Section 194C vs Section 194H: TDS on contract work vs commission payments

TDS (Tax Deducted at Source) provisions under Section 194C and Section 194H of the Income Tax Act, 1961 are pivotal for businesses and professionals when making payments in India. These provisions address two distinct types of payments: contract work and commission payments. As businesses continue to navigate the complexities of the Indian tax system, the recent amendments introduced in the Union Budgets of 2024 and 2025 have added more layers to the understanding of these provisions. These changes make it even more important for businesses to stay updated on the varying TDS rates, thresholds, and compliance requirements for each section. Let us explore the key differences between Section 194C and Section 194H, offering clarity on which section applies to different payments and providing guidance on how businesses can ensure compliance in the FY 2024-25.

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Table of Contents

• What is Section 194C vs Section 194H: TDS on contract work vs commission payments?

• Applicability and Thresholds for TDS under Section 194C and Section 194H (FY 2024-25)

• TDS Rates under Section 194C and Section 194H (Latest Amendments)

• Key Budget 2024 & 2025 Amendments

• Section 194C vs Section 194H: Key Differences and Considerations

• Frequently Asked Questions (FAQs)

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What is Section 194C vs Section 194H: TDS on contract work vs commission payments?

The primary distinction between Section 194C and Section 194H lies in the type of payments they govern. Section 194C pertains to payments made for contract work, which could encompass a wide range of services such as construction, transportation, or manufacturing under a contract. The payments to contractors or subcontractors for executing these services are subject to TDS, and the rate depends on the recipient's entity type (individual, HUF, firm, or company). In contrast, Section 194H addresses commission or brokerage payments, typically paid to intermediaries such as sales agents, brokers, or facilitators of transactions. These payments are different because they do not involve performing a service or work directly but rather facilitating a business deal or transaction. Therefore, businesses must assess the nature of the payment to determine which section applies, ensuring they adhere to the correct TDS rates and thresholds.

Nature of Payments Covered by Section 194C and Section 194H

1. Section 194C (TDS on Contract Work) Section 194C applies to payments made to contractors or subcontractors for carrying out work or services as per a contract. These can include services like construction, transportation, and manufacturing under a contract, or even consultancy and supply of labor. The key feature here is that the payment is for executing a specific task or service under an agreement. It is essential to note that the payment is tied to the execution of work as outlined in a formal contract. For example, if a company hires a contractor to build a factory or provide transportation services, TDS under Section 194C applies.

   
   

2. Section 194H (TDS on Commission/Brokerage) Section 194H governs payments made as commission or brokerage, which generally includes payments to agents, brokers, or any other intermediaries. These intermediaries facilitate or promote business deals or transactions. Common examples include real estate agents, insurance agents, and sales agents, who earn commission based on their role in securing or facilitating a transaction. Unlike Section 194C, which focuses on tangible work or services, Section 194H is concerned with payments made for facilitating business activities or deals, typically involving an intermediary between the parties involved in the transaction.

   
   

Applicability and Thresholds for TDS under Section 194C and Section 194H (FY 2024-25)

1. Section 194C: Section 194C applies to all individuals, firms, or companies making payments for contract work or services. However, there are specific thresholds that trigger the need for TDS deduction. The TDS must be deducted when the payment to a contractor exceeds ₹30,000 per contract or ₹1,00,000 in total payments during the financial year. This section applies to all types of contractors or subcontractors, excluding individuals or Hindu Undivided Families (HUFs) whose accounts are not subject to audit under the Income Tax Act. For example, a business that hires contractors for construction work must deduct TDS if the payment exceeds the prescribed thresholds.

   
   

2. Section 194H: Section 194H applies to commission or brokerage payments made during the financial year. For FY 2024-25, the threshold for TDS under this section has been revised to ₹20,000 annually (effective from April 1, 2025). This means that commission payments exceeding ₹20,000 within a financial year are subject to TDS. The section applies to all individuals and businesses, with some exemptions for specific types of commission payments (such as those related to banking transactions). An example could be a company paying an insurance agent a commission for securing a policy. If the total commission paid during the year exceeds ₹20,000, TDS will need to be deducted.

