Section 194C vs Section 194I: TDS on contract work vs TDS on rental income deductions
- Dipali Waghmode
- May 16
- 8 min read
Sections 194C and 194I of the Income Tax Act, 1961, are key provisions that regulate TDS (Tax Deducted at Source) for payments made under two distinct categories—contract work and rental income. Both sections require individuals, businesses, or organizations to deduct a certain percentage of the payment made to contractors or landlords, which is then deposited with the government. The primary goal of these provisions is to ensure that taxes are deducted at the point of payment, making the collection process more efficient and reducing the possibility of tax evasion.
Section 194C governs TDS on payments made for contract work, which includes services like construction, transportation, installation, and labor. On the other hand, Section 194I applies to TDS deductions on rental income, specifically for payments related to the rent of land, building, machinery, or furniture. Although both sections deal with tax deductions at source, they differ significantly in terms of the payments covered, the thresholds for deduction, and the rates at which tax is deducted.
Table of Contents
What is the difference between Section 194C vs Section 194I: TDS on contract work vs TDS on rental income deductions?
The key difference between Section 194C and Section 194I lies in the type of payments each section applies to. Section 194C deals with TDS on payments made for contract work, such as services related to construction, labor, transportation, and installation. It applies to contractors and subcontractors, with TDS calculated only on the labor or service portion of the contract. On the other hand, Section 194I applies to TDS on rental income, covering rent payments for land, buildings, and machinery. It applies to landlords and requires TDS to be deducted on the full rent amount. The TDS rates for Section 194C are 1% for individuals/HUFs and 2% for others, whereas Section 194I has a rate of 10% for residents and 30% for non-residents. Additionally, the thresholds for TDS under each section differ, with Section 194C requiring TDS for payments over ₹30,000 in a single transaction or ₹1,00,000 annually, while Section 194I applies when annual rent exceeds ₹6,00,000 from FY 2025-26.
Key Differences Between Section 194C and Section 194I
While both Section 194C and Section 194I address TDS, the payments covered under each section and the applicable criteria differ. Section 194C applies to payments made for executing contracts, such as those for labor, construction, and transport services. In contrast, Section 194I is specific to rent payments for land, buildings, and equipment.
The key differences between these sections lie in their applicability to different types of payments, the threshold limits, and the rates of TDS. Section 194C involves contractors and subcontractors, whereas Section 194I focuses on landlords and property owners. Understanding these differences ensures that the correct TDS obligations are met under the right section.
Summary of Key Differences:
Feature | Section 194C (Contract Work) | Section 194I (Rental Income) |
Applicability | Payments for services like construction, labor, and transport. | Payments for rent on land, buildings, machinery, or furniture. |
Deductee | Contractors, subcontractors (individuals, HUFs, firms, companies). | Landlords (residents and non-residents). |
Threshold for TDS Deduction | Single payment > ₹30,000 or total payments > ₹1,00,000 annually. | Rent payments exceeding ₹6,00,000 annually (from FY 2025-26). |
TDS Rate | 1% for individuals/HUFs, 2% for others. | 10% for residents, 30% for non-residents (plus surcharge). |
Calculation Basis | Only labor/service portion of contract, excluding goods. | Full rent amount including monthly payments. |
Section 194C: TDS on Contract Work
Applicability and Scope
TDS under Section 194C applies to payments made to contractors or subcontractors for executing contracts that involve labor, construction, transportation, and similar services. This provision is applicable to businesses, government organizations, and other entities paying contractors for services rendered.
TDS Rates and Thresholds for FY 2024-25 & FY 2025-26
Contractor Type | TDS Rate | Threshold |
Individual/HUF | 1% | Single payment > ₹30,000 or aggregate > ₹1,00,000 |
Others (firms, companies) | 2% | Single payment > ₹30,000 or aggregate > ₹1,00,000 |
TDS is not applicable for individuals or HUFs making payments for personal use, and no deduction is required if payments fall below the specified thresholds.
Calculation of TDS under Section 194C
TDS is calculated only on the service or labor portion of the contract amount, excluding the cost of materials. For example, if ₹70,000 is paid for labor and ₹30,000 for materials, TDS applies only to ₹70,000.
Practical Example of Section 194C
For a construction contract, if a contractor is paid ₹70,000 for labor and ₹30,000 for materials, TDS is calculated on ₹70,000 only. If the contractor is an individual/HUF, the TDS rate will be 1%, resulting in a TDS of ₹700.
Section 194I: TDS on Rental Income
Applicability and Scope
Section 194I governs TDS deductions on rental payments made for land, building, machinery, or furniture. The section applies to both residents and non-residents who receive rental payments.
TDS Rates and Thresholds for FY 2024-25 & FY 2025-26
Rent Payment Type | TDS Rate | Threshold |
Rent to Residents | 10% | Rent exceeding ₹6,00,000 annually (from FY 2025-26) |
Rent to Non-Residents | 30% | Rent exceeding ₹6,00,000 annually (from FY 2025-26) |
The threshold for rent payments has been increased from ₹2,40,000 to ₹6,00,000 per annum, effective from FY 2025-26. However, individuals and HUFs not under tax audit are exempt if their payments are below the threshold.
Calculation of TDS under Section 194I
TDS is calculated on the total rent amount paid to the landlord, regardless of the portion for services or goods. If rent is paid monthly, the TDS is calculated on the total rent for that month.
Practical Example of Section 194I
For example, if a landlord receives ₹7,00,000 annually as rent, TDS at 10% would amount to ₹70,000, which is deducted from the rent payment and deposited with the government.
