will help you explain all about the Section 194C TDS on contractors, its rates, limits and applicability for (FY 2025-26).

What is Section194C?

Section 194C of the Income Tax Act, 1961 governs with the Tax Deduction at source for the payments that are made with the contractors and sub-contractors for the purpose of performing work under a contract. The provision makes the deduction dependent on the one doing the credit with the prescribed rate under the section 194C of the income tax act, 1961.

The TDS is generally deducted at the earlier of:

• The date on which the amount is credited to the contractor’s account; or
• The date on which the payment is actually made.

For example: Nayra Ltd. hires a contractor for Rs.5 lakh to carry out Furniture work. If the payment falls under Section 194C, Nayra Ltd. cannot simply pay the entire Rs.5 lakh to the contractor. It must deduct the applicable TDS and deposit that TDS with the government. This is commonly referred to as TDS on contractor payment.

TDS Rates Under Section 194C for FY 2025-26

The TDS rate depends on the contractor:

• Individual contractor/HUF contractor-TDS at the rate 1%
• Others-TDS at the rate of 2%

For Example: Suppose a company makes a payment of Rs.2,00,000 to a partnership firm for a contract. Since the contractor is not an individual or HUF: TDS= Rs. 2,00,000 × 2% = Rs.4,000 in result to which the amount contractor will receive Rs. 2,00,000 − ₹4,000 = Rs. 1,96,000
The Rs. 4,000 deducted must be deposited with the government as TDS.

Threshold limit as per the Section 194C of the income tax act, 1961:

As per the Section 194C of the Income Tax Act 1961 the threshold limit for the Tax deduction at source is:
Onetime payment to the contractor shall not exceed Rs. 30,000
Aggregate payment made to the contractor shall not exceed Rs. 100,000

Who is Required to Deduct TDS Under Section 194C?

Section 194C applies to payments made by specified persons to resident contractors for carrying out specified work.

• Central Government
• State Government
• Local authorities
• Companies
• Co-operative societies
• Certain statutory authorities
• Registered societies
• Trusts
• Universities and specified educational institutions
• Firms
• Certain individuals, HUFs, AOPs and BOIs meeting the prescribed turnover/receipts condition

What Payments Are Covered Under Section 194C?

The term “work” under Section 194C is broad. Which includes many services that are:

• Advertising/Broadcasting/telecasting
• Transportation
• Catering

What If the Contractor Does Not Provide PAN?

PAN car is the most essential part of the TDS of contractors as per the provisions governed under Section 206AA of the income tax act, 1961. When the contractor does furnish valid PAN the tax at source is to be deducted at a higher rate of 20%. Therefore, a contractor’s PAN should be collected and verified before processing payments.

Time Limit Within for Deposit of Tax

The payment is made to Government than on the same day the tax at source as prescribed rates within the section 194C should be made.
If the payment is made to any non-government, then the payment is to be made before March-On or before 30 April.
In the other months the payment within 7days before the month ends in which the deduction was made.

FAQs

1. What is Section 194C?
   Section 194C deals with TDS on payments made to resident contractors and sub-contractors for carrying out specified work under a contract.
2.  What is the TDS rate under Section 194C?
   The rate is generally 1% for payments to individual/HUF contractors and 2% for payments to other resident contractors.
3. What is the Section 194C threshold?
   TDS is generally not required where a single payment does not exceed ₹30,000. However, if the aggregate payments during the financial year exceed ₹1,00,000, TDS provisions can apply.
4. Is TDS applicable to transporters?
   It can be, but Section 194C provides a specific exemption for qualifying goods carriage contractors who own 10 or fewer goods carriages and furnish the required declaration along with PAN.
5. Is Section 194C applicable to individuals?
   Yes, eligible individuals/HUFs can be required to deduct TDS under Section 194C. However, the individual/HUF must fall within the specified-person conditions, and payments made exclusively for personal purposes are outside the provision.
6. Is TDS deducted on the full invoice value?
   The applicable amount depends on the nature of the transaction. In specified manufacturing/supply cases, Section 194C contains a specific rule where separately stated material value may be excluded. GST treatment also needs to be considered based on the applicable rules and invoice structure.