What is the TDS rate for contract work under Section 194C?

The TDS rate for contract work under Section 194C is 1% for payments made to individual or HUF contractors and 2% for payments made to others (such as companies, firms, etc.). These rates are applicable on payments made to contractors for executing work or services, with specific exemptions based on the threshold limits mentioned under the section.

How is TDS calculated for rental income under Section 194I?

Under Section 194I, TDS is calculated on the total rent paid or payable to the landlord. The TDS rate is 10% for residents and 30% for Non-Resident Indians (NRIs). If the rent exceeds ₹6,00,000 annually, TDS needs to be deducted; however, if the rent does not exceed this threshold, individuals or HUFs are exempt from TDS.

What is the new TDS threshold for rent payments in FY 2025-26 under Section 194I?

For FY 2025-26, the threshold for TDS on rent payments has increased from ₹2,40,000 to ₹6,00,000 per annum. This change means that no TDS is required for rent payments below this threshold for individuals or HUFs not under tax audit, simplifying compliance for smaller payments.

Who is required to deduct TDS under Section 194C?

TDS under Section 194C must be deducted by any person (excluding individual/HUFs not under tax audit) who makes a payment to a contractor or subcontractor for executing a contract. The payer can be a company, government body, firm, or other specified entities. It is important that the payer ensures the contractor is eligible for the appropriate TDS rate based on the thresholds and rates.

What happens if PAN is not provided by the deductee?

If PAN is not provided by the deductee (contractor or landlord), the TDS will be deducted at a higher rate of 20% under both Sections 194C and 194I. The deductee can later claim the excess TDS deducted by filing their Income Tax Return and requesting a refund.

Are individuals required to deduct TDS on rental payments under Section 194I?

Individuals or HUFs not subject to tax audit are exempt from deducting TDS on rental payments under Section 194I if the total annual rent does not exceed ₹6,00,000 (effective FY 2025-26). However, individuals and HUFs subject to tax audit are still required to deduct TDS, regardless of the rent amount.

What steps should be taken if TDS was deducted at a higher rate?

If TDS has been deducted at a higher rate than applicable, the deductee can claim a refund by filing their Income Tax Return (ITR). The excess amount will be refunded to the deductee, or the excess TDS can be adjusted against future tax liabilities, ensuring that no double taxation occurs.

Can a contractor claim a tax deduction under Section 194C for materials supplied along with labor?

No, under Section 194C, TDS is calculated only on the labor portion of the contract payment. If the contract involves the supply of both goods and services (like material and labor), the TDS is deducted on the labor portion only. The cost of materials is not included in the calculation of TDS.

How does TDS on contract work under Section 194C differ from TDS on rental income under Section 194I?

TDS on contract work under Section 194C applies to payments made for the execution of a contract, and the rates are 1% for individual/HUF contractors and 2% for others. In contrast, Section 194I applies to rental income, with a 10% TDS rate for residents and 30% for non-residents. The thresholds for both provisions differ, with Section 194C focusing on work contracts and Section 194I targeting rent payments for land, buildings, or machinery. The exemptions and deductions available under both sections also vary significantly.

Section 194C vs 194I: TDS on Contract Work vs Rent for 2024-25

The Indian Income Tax Act, 1961, incorporates several provisions for Tax Deducted at Source (TDS) to ensure timely collection of taxes. Two significant provisions, Section 194C and Section 194I, deal with TDS on contract work payments and rental income, respectively. Section 194C applies to payments made to contractors or subcontractors for the execution of a contract, while Section 194I governs TDS on rent paid for land, building, and machinery. Both sections have different applicability, thresholds, rates, and compliance requirements, making it crucial for taxpayers to understand their nuances, particularly in the context of the changes for FY 2024-25 and FY 2025-26. These provisions ensure that the government receives tax deductions at the source of income, thereby streamlining the tax collection process.

Table of Content

What are the key differences between Section 194C vs Section 194I regarding TDS on contract work and rental income deductions?

