Section 194C of Income Tax Act: TDS on Payment to Contractor

Section 194C of Income Tax Act: TDS on Payment to Contractor. Section 194C of Income Tax Act deals with the provisions related to Tax Deducted at Source (TDS) on payments made to contractors and subcontractors. This section is vital for businesses and government entities that engage third parties for services such as transportation, advertising, and construction. knowing the detailed provisions of this section ensures that payments are made in compliance with tax laws and helps avoid penalties.
What is Section 194C of Income Tax Act?
Section 194C of Income Tax Act mandates that any person responsible for making payment to a resident contractor or subcontractor for carrying out any work or for supplying labor must deduct TDS at the time of credit or payment, whichever is earlier. This section applies only when there is a contractual relationship between the payer and the payee.
Contractual relationships typically exist between government bodies, companies, firms, cooperative societies, trusts, local authorities, and individuals or HUFs whose turnover exceeds the specified limit. The work can include any professional service, job work, or supply of labor.
Who is Required to Deduct TDS under Section 194C?
Under Section 194C of Income Tax Act, the responsibility to deduct TDS lies with the following specified persons:

The Central Government or any State Government

Local Authorities

Statutory Corporations

Companies

Co-operative Societies

Authorities constituted in India for housing or city planning

Societies registered under the Societies Registration Act

Trusts

Universities and deemed universities

Firms

Any person including individual, HUF, AOP, or BOI, whose total turnover or gross receipts in the preceding financial year exceeded Rs. 1 crore (in case of business) or Rs. 50 lakh (in case of profession)

If a person falls under any of the categories listed above and makes a payment to a contractor or subcontractor, they must deduct TDS as per the rules laid down in this section.
What is Considered as 'Work' Under Section 194C of Income Tax Act?
The term "work" under Section 194C is broadly defined. It includes a wide range of activities such as:

Advertising: This includes payments to advertising agencies for preparing and publishing ads.

Broadcasting and Telecasting: Payments for creating and broadcasting content.

Transportation: Transporting goods or passengers other than by railways.

Catering: Providing food services for events, offices, or institutions.

Job Work: Manufacturing or supplying a product as per customer specification using materials provided by the customer.

If the materials are purchased by the contractor and not supplied by the customer, the contract is considered a sale and not liable for TDS under this section.
Meaning of Contractor and Subcontractor
A contractor is any person who undertakes to perform work or provide labor under a contract. Subcontractors are those who enter into a contract with the main contractor to perform part or whole of the assigned work or provide labor for the same.
Payments made to subcontractors for their portion of work or labor supply are also subject to TDS under Section 194C. Thus, subcontractors come under the same tax deduction rules.
Conditions to be Satisfied for TDS Deduction
TDS under Section 194C is applicable only when all the following conditions are satisfied:

Payment is made to a resident contractor or subcontractor.

Payment is made by a specified person.

Payment is for carrying out work or supplying labor.

The payment under a single contract exceeds Rs. 30,000.

The aggregate payment during a financial year exceeds Rs. 1,00,000.

Even if a single payment is below Rs. 30,000 but total payments during the year exceed Rs. 1 lakh, TDS becomes applicable.
Time of Deduction of TDS under Section 194C
TDS must be deducted at the earlier of the following two instances:

When the amount is credited to the contractor's account.

When the payment is actually made.

If the amount is credited to a suspense account in the books of the payer, it will still be considered as credit to the contractor's account, and TDS must be deducted.
Rates of TDS under Section 194C
The applicable TDS rates under Section 194C are as follows:

1% if the payment is made to an individual or HUF

2% if the payment is made to a person other than an individual or HUF

20% if the PAN of the payee is not available

No surcharge or education cess is added to the TDS amount. If the contractor is a transporter owning 10 or fewer goods carriages and provides a declaration with PAN, TDS is not required.
Threshold Limits for Deduction of TDS

No TDS is required if the payment under a single contract is up to Rs. 30,000.

No TDS if the total payment during the financial year does not exceed Rs. 1,00,000.

If either limit is breached, TDS becomes applicable from the first payment.

