Section 194C TDS Rate, Threshold, and Applicability

What is Tax Deducted at source?

Income – Tax is Collected/recovered at two stages, namely pre-assessment stage and post assessment stage. The method by which pre-assessment tax are collected is in the following manner at different stages namely,

Advance Tax.
Tax Deducted at source.
Tax Collected at Source.

Objectives of introduction of Tax Deducted at Source.

It helps in reporting the correct Incomes.
It helps in checking Tax evasion.
Early collection of revenue by the Government.
It is the cheapest mode of collection of tax.
It helps to widen the tax base as more and more people are covered.

TDS Implication Undersection 194C

Section 194C, deduction of tax at source is required to be made from payments of any sums to resident contractors or sub-contractors.

Thus, following two situations are covered under this section 194C

Deduction of tax at source (TDS) from payment to resident contractors.
Deduction of TDS from payment to resident sub-contractors

Payer in (Contractee) Section 194C

If any individual is liable for paying any sum to a resident contractor for carrying out any work (including the supply of labour). In completion of a contract between the contractor and the following

The central government and state government or;
Any local authority or;
Any statutory corporations or;
Any company or;
Any co-operative society or;
Any statutory authority dealing with housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages or for both or;
Any society registered under the Societies Registration Act, 1860 or;
Any trust
Any university established or incorporated by or other a central, state or provincial act and an institution declared to be university under the UGC act,1956 or;
Any firm or;
Any government of a foreign state or foreign enterprise or any association or body established outside India or;
Any person, being an individual, HUF, AOP or BOI, who has total sales or gross receipts or turnover from the business or profession carried on by him exceeding 1 crore in case business and 50 lakhs in case of profession during the financial year immediately preceding the financial year in which such sum is credited or paid to the amount of the contractor.

Definition of Work in TDS in Contractor

Work includes –

Advertising
Broadcasting and telecasting including production of Programmes for such broadcasting or telecasting
Carriage of goods or passengers by any mode of transport other than by railways
Catering
Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer or its associate, being a person related to the customer. In such a case, tax shall be deducted on the invoice value excluding the value of material purchased from such customer or its associate, if such value is mentioned separately in the invoice. Where the material component has not been separately mentioned in the invoice, tax shall be deducted on the whole of the invoice value.

However, “work” shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person, other than such customer or associate of such customer, as such a contract is a contract for or supply of an article or thing (e.g., construction contract).

Therefore, 194C will cover all those cases where work is carried out for any tangible product which is not equal to contract for sale.

Contract for Work Vs Contract for Sale

Contract for Sale

Contract for work

Contract for Work	Contract for Sale
Principal object of the contract is one of work and labour even through some material might have been used in execution of the contract	Main object is the transfer of property and the delivery of the possession of a movable property even though goods might have been manufactured as per the requirement and specification of the client
Article is brought into existence by applying work and labour and materials are consumed in execution of the work	Article has an identifiable existence prior to its delivery to the purchaser and when the title to the property vests with the purchaser only upon delivery

Nature of Payment

Deduction is to be done for payment for carrying out any work (including supply of labour) in pursuance of a contract between the contractor and a specified person.

TDS to Sub-Contractor

As per the provisions of income tax act, any person (being contractor and not being an individual or Hindu undivided family),
Responsible for paying any sum to any resident
In the fulfilment of a contract with the sub-contractor or for the supply of labour for carrying out the whole part of the work taken by the contractor or for supplying whether wholly or partly any labour which the contractor has taken to supply shall,

Time of credit of the amount in the account of the sub-contractor
Time of payment in cash
By issue if a cheque or draft or by any other mode, whichever is earlier

Deduct an amount equal to 1% of the sum as income tax or income comprised therein.

Condition for payment to Sub-contractor

Payment is made to a sub-contractor who is resident within the meaning of section 6 of the income tax act, 1961
Payment is only done by the contractor
Payment is made to carry out any work, including the supply of labour
The amount of consideration of the contract in respect to which payment is made should not be less than Rs. 30,000
The amount should be credited or paid by the contractor itself of a contract undertaken by him with the specified bodies

TDS on Contract is deducted under Section 194C

The person who is responsible for making any payment to resident contractor or sub-contractor should deduct TDS

At the time of crediting such amount to the payee account
At the time of payment in cash or by issuing a cheques or by any other means, whichever is faster mode of payment
The tax has to be deducted even if the amount payable to resident contractor or subcontractor is transferred to suspense account by the payer in his books.

Rate of TDS on Section 194C

Who is Payee?

Any Resident contractor for carrying out any work (including supply of labour)

Rate of TDS

Serial No	Nature of Payment	TDS rate if PAN available	TDS Rate if PAN not available
1	Payment or Credit to resident individual or HUF	1%	20%
2	Payment or Credit to any resident person other than individual or HUF	2%	20%
3	Payment or Credit to transporters	NIL	20%

Note – No surcharge, education cess, and SHEC shall be added so because of this, TDS will be deductible at Basic Rates

For 1 single Contract – 30,000/-
For aggregate in a year – 1,00,000/-

Exemptions:

No TDS by an Individual or an HUF -- personal purposes
No TDS-- for sum credited/paid to a contractor during the course of business of plying/hiring/leasing of good/carriages on furnishing Pan to the payer/ deductor.

