Section 194C TDS Rate Limit: A Comprehensive Overview
- Dipali Waghmode
- Aug 18
- 7 min read
Updated: Aug 19
The TDS that must be subtracted from certain payments made to resident contractors and subcontractors is covered by Section 194C of the Income Tax Act of 1961. The task of deducting TDS is typically assigned to the people who are paying the contractors or subcontractors. Therefore, in order to avoid the consequences of failing to deduct the same, both the contractor and the payer (party or person) must be aware of this section of the ITA. To keep their profits from declining, contractors should also learn about zero or reduced TDS provisions. In this article, we will discuss the TDS rate limit under Section 194C in detail.
Table of Contents
What is Section 194C?
Before paying contractors or subcontractors for any type of work they perform, Section 194C requires that a payer deduct TDS. After that, the contractor deposits the TDS amount with the government. This clause is crucial for companies and contractors to comprehend since it covers a wide range of work and contracts, such as construction, transportation, and other services. Payments paid to resident contractors or subcontractors are covered under this provision. Certain exclusions do exist, though, such as tiny companies with low revenue that might not be subject to TDS regulations.
Any of the following could be the contract's parties:
Any Local Authority
The Central Government or any State Government
Any Statutory Corporation
Any corporation set up by or under a Central, State or Provisional Act
Any Co-operative Society
Any Company
Any organisation established in India by law or by any other authority that is tasked with addressing and meeting housing needs, planning, developing, or improving cities, towns, and villages, or both;
Any society registered in any part of India under the Society Registration Act, 1980, or under any applicable law
Any trust
Any firm
Any university or deemed university
Any foreign state government, foreign business, or organisation or organisation that was not founded in India
Anyone who has total revenues from their business or profession that surpass 1 crore or 50 lakhs during the previous fiscal year, whether they are an individual, HUF, AOP, or BOI.
What is “Work” under Section 194C?
Work under Section 194C includes:
Advertising
Broadcasting and telecasting
Catering
Transportation of goods and passengers, other than railways
Creating a product according to the customer specifications and using materials provided by them
Contractor and Sub-Contractor under Section 194C
A contractor is any individual who enters into an agreement to perform any type of work (including the provision of labour) with the federal, state, or local government, corporation, enterprise, or cooperative society. According to the terms of the contractor's agreement with any of the authorities listed in this section, a subcontractor is a person who enters into a contractual arrangement with the contractor to perform or supply labour for the execution of all or a portion of the work undertaken by the contractor under a contract with any of the authorities, or to supply labour in whole or in part.
Completing all or a portion of the work committed to by the contractor
Providing labour for all or a portion of the work that the contractor undertakes
Other Conditions
A contractor or subcontractor who qualifies as a resident under Section 6 receives payment.
The payment is made by a designated individual.
Any task that is completed, including labour supply, is compensated.
At least Rs. 30,000 shall be the minimum amount of consideration in the contract against which payment is being made.
The amount owed for the work completed should be paid by the contractor.
When is TDS Deducted under Section 194C?
TDS should be subtracted by the payer paying to the resident contractor or subcontractor in the following cases”
When the amount is credited to the payee's account
When the payment is made, whichever comes first
Even if the payer moves the amount owed to the resident contractor or subcontractor to the suspense account in his books, tax still needs to be subtracted.
When is TDS Not Deductible under Section 194C
In the following situations, no tax deduction is necessary:
If a single payment under a contract is Rs. 30,000 or less, there is no need for TDS.
If a contractor receives Rs. 1,00,000 or less in total payments within a fiscal year, there is no need for TDS.
If the payment is for personal use, neither individuals nor HUFs are required to deduct TDS.
Contractors that hire, lease, or ply goods carriages are exempt from TDS if they owned 10 or fewer goods carriages in the preceding year.
They give the payer their PAN and a declaration attesting to this.
What is the Section 194C TDS Rate Limit?
The type of contractor and whether or not they have a valid Permanent Account Number (PAN) determine the TDS rates under Section 194C. The rates are:
If a valid PAN is presented, TDS is withheld at 1% from the income of individuals or Hindu Undivided Families (HUFs).
For other residents (businesses, firms, etc.), TDS is withheld at a rate of 2% in the event that a legitimate PAN is shown.
For Transport Contractors: No TDS is due if a transporter files a declaration with their PAN and owns fewer than ten goods carriages during the preceding year. The TDS rate is 20% otherwise.
The TDS rate always rises to 20% on the contractor’s inability to furnish a PAN.
Below is a table that details the rate at which TDS must be withheld under section 194C.