TDS in Composite Contracts
When a contract includes both supply of material and labor, TDS is calculated as follows:

If the invoice clearly separates material and labor costs, TDS is deducted only on the labor component.

If material cost is not mentioned separately, TDS is deducted on the full invoice amount.

This distinction is important to avoid over-deduction and maintain transparency in tax compliance.
Time Limit for Deposit of TDS

For government deductors: TDS must be deposited on the same day.

For others:

If deducted in March: deposit by April 30.

If deducted in other months: deposit within 7 days from the end of the month in which the deduction is made.

Failure to deposit TDS on time can attract interest and penalties.
Due Dates for Filing TDS Return under Section 194C
TDS returns under Section 194C must be filed quarterly in Form 26Q. The due dates are:

April to June: 31st July

July to September: 31st October

October to December: 31st January

January to March: 30th April

Timely filing of TDS returns is essential to avoid late fees and notices from the Income Tax Department.
TDS Certificate under Section 194C
TDS certificates in Form 16A must be issued quarterly by the deductor to the deductee. The due dates for issuing Form 16A are:

April to June: 15th August

July to September: 15th November

October to December: 15th February

January to March: 15th June

Certificates must be downloaded from the TRACES portal and must carry a unique TDS certificate number.
Exceptions and Special Cases

No TDS is deducted for personal payments made by individuals or HUFs.

No TDS on payments to transport contractors meeting specific conditions.

No TDS on food served in restaurants.

No TDS on air tickets or bus bookings unless hired as a charter.

TDS is deducted on the amount excluding GST, provided GST is mentioned separately on the invoice.

Documents Required for Deduction

Contractor's PAN

Work Contract or Agreement

Invoice from Contractor

TDS Challan

Form 16A TDS Certificate

Keeping all these documents ready ensures compliance with Section 194C provisions.
Consequences of Non-Compliance
Failure to deduct or deposit TDS under Section 194C can lead to the following consequences:

Interest at 1% per month for delay in deduction and 1.5% per month for delay in deposit.

Penalty ranging from Rs. 10,000 to Rs. 1 lakh.

Disallowance of expenses under Section 40(a)(ia) while computing taxable income.

Frequently Asked Questions (FAQs)
Q1. Is TDS under Section 194C applicable on transportation payments?
Ans. Yes, TDS is applicable on payments made for transportation of goods or passengers, excluding railways. However, if the transporter owns ten or fewer goods carriages and provides a declaration along with their PAN, then TDS is not required.
Q2. Is TDS deducted on reimbursement of expenses under Section 194C?
Ans. If reimbursement of expenses is included in the invoice and not supported by actual bills, TDS must be deducted on the entire amount. However, if reimbursement is separately supported by bills and not part of the contract amount, then TDS may not be applicable.
Q3. What is the consequence of non-deduction of TDS under Section 194C?
Ans. If TDS is not deducted as required, the payer is liable to pay interest and penalty. Additionally, 30% of the expense may be disallowed while computing income under the head ‘profits and gains of business or profession.’
Q4. Can an assessee claim refund if excess TDS is deducted under Section 194C?
Ans. Yes, the contractor or subcontractor can claim a refund of excess TDS by filing their income tax return and adjusting the tax credit available in Form 26AS.
5.. Are payments made to daily wage laborers covered under Section 194C?
 Ans. No, direct payments to casual or daily wage laborers are not considered contractual payments. Therefore, such payments are not covered under Section 194C.
Q6. What is the penalty for late deposit of TDS under Section 194C?
Ans. If TDS is not deposited on time, interest at 1.5% per month or part of the month is charged. Additionally, a penalty equal to the amount of TDS not deposited may also be imposed under Section 271C.
Q7. Can TDS be deducted on an advance payment under Section 194C?
Ans. Yes, if an advance is paid to the contractor or subcontractor against a contract, TDS is to be deducted at the time of payment or credit, whichever is earlier.
Q8. Is TDS under Section 194C applicable to payments made to freelancers or consultants?
Ans. No, such payments are generally professional in nature and are covered under Section 194J. Section 194C applies only to payments made under a contract for work or labor.

