The TDS that must be deducted whenever a person pays a resident contractor for performing any service is covered by Section 194C of Income Tax Act, 1961. Here, the presence of a contract between the specified person and a resident contractor is crucial and necessitates the deduction of TDS.
To prevent unnecessary problems, it is crucial to understand the nuances of Section 194C TDS deduction. The rate of TDS depends on the kind of payment made. To learn more, keep reading!
Section 194C of Income Tax Act: What is a sub-contractor?
Any individual who enters into a contract with the principal or main contractor is considered a subcontractor under Section 194C. Let’s imagine, for instance, that Mr Singh entered into a labour supply agreement with an NGO. He employs Mr Sharma to do 40% of the work that is required per his contract with this NGO. Mr Singh will be the principal contractor in this instance, and Mr Sharma will be a subcontractor.
Keep in mind that Section 194C of the Income Tax Act requires the primary contractor to deduct the TDS from the subcontractor’s payment. The subcontractor may be required under the contract’s conditions to finish all or only a portion of the job that the principal contractor was given to finish.
Section 194C of Income Tax Act: The Section 194C TDS deduction limit
The following table lists the maximum TDS deductions for contractors under Section 194C of the Income Tax Act:
- TDS deduction is not required if the total credited or paid under one contract is less than Rs. 30,000.
- When more than Rs. 1,000,000 is grossly credited or paid throughout a financial year, Section 194C TDS deduction is required.
Section 194C of Income Tax Act: TDS rate
Here is a table showing several 194C TDS rates for different categories of contractors or subcontractors:
| Type of Sub-contractor/ Contractor | TDS Rate |
| Any individual or HUF | 1% |
| Individuals, except for a Hindu Undivided Family | 2% |
| A transporter | NIL |
Here, it is important to keep in mind that the TDS rate will be 20% if people don’t give the deductor their PAN information. Furthermore, the aforementioned TDS rates will not be increased by a surcharge, SHEC, or education cess. TDS must thus be deducted at standard rates.
Situations in which Section 194C allows TDS deduction
TDS must be withheld from any payments made to local contractors or subcontractors to complete a specific job.
- When paying, whether with a check, cash, draught, or another method of payment.
- When the principal contractor’s or subcontractor’s account is credited with the funds.
Section 194C of Income Tax Act: Calculation method for TDS under Section 194C
You must be familiar with a few nuances in order to comprehend the computation of TDS under section 194C. Keep in mind that while subtracting TDS, you should always take the invoice’s value into account (and not only the service component). Any payment made in exchange for the sale or purchase of any materials or commodities should not be included in the invoice amount.
Let’s assume that Mr Gupta and Mr Dutt have a contract in place for the delivery of building supplies in order to better understand how TDS is calculated. The contractor, in this instance, is Mr Dutt, and he has generated an invoice for Rs. 90,000. He has also given a breakdown of the invoice, with the worth of the products at Rs. 50,000 and the labour costs at Rs. 40,000.
In this instance,
- As soon as the value of the invoice against the labour exceeds Rs. 30,000, Section 194C will become applicable.
- According to Section 194C, the rate of TDS in the event of an individual contractor will be 1%.
- The invoice clearly breaks down the cost of services and commodities individually; thus, there would be a TDS reduction on the first Rs. 40,000. TDS here thus amounts to Rs. 400.
Although TDS deductions under Section 194C are required in some circumstances, you should be aware of several exceptions.
Section 194C of Income Tax Act: TDS exceptions
Deduction of TDS on contractor 194C may not be applied in certain situations. Let’s investigate them!
- A person is not permitted to deduct TDS if the amount paid to the contractor or subcontractor at any given time is less than Rs 30,000.
- A person is not permitted to deduct TDS if they pay a contractor or subcontractor more than Rs. 1,00,000 in a given FY.
- If the money provided to a contractor was used for personal matters, neither an individual nor a HUF would be required to deduct TDS.
- TDS is not deducted from payments made to airlines or travel agencies for the purchase of tickets.
- When renting out items, engaging in transportation services, hiring people, using carriages, etc., there cannot be any deductions from the contractor’s payment.
Section 194C of Income Tax Act: Date by which TDS must be deposited under Section 194C
TDS must be submitted on or before certain deadlines in accordance with Section 194C of the Income Tax Act:
| TDS Deducted | Due date for Deposit |
| For the months of April to February | The TDS must be deposited by the seventh day of the next month, at the latest. |
| For the month of March | The TDS must be turned in by May 1st. |
| If it is subtracted for a certain month and the government has already paid for it | Same day |
FAQs
Will the provisions of Section 194C apply to equipment rentals?
No, the TDS reduction allowed by Section 194C will not apply to equipment rentals. This is because there is no labour involved. But take notice that these services would be covered by the terms of Section 194I.
Who is covered by Section 194C if they live outside of India?
Those living outside of India are not covered by Section 194C. Contractors, subcontractors, and the individual they are entering into a contract with must all be Indian residents.
Do I need a formal agreement with a contractor in order to be eligible for TDS under Section 194C?
No, in order to be eligible for TDS under Section 194C, a primary contractor or subcontractor need not have a formal agreement with you. TDS may be taken into account even when both parties explicitly concur on any given project.
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