Section 194C: TDS on the contractor payment

Section 194C of the Income Tax Act talks about the deduction of tax at source from an individual contractor or subcontractor payments. As per this provision of this section, TDS on the contractor’s payment will be deducted by an institution or individual, who has made the payment. 

Who is a person as per Section 194C?

Under Section 194C, a person can be:

• A firm
• A trust
• A local authority
• A company
• The state or central government
• A cooperative society 
• A university
• A corporation
• A registered society
• An authority incorporation for the purpose of fulfilling housing need

What constitutes work under section 194C?

1. Any work related to the manufacturing or supply of any goods in accordance with the specification of a client, when the manufacturing of the product utilises materials bought from the client who made the request and not from any other individual.

1. Any work in the field of advertising
2. Any work in the field of catering
3. Any work in the field of Television, movies, or OTT platforms
4. Any work in the field of transportation. However, 194C excludes rail transportation.

How to distinguish between a contractor and a subcontractor under 194C

Contractor: Any person who agrees to be part of a contract involving the conduction of any form of work and supplying manpower to conduct such work:

• The central or state government
• A corporation
• A company
• A localised Authority 
• A co-operative society

Subcontractor: Any person who agrees to be a part of a contract mentioned above, for the purpose of:

• working on either all or a particular part of the assignment, which the contractor has agreed to undertake in exchange for money
• supplying manpower for all or part of the work undertaken by the contractor 

What are the prerequisites required to be a subcontractor?

• Payment made to a sub-contractor, who is a resident as per section 6 of the Income Tax Act, 1961.
• A resident contractor, not an individual or HUF, makes the payment.
• Payment in exchange for conducting any work that includes the supply of labour.
• The amount of consideration of the contract and the payment for the same shouldn’t be below Rs 30,000
• The contractor should pay the money for a contract undertaken by an individual.

What is the law for TDS deduction for subcontractors?

• Responsible for paying an aggregate sum of money to residents.

• In compatibility of an agreement with the sub-worker for hire for doing, or for the inventory of work for completing, the entire or any piece of the work attempted by the worker for hire, or for providing whether completely or incompletely any work which the project worker has embraced to supply will,

• at the time of credit of such total to the record of the sub-worker for hire
• at the time of payment, therefore, in cash
• by the issue of a cheque or demand draft or by any other payment service, whichever is early

• TDS is deducted at 1% on the gross amount of receipt at the time of payment in cash, cheque, demand draft, or any other mode (whichever is earlier).  

Deduction of TDS under Section 194C

• At the point when the money instalment is made to the worker for hire or the subcontractor and the sum is credited to their ledger.

• At the point when the cash instalment is made to the worker for hire or the subcontractor is as money.

• When the payment method is in the form of a cheque.

• When the payment takes place through any other payment method.

• At the point when the payer moves or credits any sum implied for a project worker or subcontractor to a ‘suspense account’ or any other account. 

Rate of TDS on payment to contractor under 194C

Exceptions under 194C

• When the government provides raw material: the decision will be taken concerning the contract and the conduct of the parties. 

• During the construction of a building or dam: if the government or other specified persons supply raw material for the work at the negotiable prices, the TDS will be according to the gross payment with any adjustment of the cost. 

• When the contractor is in charge of providing labour for the work and not the materials supplied, the sum payable to the contractor in respect of the contract will be the amount paid for providing labour. 

The rate of TDS for the payment made by the government or other entity will be 2% or 1% of the gross payment (payment before deducting tax and other overheads). 

Exceptions under 194C in case the party supplies materials:

• The amount paid to the contractor doesn’t surpass Rs 30,000 in a single transaction.
• The amount paid to the contractor involves hiring, employing, or leasing goods carriage. The contractor cannot possess materials over ten goods carriage (at any time) during the previous financial year.
• The contractor needs to provide the declaration with the PAN to the Deductor.
• The gross amount paid during the financial year should be Rs 1,00,000/-
• The amount paid/credited to the contractor by an individual or HUF for carrying out work for personal use.

Note: if someone fails to furnish their PAN, the Deductor would be required to deduct TDS at 20%, the maximum marginal rate. 

Time range to deposit TDS amount

• If the payment is made by or on behalf of the government: On the same day.
• If the payment is made by another entity and not the government:
• If the payment is credited during March – On or before April 30.
• Besides March – Within seven days from the end of the month

Timelines of TDS certificates

If the payment is not a salary, TDS certificates are issued on a quarterly basis in Form No. 16A as per rule 31. The dates to issue certificates are as follows.

Lowest rate of TDS

As per section 194C, if the assessment officer is satisfied that the total income of the contractor or sub-contractor asserts the deduction of income tax at a lower rate or no deduction of income tax, he can offer lower rates or full rebate. The contractor or subcontractor can then furnish the lower rate or nil TDS certificates to the deductor. 

See also : Know about TDS full form 

194C: Facts 

What are the extra charges or cess added at the time of deduction of TDS?

No extra charge or cess, such as education cess, service tax, or surcharge, will be applicable at the time of TDS deduction under Section 194C.

When does TDS get deducted?

During the time of credit of the payment and at the time of payment in cash, cheque, or demand draft.

When is TDS applied?

When the total payment made or made during a financial year exceeds Rs 1,00,000. 

What per cent of TDS is applied under 194C?

The payer deducts 1% of TDS when the payment is made to an individual or HUF; 2% TDS is deducted if the payment is made to another entity.

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