Comparison of Section 194C vs Section 194I
Aspect | Section 194C | Section 194I |
Applicable To | Contractors for services like construction, labor, etc. | Landlords for rent on property (land, building, etc.) |
TDS Rate | 1% for individuals/HUFs, 2% for others | 10% for residents, 30% for non-residents |
Threshold for TDS | ₹30,000 for single payment, ₹1,00,000 for total | ₹6,00,000 annually for rent |
Key Differences in Applicability, Deductee, and Thresholds
Section 194C applies to payments for contract work, while Section 194I applies to rental income.
TDS Threshold under Section 194C is ₹30,000 for single payments and ₹1,00,000 for aggregate payments. In comparison, Section 194I has a higher threshold of ₹6,00,000 per annum for rental payments.
TDS Rates Comparison for FY 2024-25 & FY 2025-26
Section 194C offers lower rates at 1% for individual contractors and 2% for others.
Section 194I applies 10% for resident landlords and 30% for non-resident landlords.
Practical Considerations for Compliance with TDS Regulations
PAN and Bank Account Details
Both Sections 194C and 194I require deductors to collect and verify the PAN (Permanent Account Number) and bank account details of the deductee. This ensures that the TDS is deducted correctly and is properly credited to the deductee’s account.
Exemptions for Individuals/HUFs Not Under Tax Audit
Individuals and HUFs who are not subject to tax audit are exempt from TDS under Section 194C and Section 194I if their payments do not exceed the threshold limit. Additionally, payments made for personal use are also exempt from TDS.
Conclusion
Understanding the differences between Section 194C and Section 194I is crucial for businesses and individuals involved in contract work or rental income. By keeping track of the TDS rates and thresholds for FY 2024-25 and FY 2025-26, you can ensure smooth compliance with the Income Tax Act and avoid penalties.
For a simplified approach to managing TDS obligations, TaxBuddy offers a seamless solution. TaxBuddy’s mobile app helps streamline TDS calculations, tracks important deadlines, and ensures you remain compliant with the latest tax regulations. With TaxBuddy, handling TDS for both contract work and rental income is straightforward, making tax filing a stress-free experience.
FAQs
What is the key difference between Section 194C and Section 194I?
The key difference lies in the type of payments each section applies to. Section 194C deals with payments made for contract work, including services like construction, labor, and transportation. In contrast, Section 194I applies to rent payments made for land, buildings, machinery, or furniture. The TDS rates, thresholds, and the deductees involved are different for each section, making them applicable to distinct scenarios.
Who needs to deduct TDS under Section 194C?
TDS under Section 194C needs to be deducted by anyone making payments to contractors or subcontractors for executing contracts, such as businesses, government organizations, or individuals hiring contractors for services like construction, transportation, and labor. However, individuals and HUFs who are not subject to tax audit are exempt if the payments are for personal use or fall below the specified thresholds.
What is the TDS rate for rental income under Section 194I?
The TDS rate for rental income under Section 194I is 10% for rent paid to residents and 30% for rent paid to non-residents. These rates apply to the full amount of rent paid or payable to the landlord.
How is TDS calculated under Section 194C?
Under Section 194C, TDS is calculated on the service or labor portion of the contract amount, excluding any goods supplied. For example, if a contractor is paid ₹70,000 for labor and ₹30,000 for materials, TDS will only be deducted on the ₹70,000 labor portion, not the ₹30,000 for materials.
Are there exemptions for individuals/HUFs under Section 194C and 194I?
Yes, individuals and HUFs are exempt from deducting TDS under both Section 194C and Section 194I if their payments fall below the specified thresholds. Additionally, payments made for personal use are not subject to TDS under these sections.
What happens if the PAN is not provided for TDS deductions?
If the PAN is not provided by the deductee, the TDS deduction rate will be higher. According to the Income Tax Act, the TDS rate increases to 20% for individuals without a PAN, which could lead to a higher tax burden for the deductee.
How does TDS apply to non-resident landlords under Section 194I?
For non-resident landlords, TDS under Section 194I is calculated at 30% of the rent paid. Additionally, the rate is subject to applicable surcharge and cess. Non-resident landlords must also ensure compliance with the relevant provisions for non-resident taxation.
What is the new threshold for TDS on rent payments under Section 194I?
The threshold for TDS on rent payments has been increased to ₹6,00,000 annually, effective from FY 2025-26. This is an increase from the earlier ₹2,40,000 threshold. TDS is applicable if rent payments exceed this new threshold, with exemptions for individuals/HUFs not under tax audit.
Can TDS be applied to payments made for construction services under Section 194C?
Yes, TDS under Section 194C is specifically applicable to payments made for construction services. If a contractor is hired for construction work, the payer is required to deduct TDS based on the labor portion of the contract amount, excluding any cost of materials.
How is the TDS on rent different from TDS on contract work?
TDS on rent under Section 194I is applied to the full rent amount, whereas TDS on contract work under Section 194C is calculated only on the service or labor portion of the contract. Additionally, the TDS rates are different: 10% for rent paid to residents and 30% for non-residents under Section 194I, compared to 1% for individuals/HUFs and 2% for others under Section 194C.
What are the TDS rates for Section 194C for firms and companies?
For firms and companies, the TDS rate under Section 194C is 2%. This rate applies to contractors who are not individuals or HUFs. The deduction is applicable if the payment exceeds ₹30,000 in a single transaction or ₹1,00,000 in aggregate over the year.
Is there a different TDS rate for commercial and residential rental payments under Section 194I?
No, under Section 194I, there is no differentiation between commercial and residential rental payments. The TDS rate remains at 10% for rent paid to residents and 30% for rent paid to non-residents, regardless of whether the rent is for commercial or residential property.
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