Tax Deducted at Source (TDS) is a mechanism where tax is collected at the point of certain payments and deposited with the government on the recipient's behalf. Section 194C of the Income-tax Act governs TDS on payments to contractors.
This guide sets out the TDS rate under Section 194C, the threshold that triggers deduction, who must deduct, and the deposit and return-filing compliance that follows.
What is Section 194C?
Section 194C requires TDS on payments to resident contractors and sub-contractors for carrying out any work, including supply of labour.
Rate, threshold and who deducts
| Nature of payment | Payments to contractors |
|---|---|
| TDS rate | 1% for individuals/HUF payees, 2% for others |
| Threshold | ₹30,000 per single contract, or ₹1,00,000 in aggregate during the year |
| Who deducts (deductor) | Business/person liable to audit or specified payers |
| Whose income (deductee) | Contractor / sub-contractor |
| Time of deduction | At credit or payment, whichever is earlier |
Key points
- No TDS on payments to a transporter who owns 10 or fewer goods carriages and furnishes PAN with a declaration.
Compliance for the deductor
- Deduct at the right time. Deduct TDS on payments to contractors at credit or payment, whichever is earlier.
- Deposit to the government. Pay the deducted tax by the 7th of the following month (special dates apply for March and for Form 26QB).
- File the TDS return. Report the deduction in the quarterly TDS return (Form 24Q/26Q/27Q as applicable) on the TRACES/e-filing system.
- Issue the TDS certificate. Give the deductee Form 16/16A so they can claim credit in their return.
How the deductee claims credit
TDS deducted under Section 194C appears in the deductee's Form 26AS and Annual Information Statement (AIS). It is adjusted against the final tax liability when the deductee files their income tax return, and any excess is refunded.
Frequently asked questions
Does 194C apply to a one-off small payment?
Only if a single payment exceeds ₹30,000 or annual aggregate crosses ₹1,00,000.
What happens if TDS is not deducted?
The payer can face disallowance of the expense, interest at 1%–1.5% per month, and penalties. It is important to deduct and deposit on time.
By when must TDS be deposited?
Generally by the 7th of the month following deduction (30 April for amounts deducted in March), with separate rules for property-related challans.