As per the provisions of Section 194C of the Income Tax Act if any payment is made to the resident contractor or sub-contractor and if it exceeds the specified amount then tax will be deducted under this section.
What is Section 194C?
As per section 194C, when a person is responsible for paying any sum to a resident contractor for carrying out any work (including the supply of labour) in the execution of a contract between the contractor and the specified person, then they shall deduct TDS while making the payment.
Work for the purpose of Section 194C shall include the following:
- Broadcasting and telecasting including the production of programs for such broadcasting or telecasting
- Carriage of goods and passengers by any mode of transportation, other than railways
- Manufacturing or supplying of a product according to the requirement or specification of a customer by using the materials supplied from such customer, but does not include manufacturing or supplying of a product according to the requirements or specifications of a customer by using the materials purchased from a person, other than a customer.
Specified person includes:
- The Central Government or any State Government, or
- The local authority, or
- Any corporation established by or under a Central, State, or Provincial Act, or
- Company, or
- Co-operative society, or
- Any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for the purpose of planning, development, or improvement of cities, towns, and villages or for both; or
- A registered society, or
- Any trust
- Any Individual or HUF who is liable to get his books of account audited in the previous financial year.
When to deduct TDS u/s 194C?
The TDS shall be deducted while making the payment. The date of payment shall be earlier of the below:
- Date of actual payment of cash or
- The date of crediting the sum to the payee’s account or
- The date of issue of cheque, draft, or by any other mode
TDS Rates under section 194C
|Nature of payment||TDS Rate|
|Payment to resident Individual or HUF||1%|
|Payment to any resident other than Individual or HUF||2%|
In a case where no PAN is provided by the contractor, the rate of TDS will be 20%.
Who is a sub-contractor as per section 194C?
Any person who enters into a contract with the contractor for the purpose of supply of labour either fully or partly for the work undertaken shall mean as a sub-contractor.
The following points need to be considered for deducting the TDS of the sub-contractor u/s 194C.
- The contractor should be a resident while making payment to the subcontractor then they shall deduct TDS at the rate of 1%.
- The payment date shall be earlier of the date of actual payment of cash or the date of crediting the sum to the payee’s account or the date of a cheque, draft, or by any other mode.
- It shall also be noted that the contractor should not be an Individual or HUF(except Individual/HUF covered under tax audit u/s 44AB.)
- The subcontractor should also be a resident under the ambit of this section.
- The amount of consideration of the contract should not be less than INR 30000.
Exemptions from deduction of TDS u/s 194C?
Section 194C shall not apply in the following cases :
- If the single payment made during the financial year to the contractor does not exceed INR 30,000 then no TDS is required to be deducted. But if the cumulative payments made during the financial year exceed INR 1,00,000 then the TDS needs to be deducted from the total payments made.
- No TDS is to be deducted by the Individual or HUF for the payment made to the Contractor if such sum is expended for personal use.
- No TDS shall be deducted from the amount paid to the contractor provided, they have a business of plying, hiring, or leasing of goods and carriages. Also, they own 10 or fewer goods or carriages at any point of time during the previous F.Y. and have furnished their PAN.
ABC Ltd. has given a contract to Mr. Ram and made a payment of INR 25,000 during the year. Here the company is not liable to deduct TDS as the payment doesn’t exceed INR 30,000.
ABC Ltd. has given a contract to Mr. Ram and made 5 payments of INR 25,000 each during the year. Here, the individual limit of INR 30,000 has not been exceeded but the aggregate limit of INR 1,00,000 has been exceeded during the year. So the company ABC ltd. has to deduct TDS on the whole amount of INR 1,25,000.
The deductor who deducts TDS from contract payments needs to file a quarterly return in Form 26Q. Form 26Q contains details of the amount paid to the contractor and the TDS deducted.
In the case of TDS deducted u/s 194C, the deductor will issue TDS Certificate in Form 16A on a quarterly basis. The deductor should issue Form 16A within 15 days from the due date of furnishing the TDS return and it can be downloaded from the TRACES.
No, the payments made to the non-resident contractors would come within the preview of section 195.
Tax is to be deducted only on the gross amount of payment excluding any other taxes like GST.
As per section 194C TDS is applicable only when payment made to contractors/sub-contractors is either a work contract or a contract for the supply of labour for a works contract. If payment is made under the Contract for the sale of goods then this section is not applicable.