Section 194C of Income Tax Act: TDS on Payments to Contractors and Sub-Contractors

Introduction to Section 194C of Income Tax

This section ensures that when someone pays another person for work, like fixing something or delivering services, a small part of the payment goes to the tax office right away. This helps everyone pay taxes correctly and on time.

Applicability of TDS on Payments to Contractors & Sub-Contractors

TDS applies if someone pays a resident contractor or sub-contractor for work under a contract. The payer could be a government body, company, trust, firm, or even an individual (if their business turnover is over ₹1 crore or professional income exceeds ₹50 lakh).

Types of Payments Covered Under Section 194C

This includes payments for:

• Work contracts like construction or repairs
• Supply of labor
• Advertising, catering, broadcasting
• Transport of goods or people (not railways)
• Making products as per customer specifications using materials provided by them

Threshold Limit for Deducting TDS

• No TDS if single payment ≤ ₹30,000 and the total in a year ≤ ₹1,00,000.
• If either is exceeded, TDS must be deducted on the entire amount.

TDS Rates for Contractors & Sub-Contractors

• 1% TDS for individuals or Hindu Undivided Families (HUF), if PAN is provided.
• 2% TDS for businesses, firms, companies, etc., with PAN.
• Transporters with ≤10 vehicles and who provide PAN are exempt.
• If the payee doesn’t provide a PAN, a flat 20% TDS applies (penalty rate).

Time of Deduction and Deposit of TDS

TDS is to be deducted whenever payment is made or credited, whichever comes first. Then, the deducted TDS must be deposited within 7 days after the month ends (by April 30th if in March).

Exemptions from TDS on Payments to Contractors & Sub-Contractors

You don’t need to deduct TDS if:

• The payment is for personal use by an individual or HUF.
• The contractor is a transporter with ≤10 vehicles, has PAN, and submits a declaration.

Compliance and Documentation Requirements

• File your TDS return (Form 26Q) every quarter.
• Issue Form 16A as a TDS certificate within the deadlines (Aug 15, Nov 15, Feb 15, June 15).
• Contractors may request a lower or nil TDS rate by applying to the Assessing Officer.

Penalties and Consequences of Non-Compliance

• Late TDS deduction: 1% interest per month.
• Late TDS deposit: 1.5% interest per month.
• Late TDS return filing: ₹200 penalty per day (max up to TDS amount).
• Non-deduction or late deposit: ₹10,000 to ₹1 lakh penalty, and expense may be disallowed (30%).

Practical Examples of TDS on Contractor Payments

• Example 1: Pay ₹1,20,000 across several jobs totaling >₹1,00,000 → Deduct TDS on full amount.
• Example 2: Transporter with 8 vehicles and PAN → Exempt from TDS.
• Example 3: Without PAN, a business must deduct TDS at 20%, even if usual rates are lower.