   
   

TDS Rates under Section 194C and Section 194H (Latest Amendments)

1. Section 194C: Under Section 194C, the TDS rate is 1% for individual and Hindu Undivided Family (HUF) contractors, and 2% for all other contractors, including firms, companies, and other entities. These rates have remained unchanged in the Union Budget of 2025, and the deduction applies to the total amount paid for services rendered under a contract. The TDS rate is designed to cover a wide range of contractors, from individual professionals to larger corporate entities, ensuring fair taxation on contract-based work.

   
   

2. Section 194H: Section 194H underwent significant changes in Budget 2024. The TDS rate for commission payments was reduced from 5% to 2%, effective from October 1, 2024. This reduction is aimed at providing relief to smaller businesses and individuals who earn commissions. Additionally, the threshold for TDS deduction under Section 194H has been increased from ₹15,000 to ₹20,000 annually, effective from April 1, 2025. These amendments are designed to reduce the compliance burden on commission earners while still ensuring tax collection for such intermediary services.

   
   

Key Budget 2024 & 2025 Amendments

1. Section 194H: The key amendments in Budget 2024 and 2025 for Section 194H include a significant increase in the threshold, from ₹15,000 to ₹20,000, making TDS applicable only for commission payments exceeding ₹20,000 annually. Moreover, the TDS rate for commission payments has been reduced from 5% to 2% starting from October 1, 2024. These amendments are particularly beneficial for small commission earners, as they reduce the TDS deduction rate and increase the threshold for TDS applicability.

   
   

2. Section 194C: For Section 194C, there were no changes to the TDS rates or thresholds in the Union Budgets of 2024 and 2025. The TDS rate remains at 1% for individual/HUF contractors and 2% for others, with the same threshold limits for contract payments (₹30,000 per contract or ₹1,00,000 annually). This stability ensures that businesses engaged in contract work can continue to comply with the same TDS rules without adjustments to their processes.

   
   

Section 194C vs Section 194H: Key Differences and Considerations

Section 194C and Section 194H, although both under the umbrella of TDS provisions, apply to very different categories of payments. Understanding these distinctions is essential for businesses and professionals to ensure compliance with the Income Tax Act, 1961. Below is a breakdown of the key differences:

1. Nature of Payments

1. Section 194C: This section primarily applies to payments made for contract work or services. It covers a wide variety of industries where services or work are carried out under a contract. Some common examples include:

2. Construction work (e.g., building or infrastructure development)

3. Transportation services (e.g., payments to truckers)

4. Manufacturing services under a contract (e.g., outsourcing production)

5. Consultancy services (e.g., payments for professional advice under a contract)

   
   

The key factor here is that the payment is made for executing or carrying out a specific task or service under an agreement.

1. Section 194H: Section 194H, in contrast, is specific to payments made as commission or brokerage. These payments are typically made to intermediaries such as:

2. Sales agents

3. Insurance agents

4. Real estate brokers

5. Other brokers or agents facilitating transactions, typically based on a percentage of the transaction value.

This section is not concerned with direct work or services, but rather with payments made for facilitating or promoting business deals.

2. TDS Rates

1. Section 194C: The TDS rate under Section 194C is relatively lower compared to Section 194H:

2. 1% for individual contractors or Hindu Undivided Families (HUF) who are not subject to a tax audit.

3. 2% for other types of contractors, such as firms, companies, etc.

These rates apply to payments made for contract work, as defined under the section. The rate remains unchanged in the Union Budget 2025, making it predictable for contractors to plan for TDS deductions.

1. Section 194H: Section 194H deals with commission or brokerage payments, and the TDS rates here are higher:

2. 2% effective from October 1, 2024 (down from 5%).

The reduced rate is a significant change introduced in Budget 2024, aimed at easing the burden on smaller commission earners. Previously, the rate was higher, but now it is aligned with the rate for Section 194C, making it more business-friendly.

3. Thresholds for TDS Deduction

1. Section 194C: The threshold for Section 194C is relatively higher compared to Section 194H, which means businesses must deduct TDS only when the payment to the contractor exceeds specific limits:

2. ₹30,000 per contract: If a business makes payments for a single contract that exceed ₹30,000, TDS must be deducted.

3. ₹1,00,000 annually: If the aggregate payments made to a contractor exceed ₹1,00,000 within a financial year, TDS is mandatory.

4. This higher threshold allows businesses to make larger payments under contracts before TDS becomes applicable, offering more flexibility to businesses dealing with multiple or higher-value contracts.