Section 194C: TDS on Contract Work

Section 194I: TDS on Rental Income

Key Differences Between Section 194C and Section 194I

Practical FAQs Related to Bank Account Forms and TDS

Summary for FY 2024-25 & FY 2025-26

Most Asked Questions

What are the key differences between Section 194C vs Section 194I regarding TDS on contract work and rental income deductions?

Section 194C and Section 194I both deal with TDS deductions, but they apply to different types of payments. Section 194C focuses on payments made for contract work, requiring TDS at 1% for individual/HUF contractors and 2% for others, with specific thresholds for exemption. On the other hand, Section 194I applies to rental income, where TDS is deducted at 10% for rent payments on land, building, or machinery, and a higher rate of 30% for non-resident landlords. The thresholds for rental income TDS have increased to ₹6 lakhs per annum from FY 2025-26, whereas Section 194C has its own exemptions for personal use payments. Both sections require proper reporting and adherence to PAN and bank account details for accurate TDS credit.

Section 194C: TDS on Contract Work

Applicability of Section 194C

Section 194C applies to payments made by any person (excluding individuals or Hindu Undivided Families (HUF) not subject to tax audit) to a contractor or subcontractor for executing work. This includes contracts for construction, supply of labor, and certain other services like transportation and installation. The provision is applicable to all types of organizations, including government bodies, companies, firms, societies, and trusts. It ensures that TDS is deducted at the point of payment to contractors involved in work execution, making it an essential compliance requirement for various business entities.

Thresholds and Rates for FY 2024-25 & FY 2025-26

For Section 194C, TDS is deducted at the rate of:

1% for payments made to individual/HUF contractors.
2% for payments made to others (i.e., firms, companies, etc.).

However, there are exemptions in the following cases:

If the single payment under a contract is ₹30,000 or less.
If the aggregate payment to a contractor in a financial year does not exceed ₹1,00,000.
Payments made by individuals or HUFs for personal use are also exempt from TDS.

These rates and thresholds remain largely the same for FY 2024-25 and FY 2025-26, though some broader exemptions may be introduced, particularly concerning senior citizens and rent payments from FY 2025-26 onwards.

Calculation Notes for TDS on Contract Work

TDS under Section 194C is calculated on the invoice value excluding the cost of goods supplied, where applicable. For contracts that involve both goods and services, TDS is deducted on the labor portion of the payment only. Additionally, commission or brokerage on fixed deposits and payments to clearing agents or electricians fall under different provisions and are not subject to Section 194C. It is crucial for businesses to ensure that the correct portion of the payment is considered while calculating TDS to avoid discrepancies.

Section 194I: TDS on Rental Income

Applicability of Section 194I

Section 194I applies to payments made for the rent of land, building, furniture, or machinery. The provision is applicable to any person who is required to deduct TDS on rent payments made to residents. However, individuals or HUFs not subject to tax audit are exempt from deducting TDS if their annual rent payments do not exceed the threshold limit. For rent paid to non-residents, the TDS rate is higher. Section 194I helps in the timely deduction of taxes from rental income, ensuring that landlords pay their due taxes through the deductors.

Thresholds and Rates for FY 2024-25 & FY 2025-26

For Section 194I, TDS is deducted at the rate of:

10% for rent paid for land, building, furniture, or machinery to residents.
30% for rent paid to Non-Resident Indians (NRIs), with applicable surcharge and cess.

The threshold for TDS deduction on rental income has been updated for FY 2025-26:

TDS is applicable only when the annual rent exceeds ₹6,00,000. This is an increase from the previous limit of ₹2,40,000 in FY 2024-25.

For individuals or HUFs not subject to tax audit, no TDS is required if the rent does not exceed the specified limit. These provisions remain consistent for FY 2024-25 and FY 2025-26, with only the threshold limit for TDS being revised for the latter.

Calculation Notes for TDS on Rental Income

Under Section 194I, TDS is calculated on the total rent paid or payable for land, building, or machinery. If rent is paid monthly, TDS is deducted on the monthly payment. For payments to non-residents, the TDS rate of 30% applies, along with additional surcharge and cess, making it crucial for the deductor to ensure the correct rate is applied. It is also important to ensure that the TDS is deducted at the correct time to avoid penalties and ensure proper credit of TDS to the deductee's account.