Section 194C of Income Tax Act deals with the provisions related to Tax Deducted at Source (TDS) on payments made to contractors and subcontractors. This section is vital for businesses and government entities that engage third parties for services such as transportation, advertising, and construction. knowing the detailed provisions of this section ensures that payments are made in compliance with tax laws and helps avoid penalties.

What is Section 194C of Income Tax Act?

Section 194C of Income Tax Act mandates that any person responsible for making payment to a resident contractor or subcontractor for carrying out any work or for supplying labor must deduct TDS at the time of credit or payment, whichever is earlier. This section applies only when there is a contractual relationship between the payer and the payee.

Contractual relationships typically exist between government bodies, companies, firms, cooperative societies, trusts, local authorities, and individuals or HUFs whose turnover exceeds the specified limit. The work can include any professional service, job work, or supply of labor.

Who is Required to Deduct TDS under Section 194C?

Under Section 194C of Income Tax Act, the responsibility to deduct TDS lies with the following specified persons:

The Central Government or any State Government
Local Authorities
Statutory Corporations
Companies
Co-operative Societies
Authorities constituted in India for housing or city planning
Societies registered under the Societies Registration Act
Trusts
Universities and deemed universities
Firms
Any person including individual, HUF, AOP, or BOI, whose total turnover or gross receipts in the preceding financial year exceeded Rs. 1 crore (in case of business) or Rs. 50 lakh (in case of profession)

If a person falls under any of the categories listed above and makes a payment to a contractor or subcontractor, they must deduct TDS as per the rules laid down in this section.

What is Considered as 'Work' Under Section 194C of Income Tax Act?

The term "work" under Section 194C is broadly defined. It includes a wide range of activities such as:

Advertising: This includes payments to advertising agencies for preparing and publishing ads.
Broadcasting and Telecasting: Payments for creating and broadcasting content.
Transportation: Transporting goods or passengers other than by railways.
Catering: Providing food services for events, offices, or institutions.
Job Work: Manufacturing or supplying a product as per customer specification using materials provided by the customer.

If the materials are purchased by the contractor and not supplied by the customer, the contract is considered a sale and not liable for TDS under this section.

Meaning of Contractor and Subcontractor

A contractor is any person who undertakes to perform work or provide labor under a contract. Subcontractors are those who enter into a contract with the main contractor to perform part or whole of the assigned work or provide labor for the same.

Payments made to subcontractors for their portion of work or labor supply are also subject to TDS under Section 194C. Thus, subcontractors come under the same tax deduction rules.

Conditions to be Satisfied for TDS Deduction

TDS under Section 194C is applicable only when all the following conditions are satisfied:

Payment is made to a resident contractor or subcontractor.
Payment is made by a specified person.
Payment is for carrying out work or supplying labor.
The payment under a single contract exceeds Rs. 30,000.
The aggregate payment during a financial year exceeds Rs. 1,00,000.

Even if a single payment is below Rs. 30,000 but total payments during the year exceed Rs. 1 lakh, TDS becomes applicable.

Time of Deduction of TDS under Section 194C

TDS must be deducted at the earlier of the following two instances:

When the amount is credited to the contractor's account.
When the payment is actually made.

If the amount is credited to a suspense account in the books of the payer, it will still be considered as credit to the contractor's account, and TDS must be deducted.

Rates of TDS under Section 194C

The applicable TDS rates under Section 194C are as follows:

1% if the payment is made to an individual or HUF
2% if the payment is made to a person other than an individual or HUF
20% if the PAN of the payee is not available

No surcharge or education cess is added to the TDS amount. If the contractor is a transporter owning 10 or fewer goods carriages and provides a declaration with PAN, TDS is not required.

Threshold Limits for Deduction of TDS

No TDS is required if the payment under a single contract is up to Rs. 30,000.
No TDS if the total payment during the financial year does not exceed Rs. 1,00,000.
If either limit is breached, TDS becomes applicable from the first payment.

