What is TDS under Section 194C?

Provision of section 194C of the Income Tax Act comes to play whenever a payment is made in pursuance of a contract (whether written contract or oral contract).

In the present article, let us briefly understand the applicability of provisions of section 194C; time of TDS and threshold limit for deduction of TDS under section 194C; the rate at which TDS is deductible under section 194C; circumstances under which TDS under section 194C is not deductible; manner of calculation of TDS under section 194C and relevant Frequently Asked Questions.

Applicability of provisions of section 194C of Income Tax Act

Provision of section 194C gets applicable when the following conditions are satisfied –

1. Contract (which also includes sub-contract) is entered between the ‘specified person’ and the contractor;

2. ‘Specified person’ is responsible for paying any sum for carrying out any ‘work’ in pursuance of the said contract; and

3. Such an amount is paid to a resident (contractor).

Notably, two important terms i.e. ‘specified person’ and ‘work’ are explained hereunder –

As per explanation (i) to section 194C, the term ‘specified person’ means any of the following categories of person –

• The Central Government;
• Any State Government;
• Any local authority;
• Any established Corporation;
• Any Co-operative Society;
• Any company;
• Any firm;
• Any registered society;
• Any authority engaged for the purpose of dealing with and satisfying the need for housing accommodation or for planning/ development/ improvement of towns, cities and villages;
• Any trust;
• Any university;
• Any Government of a foreign state/ foreign enterprise or any association/ body established outside India;
• Any individual or Hindu Undivided Family (HUF) or an Association of Person (AOP) or Body of Individual (BOI) having total sales/ gross receipts/ turnover from business (exceeding INR 1 Crores) or profession (exceeding INR 50 Lakhs) during the preceding Financial Year.

As per Explanation (iv) to section 194C, ‘work’ includes the following –

• Advertising;
• Catering;
• Broadcasting and telecasting (which includes production of the programmes);
• Carriage of passengers/ goods by any mode of transport (other than by railways);
• Manufacturing/ supplying a product as per the requirement/ specification of a customer by using material purchased from such customer or its associates.

It is important to note that the term ‘work’ doesn’t include manufacturing/ supplying a product as per the requirement/ specification of a customer by using material purchased from a person other than such customer/ its associates.

Time of deduction of tax under section 194C of the Income Tax Act

TDS u/s 194C is deductible within earlier of the following –

• At the time of credit of the amount to the account of the contractor; or
• At the time of payment of the amount either in cash or by cheque or draft or any other payment mode.

Rate at which tax is deductible under section 194C of Income Tax Act

The rate of TDS deduction u/s 194C is tabulated hereunder –

Importantly, if the PAN of the contractor is not provided, then TDS is deductible at a higher rate of 20% as per provisions of section 206AA of the Income Tax Act.

Threshold limit for deduction of TDS under section 194C of Income Tax Act

The threshold limit for deduction u/s 194C is tabulated hereunder –

Circumstances under which TDS under section 194C is not deductible –

TDS u/s 194C is not deductible under the following circumstances –

1. When the amount is paid/ credited to a non-resident contractor/ sub-contractor;

2. When the amount is paid/ credited to the contractor by an individual or HUF for carrying out the work in the nature of personal use;

3. The amount of any sum credited/ paid to the contractor doesn’t exceed INR 30,000 or an aggregate amount of sum credited/ paid to the contractor in the Financial Year doesn’t exceed INR 1,00,000;

4. The sum credited/ paid during the Financial Year to the account of the contractor during the course of business of hiring/ plying/ leasing goods carriage and the said contractor satisfies both of the following conditions –

Condition 1 – Contractor owns ten or less goods carriage at any time during the Financial Year; and

Condition 2 – Contractor furnishes the declaration to that effect along with its PAN.

Manner of calculation of TDS under section 194C of Income Tax Act

Let us go through one simple example to understand the manner of calculation of TDS under section 194C –

Supp. M/s. A, a specified person, has made the following payments to M/s. B a contractor in pursuance of a contract –

It is important to note that at the time of making payment/ credit of INR 30,000 (01/01/2023), TDS is deductible on the entire payment of INR 1,20,000 (and not just payment above INR 1,00,000). Accordingly, the TDS deductible will be 2% of INR 1,20,000 i.e. 2,400.

Thus, payment to be made after the deduction of TDS under section 194C of the Income Tax Act will be INR 27,600 (INR 30,000 – INR 2,400).

Frequently Asked Questions (FAQs) on TDS under section 194C

Frequently Asked Questions relating to provisions of section 194C of the Income Tax Act are highlighted hereunder –

1. What is Section 194C of TDS?

TDS under section 194C of the Income Tax Act is deductible when any sum is paid to any resident contractor/ sub-contractor by the specified person for carrying out any work in pursuance of a contract.

2. What is the limit to deduct TDS 194C?

The limit to deduct TDS u/s. 194C is –

• INR 30,000 – single payment made/ credited to the account of the contractor;
• INR 1,00,000 – aggregate payment made/ credited to the account of the contractor during the Financial Year.

3. What is covered under 194C?

The specified persons like Central Government, State Government, local authority, company, firm, co-operative society, trust, corporation, individual/ HUF having turnover above INR 1 Crores in case of business or INR 50 Lakhs in case of the profession, etc. making payment to a resident contractor are covered under section 194C of the Income Tax Act.

4. What is the TDS rate on contractor?

TDS rate on the contractor is as follows –

• 1% when payment is made/ credited to an individual/ HUF;
• 2% for any other payments.

5. Who is liable to deduct TDS under 194C?

The specified person making payment to the contractor is liable to deduct TDS under 194C before making payment or crediting the account of the contractor.

6. Is 194C applicable on purchase of goods?

Provisions of section 194C are applicable only to ‘work’ carried out by the contractor. The same is not applicable in the case of the purchase of goods.

7. Is it mandatory to have written contract to attract TDS under 194C?

No, the applicability of provisions of section 194C doesn’t depend on a written contract. The provisions are applicable even if there is an oral contract.

8. What is the difference between 194C and 194Q?

Provisions of section 194C are applicable in case of payments to contractors, the same is not applicable in case of purchase of goods. Whereas, provisions of section 194Q are applicable in case of payments for purchase of goods.

Difference between 194C and 194Q is that 194C is applicable in case of ‘work’ and 194Q is applicable in case of ‘goods’.

9. Is 194C applicable to individuals?

Provisions of section 194C of the Income Tax Act are applicable to the individuals only in case the total sales/ gross receipts/ turnover either from business exceeds INR 1 Crore or from profession exceeds INR 50 Lakhs in the immediately preceding Financial Year.