Nature of Payment | TDS Rate | TDS Rate (PAN Not Available) |
Payment made to Resident individual or HUF | 1% | 20% |
Payment made to any Resident person other than individual / HUF | 2% | 20% |
Payment made to Transporters | NIL | 20% |
The AO will issue a lower deduction certificate if it is convinced that the contractor's or subcontractor's total income warrants a TDS deduction at any lower rate or none at all. The payer will then deduct TDS for that specific contractor if they provide a reduced rate or nil TDS certificate.
TDS Deduction Threshold under Section 194C
If the contract payment does not exceed Rs. 30,000, no deduction will be necessary.
If the total paid to the contractors throughout the financial year exceeds Rs. 30,000 in a single payment or Rs. 1,00,000 as a whole, TDS would be withheld.
TDS shall also be withheld under Sec. 194C if the total amount credited or paid to the contractor throughout the financial year exceeds Rs. 1,00,000, even if a single payment does not exceed Rs. 30,000.
Time Limit to Deposit TDS under Section 194C
Payments made by the government or on its behalf should be handled the same day. In situations involving transactions outside of government:
The deadline is April 30th at the latest if the money is credited in March.
For the remaining months, the deduction must be finished within seven days of the month's end.
Time Limit to File TDS under Section 194C
A quarterly TDS return in Form 26Q must be filed once TDS has been deposited to the government. The deadlines are listed below:
Quarter | Due date |
April - June | 31st July |
July-September | 31st October |
October-December | 31st January |
January - March | 30th April |
Time Limit for TDS Certificate Issuance under Section 194C
TDS certificates must be issued quarterly on Form 16A for payments other than salaries. The following dates must pass before the certificate is issued:
Quarter | Due date |
April to June | 15th August |
July to September | 15th November |
October to December | 15th February |
January to March | 15th June |
In order to issue a TDS certificate in Form 16A, all deductors must generate the certificate using the TIN central system and download it from the TIN website using a unique TDS certificate number. Either a digital signature or a manual signature can be used to authenticate the certificate in question.
Calculation of TDS under Section 194C
The following things are to be noted when determining the TDS amount under section 194C:
Take into account the invoice value less the cost of commodities when dealing with contracts that involve a composite supply of goods and services. Make sure the worth of the goods is stated clearly on the invoice. TDS should be subtracted from the overall invoice value if this information is absent from the invoice.
Section 194C of the Income Tax Act does not apply to commissions or brokerages on fixed deposits.
Section 194C covers payments made to clearing and forwarding agents for the transportation of goods.
Unless the bus, aeroplane, or other form of transportation is chartered, in which case section 194C applies, payments made to airlines or travel agencies for ticket sales are not included.
Section 194C of the Income Tax Act governs payments made to contractors or electricians for electrical work.
Conclusion
For companies and individuals involved in contracts or services that require payments to contractors, Section 194C of the Income Tax Act is a crucial clause. It ensures compliance and curbs the possibility of tax evasion by requiring the deduction of TDS. Following Section 194C's guidelines guarantees timely tax deductions and prevents fines, regardless of whether you are a payer or a contractor. Businesses can more successfully negotiate the tax system if they are aware of the exclusions and exceptions, as well as when and how TDS should be withheld.
FAQ
Q1. What is Section 194C?
TDS on payments made to contractors and subcontractors comes under Section 194C.
Q2. What is the threshold limit for Section 194C TDS deduction?
There is no need for TDS to be subtracted from the contractor's payment if it is less than Rs 30,000. Additionally, no TDS would be withheld under Section 194C if the amount of all such payments made or due during a fiscal year is less than Rs. 1,00,000.
Q3. What is the rate of TDS under Section 194C?
TDS must be deducted at a rate of 1% for payments made to an individual or HUF, and 2% if it is made to others.
Q4. Is a written contract mandatory for TDS u/s 194C?
No, a written contract is not necessary in this case. TDS is deducted even in cases when an agreement is verbal.
Q5. Is payment to a manpower supply covered by section 194C?
Yes. The provision of labour is likewise covered under Section 194C. Payments for labour services are made to manpower supply companies. Section 194C's provisions will therefore be applicable.
Q6. Is TDS applicable for payments made for goods supply?
The supply of goods is exempt from TDS. Only labour charges in composite contracts are covered. TDS is only subtracted from labour costs if material and labour costs are listed separately on the invoice.
Q7. What are the consequences of Section 194C non-compliance?
Interest, penalties, and even imprisonment are among the consequences of breaking Section 194C of the Income Tax Act. In addition to penalties ranging from Rs. 10,000 to Rs. 1 lakh, failure to deduct or deposit TDS within the allotted time frame may result in interest at the rate of 1% per month or a portion of it.
