TDS on contract work under Section 194C vs Section 194J: What’s the difference?

Under the Income Tax Act, 1961, Section 194C and Section 194J determine the deduction of Tax Deducted at Source (TDS) on payments related to contract work and professional services. Understanding the distinctions between these two sections is essential to ensure proper tax compliance for FY 2024-25 and FY 2025-26, especially with recent updates in the Union Budgets. Let us explore the nuances of both sections, including the types of payments covered, TDS rates, and the key differences to help you discharge your tax obligations correctly.

---

Table of Contents

• What’s the difference between TDS on contract work under Section 194C vs Section 194J?

• TDS on Contract Work under Section 194C

• TDS on Professional Services under Section 194J

• Key Differences between Section 194C and Section 194J

• Recent Amendments and Budget 2024-25 & 2025-26 Updates

• Practical Considerations for Compliance

• Conclusion

• FAQs

---

What’s the difference between TDS on contract work under Section 194C vs Section 194J?

Section 194C applies to payments made for contract work, such as construction, labor, and transport services, while Section 194J applies to professional services, including legal, medical, and consultancy fees. The main distinction lies in the type of services and the applicable TDS rates. Section 194C typically attracts a lower TDS rate (1% or 2%) compared to Section 194J, which is set at 5%. Additionally, the thresholds for deducting TDS differ between the two, with Section 194C having both a per-payment threshold and an aggregate threshold, while Section 194J only applies when professional fees exceed ₹30,000 in a year. Understanding these differences is key to ensuring accurate TDS deductions.

TDS on Contract Work under Section 194C

Definition and Applicability

Section 194C of the Income Tax Act, 1961 governs the deduction of TDS (Tax Deducted at Source) on payments made to contractors and subcontractors for carrying out any work. The term "work" encompasses a broad range of activities, including construction, repair, maintenance, and labor supply. It also includes services related to transportation, installation, and various physical tasks that involve the execution of labor.

The section is applicable to all entities, whether individuals, companies, firms, or government bodies, that make payments to contractors for work-related services. Payments made to contractors are subject to TDS deductions under Section 194C, provided that the contract is established between the payer and the contractor/subcontractor. Importantly, this section does not apply to payments related solely to the supply of goods—only the labor or service component of composite contracts that include goods and services is subject to TDS.

Types of Payments Covered under Section 194C

Section 194C specifically applies to the following types of payments:

1. Payments for Construction Work: This includes payments made to contractors involved in building structures, roads, bridges, etc.

2. Repair and Maintenance Services: Any payments made for the repair and maintenance of machinery, buildings, and other assets.

3. Labor and Transportation Services: Payments to contractors for supplying labor or transport services.

4. Installation and Other Physical Work: Payments made to contractors for work that involves the installation of goods or equipment, or similar tasks.

These services must involve physical execution of work, and the contract must be for providing a specific service rather than the mere sale of goods.

TDS Rate and Threshold for Section 194C

The TDS rates under Section 194C vary depending on the type of contractor (individual/HUF or other entities like companies, firms):

• 1% TDS for payments to individual contractors or Hindu Undivided Families (HUFs).

• 2% TDS for payments to all other contractors, including companies and firms.

The threshold for TDS deduction is also based on the value of the contract:

• TDS is applicable if the single payment exceeds ₹30,000 or if the aggregate payments exceed ₹1,00,000 in a financial year.

• No TDS is deducted if the payment is for personal use or under certain specific exemptions.

TDS under Section 194C is to be deducted at the time of either credit or payment, whichever occurs first. It is important to distinguish between the labor/service portion and the goods portion of any composite contract, as only the service portion is subject to TDS.

TDS on Professional Services under Section 194J

Definition and Applicability

Section 194J applies to payments made for professional or technical services. These services include, but are not limited to, legal, medical, engineering, architectural, accounting, and consultancy services. It also covers fees paid for royalty, non-compete clauses, and director’s remuneration. This section ensures that TDS is deducted on payments made for services rendered by professionals who possess specialized skills or knowledge.

This section is primarily applicable when an individual or business pays fees to professionals or experts in any field that requires technical knowledge or professional qualifications. It applies to a wide range of professional services, including but not limited to, services provided by doctors, lawyers, consultants, and even media professionals who provide intellectual property services.

