194C TDS on Payments to Contractors – 194C TDS Rate, Applicability, Limits – Simple Guide

Under the Income Tax Act, Section 194C deals with the TDS that has to be deducted on payments made to contractors, the threshold limits for deduction, applicability of such TDS, exceptions to the law and 194C TDS rate specifications. Before diving into the rates and threshold limits, let us first understand the deductors, deductees and interpretation of the important definitions pertaining to the Section 194C.

Section 194C – Deductors and Deductees

TDS u/s 194C has to be deducted for payments to contractors by any of the following persons:-

• Any individual, HUF, AOP or BOI having a total sales or gross receipts from business or profession excedding Rs. 1 crore or Rs.50 lakhs respectively in the preceeding FY,
• Companies, LLPs, firms
• Central Government,
• State Government,
• Local Authority,
• Statutory Corporations,
• Authorities constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the needs for housing accommodation or for planning, development or improvement of cities, towns or villages,
• Societies registered under the Society Registration Act, 1980,
• Trusts, universities or deemed universities,
• Any government of a foreign state or foreign enterprises or any such association/body established outside India.

Therefore, any person other than an individual, HUF, AOP or BOI not having a total sales or gross receipts from business or profession exceeding Rs. 1 crore or Rs.50 lakhs respectively in the preceeding FY, is liable to deduct TDS u/s 194C on payment to contractors as per the 194C TDS rate structure and adhering to the timelines for such deduction and deposit.

The deductee can be resident person.

Section 194C – Applicability

Section 194C is applicable when any of the deductors as elaborated above are liable to make a payment to any resident contractor or sub-contractor as the case may be i.e. deductee in lieu of any work under a contract between the deductor and the deductee.

The key phrases here are deductors, deductees, sub-contract and work. The exhaustive list of the deductors and deductees have been mentioned above, we now proceed to the definitions of sub-contractor and work.

Meaning of Sub-contractor

Sub-contractor means a person who engages in a contractual agreement with the contractor to perform, or provide labour for the execution of all or a portion of the work undertaken by the contractor under a contract with any of the authorities, or to supply labour, in whole or in part, as specified in the contractor’s agreement with any of the authorities mentioned in this section.

Meaning of “Work” for Section 194C

Work includes :-

• advertising,
• broadcasting and telecasting,
• carriage of goods and passengers using any mode of transport other than railways,
• catering,
• manufacturing or supply of a product as per a customer’s specification by using the material purchased from him/her but does not include manufacturing or supplying a product according to a customer’s specification by using material purchased from other than such customer.

A works contract under section 194C excludes:

• Contracts for the sale of goods.
• Contracts that do not involve any labour for carrying out any work.
• Pure supply contracts where no work is involved.
• Contracts for the manufacture or supply of a product according to the requirements or specifications of a customer by using material purchased from a person other than such customer.
• Service contracts where no work is involved.

These exclusions ensure that only contracts involving labour for the execution of work are covered under section 194C.

Threshold for deduction of TDS u/s 194C

TDS u/s 194C has to deducted if the payments in case of a single contract exceed Rs. 30,000 or exceeds Rs. 1,00,000 in aggregate during the financial year.

Moreover, no TDS u/s 194C is required to be deducted by individuals or HUF under a contract for personal purposes even if his total sales or gross receipts exceeded Rs. 1 crore or Rs. 50 lakhs respectively in the preceeding FY.

When do we have deduct TDS u/s 194C?

TDS u/s 194C has to be deducted:-

• At the time of crediting such sum to the account to the payee, or
• At the time of payment,

Whichever is earlier.

Even when the income is credited to any account in the nature of “Suspense Account” in the books of accounts of the payee, such credit shall be deemed to be credit of such income to the account of the payee.

194C TDS Rate

The 194C TDS Rate Structure is as under:-

• On payment or credit to resident individual or HUF, where the PAN of the deductee is available – 194C TDS Rate will be 1%.
• On payment or credit to any person other than resident individual or HUF, where the PAN of the deductee is available – 194C TDS Rate will be 2%.
• On payment or credit to any person, where the PAN of the deductee is not available – 194C TDS Rate will be 20%.

Therefore, where the PAN of the deductee is not available, whether resident individual or HUF or any other resident, the 194C TDS rate will be 20%.

Exception to the 194C TDS rate structure:-

On an application filed by the deductee, if the Assessing Officer is satisfied that on the basis of the total income of the deductee, a lower rate of income tax or no deduction of income tax is justified, then the AO will issue a certificate than can be furnished to the deductors for lower or nil rates of tax deduction.

Time limit for TDS to be deposited

Once the TDS has been deducted as per the 194C TDS rate structure as explained above, the deductor is required to be deposited as per the following timelines:-

• Payment has been made by or on behalf of the Government – TDS has to be deposited on the same day.
• Payment has been made for all cases other than the Government – TDS has to be deposited within 7 days from the end of the month in which the deduction has been made. However, for the month of March, the TDS has to be deposited on or before 30^th April.

TDS u/s 194C for transporters

TDS will not be deducted on any sum credited or paid or due to be paid during the previous year to a contractor or sub-contractor during the course of business of plying, hiring or leasing goods carriages, where he owns 10 or less goods carriages at any time during the previous year and furnishes a declaration for the same along with his PAN.

Read the implications of inoperative PAN for deduction of TDS here.