Section 194C of the Income Tax Act: TDS on Payments to Contractors and Subcontractors
Section 194C of the Income Tax Act focuses on the deduction of tax at source (TDS) on payments made to contractors and subcontractors for executing various work. This provision is crucial for both individuals and businesses that engage contractors for services, as it specifies the conditions for TDS deduction, rates, and applicable exemptions.
What is Section 194C?
Section 194C applies to any person responsible for making payments to a resident contractor or subcontractor for carrying out work under a contract. The contract may involve labor supply or other services, and the payer can be a variety of entities, including:
- The Central Government or any State Government
- Local authorities, statutory corporations, or corporations established under any law
- Companies, co-operative societies, or trusts
- Firms, societies registered under the Societies Registration Act, and more.
What Does “Work” Mean Under Section 194C?
In the context of this section, “work” includes:
- Advertising and media services
- Broadcasting, including production for broadcasting
- Carriage of goods and passengers (excluding railways)
- Catering services
- Manufacturing or supplying a product according to a customer’s specification, using materials provided by the customer.
Who Is Considered a Sub-Contractor Under Section 194C?
A subcontractor is any individual or entity who:
- Enters into a contract with a contractor for executing part of the work.
- Supplies labor to fulfill the contractor’s obligations.
Conditions for Deducting TDS
For TDS to be deducted under Section 194C, the following conditions must be met:
- Payment is made to a resident contractor or subcontractor as defined under Section 6 of the Income Tax Act.
- The work is carried out by the contractor or subcontractor under the prescribed contract.
- The payment is at least Rs. 30,000 for a single transaction or Rs. 1,00,000 during the financial year.
When Should TDS Be Deducted?
TDS under Section 194C must be deducted at the earliest of:
- When the payment is credited to the contractor’s account.
- When the payment is made by cash, cheque, or any other mode.
TDS Rate Under Section 194C
The TDS rates applicable under Section 194C are as follows:
Nature of Payment | TDS Rate (with PAN) | TDS Rate (without PAN) |
Payments to resident individual/HUF | 1% | 20% |
Payments to other resident entities | 2% | 20% |
Payments to transporters | Nil | 20% |
Threshold Limit for TDS Deduction
TDS is not required if:
- The payment does not exceed Rs. 30,000 for a single payment.
- The total payments to a contractor do not exceed Rs. 1,00,000 during the financial year.
Exceptions to TDS Deduction on Contractor Payments
- Composite Contracts: If materials are supplied as part of the contract, TDS may be deducted on the gross or net payment, depending on the contract terms.
- Labour-Only Contracts: If a contractor is only providing labor and the government or other entity supplies materials, TDS is calculated based on the labor payment only.
Section 194C of the Income Tax Act deals with the deduction of tax at source (TDS) on payments made to contractors or sub-contractors. This section outlines the guidelines and conditions under which TDS is applicable to payments for services, including labor supply, made by various entities.
What is Section 194C?
Section 194C applies when a person makes a payment to a resident contractor or sub-contractor for the execution of work under a contract. These entities can include:
- Central or State Governments
- Local authorities
- Statutory Corporations
- Companies
- Co-operative societies
- Various other authorities, including universities, trusts, and firms
- Foreign governments or entities operating in India
- Individual businesses with high turnover (over Rs. 1 crore for businesses, or Rs. 50 lakh for professionals)
What is the Meaning of “Work” under Section 194C?
The term “work” under Section 194C encompasses:
- Advertising services
- Broadcasting and telecasting, including the production of related programs
- Transporting goods and passengers (excluding railways)
- Catering services
- Manufacturing or supplying products based on customer specifications using their materials
Who is Considered a Sub-Contractor under Section 194C?
A sub-contractor is anyone who enters into a contract with the main contractor to perform part of the work or supply labor for the main contract. This could include those who provide labor for the contractor’s project, wholly or partially.
Conditions for Deducting TDS under Section 194C
TDS needs to be deducted when:
- Payment is made to a resident contractor/sub-contractor
- Payment is made by any of the specified entities mentioned above
- The contract payment is at least Rs. 30,000
- The contract is related to the execution of any work or supply of labor
- The payment is made or credited within the prescribed timeframes
When to Deduct TDS?
TDS must be deducted at the earliest of the following:
- When the payment is credited to the contractor’s account
- When the payment is made (via cash, cheque, or other methods)
- If the sum is transferred to a suspense account, the TDS still applies
TDS Rates under Section 194C
- 1% for payments to resident individuals/HUF
- 2% for other residents (except individuals/HUF)
- 0% for transporters with PAN details
If PAN is not provided, the TDS rate is 20%.
When is TDS Not Required to Be Deducted?
TDS is not applicable under the following circumstances:
- Payments under Rs. 30,000 per contract or Rs. 1,00,000 in aggregate during the financial year.
- Payments for personal use by an individual or HUF.
- Payments to transporters owning fewer than ten goods carriages, provided they submit their PAN along with a declaration.
Time Limits for Depositing TDS
- Government payments: Same day
- Other payments: Within 7 days after the end of the month the TDS was deducted, or by April 30th for March payments.
TDS Certificate
The payer must issue a TDS certificate (Form 16A) for payments other than salary, within the following timelines:
- April to June: By August 15th
- July to September: By November 15th
- October to December: By February 15th
- January to March: By June 15th
TDS at a Lower Rate
Contractors can apply to the Assessing Officer (AO) for a lower TDS rate certificate if their income justifies it. Once approved, this certificate can be provided to the payer for TDS at a lower or nil rate. For any queries, contact us.
FAQs on Section 194C – TDS on Rent
1. What is Section 194C?
Section 194C mandates the deduction of TDS on payments made to contractors or subcontractors for carrying out work under a contract.
2. Who is responsible for deducting TDS under Section 194C?
Any person making payments to contractors or subcontractors for work carried out under a contract, including government bodies, corporations, firms, and individuals with significant business turnover.
3. What types of work are covered under Section 194C?
The section covers various types of work such as advertising, broadcasting, transportation, catering, and manufacturing or supplying products as per customer specifications.
4. What is the threshold for TDS deduction under Section 194C?
TDS must be deducted if the payment exceeds Rs. 30,000 in a single transaction or Rs. 1,00,000 in aggregate during the financial year.
5. What are the TDS rates under Section 194C?
The TDS rate is 1% for individuals or HUFs, 2% for other residents, and nil for transporters, provided PAN is available. If PAN is not available, the rate increases to 20%.
6. When should TDS be deducted under Section 194C?
TDS should be deducted at the time of payment or when the payment is credited to the contractor’s account, whichever occurs first.
7. Are there any exceptions to TDS deduction?
Yes, there are exceptions, especially in composite contracts where materials are involved. The TDS rate may be based on the gross or net payment depending on the contract terms.