Key Differences Between Section 194C and Section 194I

Feature	Section 194C (Contract Work)	Section 194I (Rental Income)
Nature of Payment	Payments for contract work or services	Payments for rent of land, building, machinery, etc.
Applicability	Applicable to contractors and subcontractors for work execution	Applicable to individuals/entities paying rent
Deductee	Contractors, subcontractors	Landlords (residents and non-residents)
Threshold Limit	₹30,000 for a single payment; ₹1,00,000 for aggregate payments	₹6,00,000 per annum from FY 2025-26
TDS Rate	1% for individual/HUF contractors; 2% for others	10% for residents; 30% for non-residents
Exemption	Exempt for personal use payments by individuals/HUFs	Exempt for individuals/HUFs not subject to tax audit
Tax Filing Requirement	TDS returns filed quarterly by the deductor	TDS returns filed quarterly by the deductor
Calculation	TDS on the invoice value excluding goods cost	TDS on total rent paid or payable

Practical FAQs Related to Bank Account Forms and TDS

Q: Should bank account details be provided for TDS deduction under these sections?

Yes, PAN and bank details of contractors or landlords should be collected and quoted in TDS returns to avoid higher TDS rates and ensure proper credit of TDS.

Q: What if PAN is not provided by the deductee?

TDS is deducted at a higher rate (20%) if PAN is not furnished under both Sections 194C and 194I.

Q: Are individuals required to deduct TDS under Section 194I on rent?

Individuals or HUFs not subject to tax audit are exempt from deducting TDS under Section 194I if rent does not exceed the threshold of ₹6,00,000 in FY 2025-26.

Q: How to report TDS deducted under these sections?

Deductors must file TDS returns quarterly, furnishing details of deductees and TDS amounts, linking PAN and bank details for proper credit.

Q: Can a contractor under Section 194C deduct TDS on the cost of materials supplied along with labor?

No, TDS under Section 194C is calculated only on the labor portion of the contract, excluding the cost of materials if they are separately mentioned in the invoice.

Q: Is there any threshold for TDS on rental income?

Yes, TDS under Section 194I is deducted if the rent exceeds ₹6,00,000 in FY 2025-26. If rent is below this threshold, no TDS is required, except in cases of payments to non-residents.

Q: Can a contractor claim an exemption from TDS under Section 194C?

Yes, a contractor can be exempt if the contract payment is under ₹30,000 or the aggregate payment for the financial year is below ₹1,00,000.

Q: What is the TDS rate for rent paid to NRIs under Section 194I?

The TDS rate for rent paid to non-resident Indians (NRIs) under Section 194I is 30%, plus applicable surcharge and cess.

Q: What should be done if TDS was deducted at a higher rate?

If TDS is deducted at a higher rate, the deductee can claim a refund by filing their income tax return (ITR), or the excess amount can be adjusted in subsequent payments.

Q: Are there any exemptions for TDS on rent paid to individuals?

Yes, individuals or HUFs not subject to tax audit are exempt from deducting TDS on rent under Section 194I if the rent does not exceed ₹6,00,000 in FY 2025-26.

Summary for FY 2024-25 & FY 2025-26

In FY 2024-25, Section 194C applies to TDS on contract work, with a 1% rate for individual/HUF contractors and 2% for others. Section 194I governs TDS on rental income, applying a 10% rate for residents and 30% for non-residents. For FY 2025-26, there is an update in Section 194I, where the threshold for TDS on rent payments has increased to ₹6,00,000 per annum, making it easier for smaller landlords to avoid TDS deductions.

Both sections require proper reporting of PAN and bank account details for accurate credit of TDS. While Section 194C remains largely unchanged, Section 194I sees an increase in the threshold limit, making compliance simpler for taxpayers. It is important for deductors to be aware of these provisions to ensure correct deduction and avoid penalties. For individuals or HUFs not subject to tax audit, there are exemptions under both sections based on the specified thresholds.