Types of Payments Covered under Section 194J

Section 194J specifically applies to the following:

1. Professional Services: This includes services provided by qualified professionals such as lawyers, doctors, accountants, engineers, architects, and others.

2. Technical Services: These are services that require technical expertise, such as IT consulting, technical consultancy, or engineering services.

3. Royalty Payments: Payments made for the use of intellectual property, such as patents, trademarks, or copyrights.

4. Non-Compete Fees: Fees paid for the agreement where a professional agrees not to engage in a similar business or service for a certain period.

5. Director’s Remuneration: Payments made to directors of a company for their services as directors.

This section applies to payments made to professionals irrespective of whether they are employed by the payer or working independently as consultants or advisers.

TDS Rate and Threshold for Section 194J

Under Section 194J, the TDS rate for professional and technical services is set at:

• 5% TDS for all payments covered under Section 194J, including professional fees, technical services, royalty, and director’s remuneration.

The threshold for TDS deduction under Section 194J is:

• ₹30,000 in a financial year. This means TDS is to be deducted when the aggregate payment for professional or technical services exceeds ₹30,000 during the year. If the payment is less than this amount, no TDS needs to be deducted.

TDS under this section must be deducted when the payment is credited or paid, whichever occurs first.

Key Differences between Section 194C and Section 194J

Aspect	Section 194C	Section 194J
Type of Payment	Contract work, labor, transportation, construction, maintenance	Professional and technical services, royalty, director’s remuneration
TDS Rate	1% (individual/HUF), 2% (others)	5%
Threshold	₹30,000 per payment or ₹1,00,000 aggregate in a year	₹30,000 in aggregate for the year
Applicability	Contractors and subcontractors	Professionals, consultants, technical service providers
Exclusions	Does not cover professional/technical fees	Does not cover contract work payments
Calculation Basis	On service or labor portion of contracts	On fees for professional or technical services

Recent Amendments and Budget 2024-25 & 2025-26 Updates

In the Union Budgets of 2024 and 2025, no significant changes have been announced specifically related to TDS under Sections 194C or 194J. However, a few important updates in the overall tax landscape were introduced:

• Threshold Increases for TDS on Rent and Senior Citizen Interest: The threshold for TDS on rent was increased from ₹2.4 lakhs to ₹6 lakhs per annum in Budget 2025-26. Similarly, the threshold for senior citizen interest income increased from ₹50,000 to ₹1,00,000 in Budget 2025-26. However, these updates do not directly affect TDS under Sections 194C or 194J.

The TDS rates and thresholds for contract work and professional fees remain unchanged for FY 2024-25 and FY 2025-26.

Practical Considerations for Compliance

To ensure compliance with TDS regulations under Sections 194C and 194J, it is important to:

1. Correctly Classify Payments: Accurately categorize payments as either contract work (Section 194C) or professional services (Section 194J). This classification determines the applicable TDS rate and threshold.

2. Maintain Detailed Documentation: Keep track of all contracts, payments, and invoices, ensuring that the service portion in composite contracts is correctly identified for TDS purposes.

3. Ensure Proper PAN and Aadhaar Details: Collect accurate PAN and Aadhaar details when opening bank accounts for contractors or professionals to facilitate proper TDS compliance.

4. Record and Report TDS: Ensure that TDS deductions are accurately recorded in the payment system and reported in the TDS returns to avoid penalties.

5. Verify TDS Thresholds: Regularly monitor the aggregate payments to contractors and professionals to ensure timely deductions once thresholds are exceeded.

These measures are essential to avoid penalties for incorrect deductions or non-compliance.

Conclusion

Understanding the difference between Section 194C and Section 194J is vital for ensuring compliance with TDS regulations. Contractors and subcontractors providing physical services are governed by Section 194C, while professionals offering technical or consultancy services are governed by Section 194J. By keeping track of the applicable rates, thresholds, and documentation requirements, businesses can avoid penalties and ensure smooth income tax filings.

Frequently Asked Question (FAQs)

Q1. What is Section 194C of the Income Tax Act, and who does it apply to?

Section 194C of the Income Tax Act, 1961 governs TDS on payments made to contractors and subcontractors for carrying out contract work. It applies to individuals, companies, firms, and government bodies making payments to contractors for services such as construction, labor, transportation, repair, and installation. The section ensures that tax is deducted at the source when payments are made for these services, provided the contract is established between the payer and the contractor.