5. Section 194H: For Section 194H, the threshold has been set at ₹20,000 annually (effective from April 1, 2025). This means commission or brokerage payments exceeding ₹20,000 within a financial year are subject to TDS deductions. Prior to the amendment, the threshold was ₹15,000, but it was increased to ₹20,000 to ease the compliance burden for smaller commission earners. This change is part of the budget revisions aimed at simplifying the tax process for smaller businesses or individuals receiving commission payments.

   
   

4. Exemptions and Special Considerations

1. Section 194C: Section 194C does not apply to certain payments that are made for personal use by individuals or Hindu Undivided Families (HUFs) who are not subject to tax audits. There are also exemptions for certain small contractors and specific types of contract work (e.g., agricultural contracts, personal household services).

2. Section 194H: Certain types of commissions, such as bank commissions or commission for transactions involving financial products, may be exempt under Section 194H. This exemption typically applies if the commission is under a specific limit or if the payment is for services not directly related to business or commercial activities.

   
   

Frequently Asked Questions (FAQs)

Q1: How do I determine whether to deduct TDS under Section 194C or 194H?

• If the payment is made for work or services performed under a contract (e.g., construction, transport), Section 194C applies. If the payment is made as a commission or brokerage (e.g., for arranging sales or business deals), Section 194H applies.

  
  

Q2: Are bank commissions covered under Section 194H?

• Certain bank commissions are indeed covered under Section 194H. However, there may be exemptions depending on the specific nature of the commission. For example, some banking commissions may be exempted based on the regulations issued by the government.

  
  

Q3: What if a payment includes both contract and commission elements?

• If a payment includes both elements, the nature of the payment should be evaluated to determine the dominant component. For example, if the primary purpose of the payment is for executing a contract (e.g., construction services), Section 194C would apply. If the primary purpose is for facilitating or arranging a deal, Section 194H would apply.

  
  

Q4: Are there any changes in TDS compliance for small businesses or individuals?

• Yes, the reduced rate for Section 194H (from 5% to 2%) and the increased threshold (₹20,000 annually) ease the TDS compliance burden for smaller businesses or individuals who earn commissions. This makes it simpler for small commission earners to comply with TDS regulations.

  
  

Q5: How is TDS calculated for composite contracts (goods + services)?

• Under Section 194C, TDS is deducted only on the value attributable to services or labor, not on the goods portion of the contract, provided the goods and services are separately specified in the invoice.

  
  

Q6: What are the exemptions under Section 194C and Section 194H?

• Section 194C exempts certain personal payments made by individuals or HUFs who do not require a tax audit. Section 194H allows exemptions for certain types of commission (e.g., banking commissions) under specified conditions.

  
  

Q7: How are payments made to freelancers treated under these provisions?

• Payments made to freelancers for professional services are typically covered under Section 194C, provided the payment is for a contract or service. If a freelancer earns commission for facilitating transactions, Section 194H would apply.

  
  

Q8: What happens if I exceed the TDS threshold?

• If your payments exceed the TDS threshold under either Section 194C or Section 194H, TDS must be deducted at the applicable rate, and you must remit the amount to the Income Tax Department to avoid penalties.

  
  

Q9: How do the new rates for Section 194H affect commission payments for agents?

• The reduced TDS rate of 2% (from 5%) under Section 194H, effective from October 2024, provides a relief for agents and brokers who receive commission payments. This lowers the TDS burden and simplifies compliance.

  
  

Q10: Are there any specific reporting requirements for Section 194C and Section 194H?

• Yes, businesses must file TDS returns for Section 194C and Section 194H to report the TDS deducted and paid. This must be done through quarterly TDS returns, which should include the details of the payment, TDS deducted, and remittance to the government.

  
  

Q11: Can Section 194C apply to payments made to non-resident contractors?

• Yes, Section 194C applies to payments made to non-resident contractors as well, but the TDS rate may vary based on the provisions for non-residents under the Income Tax Act.

  
  

Q12: How do the provisions impact businesses with multiple contracts or commission payments?

• Businesses with multiple contracts or commission payments should track the total payments made under each section to ensure TDS is deducted when applicable. Multiple small payments may accumulate to exceed the threshold, requiring TDS deductions at the correct rates.