FAQs

What is the TDS rate for contract work under Section 194C?
The TDS rate for contract work under Section 194C is 1% for payments made to individual or HUF contractors and 2% for payments made to others (such as companies, firms, etc.). These rates are applicable on payments made to contractors for executing work or services, with specific exemptions based on the threshold limits mentioned under the section.
How is TDS calculated for rental income under Section 194I?
Under Section 194I, TDS is calculated on the total rent paid or payable to the landlord. The TDS rate is 10% for residents and 30% for Non-Resident Indians (NRIs). If the rent exceeds ₹6,00,000 annually, TDS needs to be deducted; however, if the rent does not exceed this threshold, individuals or HUFs are exempt from TDS.
What is the new TDS threshold for rent payments in FY 2025-26 under Section 194I?
For FY 2025-26, the threshold for TDS on rent payments has increased from ₹2,40,000 to ₹6,00,000 per annum. This change means that no TDS is required for rent payments below this threshold for individuals or HUFs not under tax audit, simplifying compliance for smaller payments.
Who is required to deduct TDS under Section 194C?
TDS under Section 194C must be deducted by any person (excluding individual/HUFs not under tax audit) who makes a payment to a contractor or subcontractor for executing a contract. The payer can be a company, government body, firm, or other specified entities. It is important that the payer ensures the contractor is eligible for the appropriate TDS rate based on the thresholds and rates.
What happens if PAN is not provided by the deductee?
If PAN is not provided by the deductee (contractor or landlord), the TDS will be deducted at a higher rate of 20% under both Sections 194C and 194I. The deductee can later claim the excess TDS deducted by filing their Income Tax Return and requesting a refund.
Are individuals required to deduct TDS on rental payments under Section 194I?
Individuals or HUFs not subject to tax audit are exempt from deducting TDS on rental payments under Section 194I if the total annual rent does not exceed ₹6,00,000 (effective FY 2025-26). However, individuals and HUFs subject to tax audit are still required to deduct TDS, regardless of the rent amount.
How can a contractor claim an exemption from TDS under Section 194C?A contractor can be exempt from TDS under Section 194C if:
The single payment for the contract does not exceed ₹30,000.
The aggregate payments to the contractor in a financial year do not exceed ₹1,00,000.
The payments are made by an individual or HUF for personal use (i.e., non-business purposes).
What is the TDS rate for rent paid to NRIs under Section 194I?
For rent paid to Non-Resident Indians (NRIs) under Section 194I, the TDS rate is 30%. Additionally, surcharge and cess may apply depending on the income level of the NRI. This higher rate ensures that the tax is collected at source from foreign residents receiving rental income in India.
What steps should be taken if TDS was deducted at a higher rate?
If TDS has been deducted at a higher rate than applicable, the deductee can claim a refund by filing their Income Tax Return (ITR). The excess amount will be refunded to the deductee, or the excess TDS can be adjusted against future tax liabilities, ensuring that no double taxation occurs.
Are there any exemptions for TDS on rent paid to individuals?
Yes, under Section 194I, individuals or HUFs not subject to tax audit are exempt from deducting TDS on rent payments if the total annual rent does not exceed ₹6,00,000. This exemption applies only to individuals and HUFs whose business or profession is not under tax audit.
Can a contractor claim a tax deduction under Section 194C for materials supplied along with labor?
No, under Section 194C, TDS is calculated only on the labor portion of the contract payment. If the contract involves the supply of both goods and services (like material and labor), the TDS is deducted on the labor portion only. The cost of materials is not included in the calculation of TDS.
How does TDS on contract work under Section 194C differ from TDS on rental income under Section 194I?
TDS on contract work under Section 194C applies to payments made for the execution of a contract, and the rates are 1% for individual/HUF contractors and 2% for others. In contrast, Section 194I applies to rental income, with a 10% TDS rate for residents and 30% for non-residents. The thresholds for both provisions differ, with Section 194C focusing on work contracts and Section 194I targeting rent payments for land, buildings, or machinery. The exemptions and deductions available under both sections also vary significantly.