Non-applicability of TDS for Transporter

TDS shall not be applicable to the payment in the nature of transport charges (whether paid by a person engaged in the business of transport or otherwise) made to a contractor, who fulfils the following three conditions cumulatively

Owns ten or less goods carriages at any time during the Financial Year.
Is engaged in the business of plying, hiring or leasing goods carriages
Has furnished a declaration to this effect along with his PAN.

Goods carriage means

Any motor vehicle constructed or adapted for use solely for the carriage of goods or
Any motor vehicle not so constructed or adapted, when used for the carriage of goods.

The term, “motor vehicle” does not include vehicle having less than four wheels and with engine capacity not exceeding 25cc as well as vehicles running on rails or vehicles adapted for use in a factory or in enclosed premises.

Minimum amount of payment for deduction of TDS

If the payment that is being made to the contractor does not exceed Rs. 30,000, no TDS on payment to the contractor is required to be deducted. However, if the total of all such payments made or to be made during a financial year exceeds Rs. 1,00,000.

Case 1	Single contract of Rs. 30,000	No
Case 2	Two contracts of Rs. 30,000 each in the year	No
Case 3	Three contracts of Rs 40,000 each in the year	Yes (TDS to deducted on Rs. 1,20,000)
Case 4	Single contract of Rs. 40,000 each in the year	Yes
Case 5	Five contracts of Rs. 15,000 each in the year	No
Case 6	Seven contracts of Rs. 15,000 each in the year	Yes (TDS to deducted on Rs. 1,05,000)

Time limit within TDS on Contract is to Deposited

Payment is made on behalf of the Government – On the same day
Payment is made other than the Government

If the amount is credited in the month of march – On or before April 30th
In another month – within 7 days from the end of the month in which the deduction is made

Note – The Payer is the person responsible for TDS.

Issue of TDS on Contract Certificate

TDS certificate are to be issued on quarterly basis in as per Rule 31

Form 16A – Payments other salary, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form 16A.

The certificate is issued by the following dates

Quarter	Due date for non-Government deductor	Due date for Government deductor
April to June	30^th July	15^th August
July to September	30^th October	15^th November
October to December	30^th January	15^th February
January to March	30^th May	30^th May

It is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate form the Tin website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1st April 2012. The certificate so issued can be authenticated either by using the digital signature or manual signature.

TDS at a Lower Rate

Under the section 194c, where the assessment officer is pleased that the net income of the contractor or sub-contractor justifies the deduction at any lower rate or non-deduction of income tax, the Assessing officer (AO) shall, on application made by the contractor or subcontractor in this behalf give to him such certificate as may be appropriate.

TDS Return of 194C

A TDS Return is a quarterly statement which has to be submitted to the Income Tax Department of India. Submitting TDS Return is mandatory if you are a deductor. It has details of TDS deducted and deposited by you.

Due dates of submission of quarterly TDS Return are

31st July for Q1,
31st October for Q2,
31st January for Q3, and
31st May for last quarter.

Form 26Q – TDS on payments other than Salaries (194C Payment against Contractor),

Code USED in RPU

94C for Section 194C
· 01 for company
· 02 for Non company

Reason for lower /Higher / NIL deduction

Code	Category
A	Lowe / Nil deduction certificate u/s 197
C	“PANAPPLIED”, “PANVALID” or “PANNOTAVBL” Higher TDS rate for no PAN
T	In case of Transporter transaction and valid PAN is provided
Y	Within threshold limit – hence no TDS
Z	Notified organization u/s 197A (1F)

Conclusion

Understanding Section 194C of the Income Tax Act is crucial for businesses engaging in contracts and sub-contracts. This section pertains to Tax Deducted at Source (TDS), which is a means of collecting income tax at the source of income.

Under Section 194C, TDS is applicable when a contract is executed for carrying out any work, including the supply of labour. The payer, often referred to as the contractee, is responsible for deducting TDS at the prescribed rate. The definition of "work" under this section encompasses a wide range of activities, ensuring that various forms of contracts are covered.

The TDS rate under Section 194C is typically set at 1% for individuals and 2% for other entities. Importantly, TDS is only deducted if the payment exceeds the threshold limit of ₹30,000 for a single contract or ₹1,00,000 in aggregate during the financial year.

Timely compliance is essential; TDS deducted must be deposited with the government within 7 days from the end of the month in which the deduction was made. Additionally, a TDS certificate must be issued to the contractor, providing proof of the deduction, and TDS returns must be filed quarterly.

In conclusion, understanding the nuances of Section 194C is vital for both payers and payees to ensure compliance and avoid penalties. Proper management of TDS obligations not only fosters transparency but also strengthens business relationships.

FAQ's

Is GST included while calculating TDS under 194C?

No, if GST is shown separately on the invoice, TDS is deducted on the amount excluding GST

Is TDS applicable on advance payments to contractors?

Yes, TDS applies even on advance payments.

Is TDS deducted if the contractor is a non-resident?

No, Section 194C applies only to resident contractors. For non-residents, Section 195 applies.

What if multiple small payments under ₹30,000 are made, but the total exceeds ₹1,00,000 in a year?

TDS must be deducted once the aggregate exceeds ₹1,00,000.

Are reimbursement of expenses included in TDS calculation?

Yes, unless supported by actual bills or treated separately in the contract.