Q2. What types of payments are covered under Section 194C?

Section 194C applies to payments made for a range of contract services, including:

• Construction work (e.g., building structures, roads)

• Repair and maintenance services

• Labor supply and transportation

• Installation services and any other physical execution of work that involves labor

However, it does not apply to payments made solely for the supply of goods.

Q3. How is TDS calculated under Section 194C?

TDS under Section 194C is calculated based on the payment made for services or labor involved in the contract work. The TDS rates are:

• 1% for individual/HUF contractors

• 2% for all other contractors (such as companies or firms)TDS is deducted at the time of credit or payment, whichever occurs first, and is based only on the service/labor portion of the contract if the contract involves both goods and services.

  
  

Q4. What is Section 194J, and who does it apply to?

Section 194J applies to payments made for professional or technical services. It applies to payments made to professionals such as lawyers, doctors, accountants, consultants, engineers, architects, and other technical experts. This section also includes payments for royalty and director’s remuneration. TDS is deducted when the payment exceeds the prescribed threshold for the year.

Q5. What payments are covered under Section 194J?

Payments covered under Section 194J include:

• Professional services such as legal, medical, and consultancy fees

• Technical services including IT consulting, engineering services, and other specialized expertise

• Royalty payments for the use of intellectual property

• Non-compete fees paid for professional services

• Director’s remuneration paid to company directors

  
  

Q6. What is the TDS rate under Section 194J?

The TDS rate under Section 194J is 5% for all professional and technical services. This rate applies to payments for services like consultancy, technical expertise, royalty, and director’s remuneration. TDS is applicable when the total payment for professional or technical services exceeds ₹30,000 in a financial year.

Q7. What is the threshold for TDS deduction under Section 194C?

Under Section 194C, TDS is applicable if:

• Single payment exceeds ₹30,000, or

• Aggregate payments exceed ₹1,00,000 in a financial year.The threshold for personal use payments does not require TDS, and TDS is only applicable on the labor/service portion of a composite contract.

  
  

Q8. What is the threshold for TDS deduction under Section 194J?

Under Section 194J, TDS is applicable when:

• The aggregate payments for professional or technical services exceed ₹30,000 in a financial year.If payments exceed this amount, the payer is required to deduct TDS at 5%. If the payment is below ₹30,000, no TDS is required.

  
  

Q9. What are the key differences between Section 194C and Section 194J?

The main differences between Section 194C and Section 194J include:

1. Type of Payment: Section 194C covers contract work (construction, repair, transportation), whereas Section 194J covers professional and technical services (legal, consultancy, IT services).

2. TDS Rate: Section 194C has a lower TDS rate (1% for individual/HUF contractors and 2% for others), while Section 194J has a higher rate of 5%.

3. Threshold: Section 194C has a higher aggregate payment threshold of ₹1,00,000, while Section 194J applies when payments exceed ₹30,000.

   
   

Q10. What documents are required for TDS compliance under Sections 194C and 194J?

To ensure compliance with TDS under Sections 194C and 194J, the following documents should be maintained:

• PAN and Aadhaar details of contractors and professionals for accurate TDS deductions

• Contracts and agreements that outline the nature of services (contract work vs. professional services)

• Invoices and payment receipts to track payments and deductions

• TDS returns filed periodically to report TDS deductions and ensure transparency

  
  

Q11. How can I differentiate between contract work and professional services for TDS?

The key difference lies in the nature of the service provided:

• Contract work (under Section 194C) refers to physical work or labor-based services such as construction, maintenance, and installation.

• Professional services (under Section 194J) require specialized expertise and are typically provided by professionals with qualifications, such as legal, medical, or technical consulting.

Clear documentation and classification of services are crucial to determine the correct TDS section to apply.

Q12. Are there any recent changes in the TDS provisions under Sections 194C and 194J in the Union Budget 2024 and 2025?

No significant changes were announced specifically for TDS under Sections 194C and 194J in the Union Budgets of 2024 and 2025. However, the budgets introduced threshold increases for other areas like rent and senior citizen interest income TDS, but these changes do not affect the TDS rates or thresholds under Sections 194C and 194J. Therefore, the TDS rates and thresholds for these sections remain unchanged for FY 2024-25 and FY 2025-26.