The Finance Bill, 2026 seeks to resolve long-standing ambiguity on the applicable rate of tax deduction at source (TDS) for payments made for supply of manpower. Under the Income-Tax Act, 2025, different TDS rates apply to contractor payments for “work” and to fees for professional or technical services, leading to confusion on whether manpower supply should be taxed as contractual work or as technical services. To provide clarity and ensure uniform application, Clause 78 proposes to expressly include “supply of manpower to work under the supervision, control or direction of the payer” within the definition of “work” under section 402(47). As a result, TDS on manpower supply will be governed by the contractor provisions under section 393(1) [Table: Sl. No. 6(i) or 6(ii)], depending on the payer’s status, and not as fees for technical services. This amendment brings certainty to taxpayers, prevents inconsistent deductions, and reduces disputes over applicable TDS rates. The change will take effect from 1 April 2026.
Application of TDS on supply of manpower
Section 393(1) [Table: Sl. No. 6(i)] provides for the tax deduction at source (TDS) in the case of payments made to contractors for carrying out any work. It provides for rate of deduction of 1% when payment is made to individual or HUF and 2% in other cases.
2. Section 393(1) [Table: Sl. No. 6(iii)] provides for the tax deduction at source in the case of fees paid for professional or technical services. It provides for rate of deduction of 2% in case of fees for technical services or royalty for sale, distribution or exhibition of cinematographic films or to the business engaged in operation of call centre and 10% in other cases.
3. Section 393(1)[Table: Sl. No. 6(ii)] provides for the tax deduction at source by individual and HUF in the case of payments made to contractors for carrying out any work (not covered under section 393(1)[Table: Sl. No. 6(i)], by way of commission or brokerage or by way of professional services (not covered under section 393(1) [Table: Sl. No. 6(iii)]). It provides for rate of deduction of 2% for such payments.
4. There is ambiguity with regard to applicable rate of TDS for supply of manpower that whether provisions under section 393(1) [Table: Sl. No. 6(i)/(ii)] or [Table: Sl. No. 6(iii)] shall be applied.
5. In order to provide clarity with regard to the deduction of tax at source in case of supply of manpower, it is proposed to include it under the ambit of “work” in section 402(47) so that the provisions of Section 393(1)[Table: Sl. No. 6(i)] or 393(1)[Table: Sl. No. 6(i)], as the case may be, applies.
6. The amendment will take effect from the 1st day of April, 2026.
[Clause 78]
Extract of Relevant Clauses of Finance Bill, 2026
Clause 78 of the Bill seeks to amend section 402 of the Income-tax Act, 2025 relating to interpretation for the purposes of Chapter XIX-B.
Clause (27) of the said section provides for the definition of the expression “person responsible for paying”.
Sub-clause (c) of the said clause provides that in case of payment of any sum to a nonresident where such sum represents consideration for the transfer by him of any foreign exchange asset, which is not a short-term capital asset, the authorised person responsible for remitting such sum to the non-resident Indian or for crediting such sum to his Non-resident (External) Account.
It is proposed to amend the said sub-clause to clarify that the term “authorised person” referred to therein shall have the same meaning as assigned to it in clause (c) of section 2 of the Foreign Exchange Management Act, 1999.
Extract of Relevant Amendment Proposed by Finance Bill, 2026
78. Amendment of section 402.
In section 402 of the Income-tax Act,––
(a) in clause (27), in sub-clause (c), for the words “authorised person responsible”, the words, brackets, letter and figures “authorised person, referred in clause (c) of section 2 of the Foreign Exchange Management Act, 1999, responsible” shall be substituted;
(b) in clause (47), after sub-clause (e), the following sub-clause shall be inserted, namely: —
“(f) supply of manpower to a person to work under his supervision, control or direction.”