TDS in Composite Contracts

When a contract includes both supply of material and labor, TDS is calculated as follows:

If the invoice clearly separates material and labor costs, TDS is deducted only on the labor component.
If material cost is not mentioned separately, TDS is deducted on the full invoice amount.

This distinction is important to avoid over-deduction and maintain transparency in tax compliance.

Time Limit for Deposit of TDS

For government deductors: TDS must be deposited on the same day.
For others:

If deducted in March: deposit by April 30.
If deducted in other months: deposit within 7 days from the end of the month in which the deduction is made.

Failure to deposit TDS on time can attract interest and penalties.

Due Dates for Filing TDS Return under Section 194C

TDS returns under Section 194C must be filed quarterly in Form 26Q. The due dates are:

April to June: 31st July
July to September: 31st October
October to December: 31st January
January to March: 30th April

Timely filing of TDS returns is essential to avoid late fees and notices from the Income Tax Department.

TDS Certificate under Section 194C

TDS certificates in Form 16A must be issued quarterly by the deductor to the deductee. The due dates for issuing Form 16A are:

April to June: 15th August
July to September: 15th November
October to December: 15th February
January to March: 15th June

Certificates must be downloaded from the TRACES portal and must carry a unique TDS certificate number.

Exceptions and Special Cases

No TDS is deducted for personal payments made by individuals or HUFs.
No TDS on payments to transport contractors meeting specific conditions.
No TDS on food served in restaurants.
No TDS on air tickets or bus bookings unless hired as a charter.
TDS is deducted on the amount excluding GST, provided GST is mentioned separately on the invoice.

Documents Required for Deduction

Contractor's PAN
Work Contract or Agreement
Invoice from Contractor
TDS Challan
Form 16A TDS Certificate

Keeping all these documents ready ensures compliance with Section 194C provisions.

Consequences of Non-Compliance

Failure to deduct or deposit TDS under Section 194C can lead to the following consequences:

Interest at 1% per month for delay in deduction and 1.5% per month for delay in deposit.
Penalty ranging from Rs. 10,000 to Rs. 1 lakh.
Disallowance of expenses under Section 40(a)(ia) while computing taxable income.

Frequently Asked Questions (FAQs)

Q1. Is TDS under Section 194C applicable on transportation payments?

Ans. Yes, TDS is applicable on payments made for transportation of goods or passengers, excluding railways. However, if the transporter owns ten or fewer goods carriages and provides a declaration along with their PAN, then TDS is not required.

Q2. Is TDS deducted on reimbursement of expenses under Section 194C?

Ans. If reimbursement of expenses is included in the invoice and not supported by actual bills, TDS must be deducted on the entire amount. However, if reimbursement is separately supported by bills and not part of the contract amount, then TDS may not be applicable.

Q3. What is the consequence of non-deduction of TDS under Section 194C?

Ans. If TDS is not deducted as required, the payer is liable to pay interest and penalty. Additionally, 30% of the expense may be disallowed while computing income under the head ‘profits and gains of business or profession.’

Q4. Can an assessee claim refund if excess TDS is deducted under Section 194C?

Ans. Yes, the contractor or subcontractor can claim a refund of excess TDS by filing their income tax return and adjusting the tax credit available in Form 26AS.

5.. Are payments made to daily wage laborers covered under Section 194C?

Ans. No, direct payments to casual or daily wage laborers are not considered contractual payments. Therefore, such payments are not covered under Section 194C.

Q6. What is the penalty for late deposit of TDS under Section 194C?

Ans. If TDS is not deposited on time, interest at 1.5% per month or part of the month is charged. Additionally, a penalty equal to the amount of TDS not deposited may also be imposed under Section 271C.

Q7. Can TDS be deducted on an advance payment under Section 194C?

Ans. Yes, if an advance is paid to the contractor or subcontractor against a contract, TDS is to be deducted at the time of payment or credit, whichever is earlier.

Q8. Is TDS under Section 194C applicable to payments made to freelancers or consultants?

Ans. No, such payments are generally professional in nature and are covered under Section 194J. Section 194C applies only to payments made under a contract for work or labor.