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Section 194C-TDS on payment to Contractor

Section 194C of the Income Tax Act

Section 194C outlines the rules for deducting tax at source for payments to contractors/sub-contractors. 

The section applies when a resident contractor or subcontractor receives payment for work, including labor supply, under a contract. Tax is deducted if the payment exceeds Rs.30,000 once or RS.1,00,000 in total during the year. The tax deduction rate is 1% for individuals & HUF and 2% for others.

TDS Deduction Responsibility under Section 194C

Those required to deduct TDS when paying a resident contractor include: 

  • Central or State Government
  • Local Authority
  • Corporation
  • Company
  • Co-operative Society
  • Trust
  • University
  • Registered Society
  • Firm

This also applies to any individual, Hindu undivided family, association of persons or body of individuals if their total sales, gross receipts or turnover from the previous financial year exceeds one crore rupees for businesses or fifty lakh rupees for professions.

Work Definition under Section 194C

Work involves: 

  • Advertising
  • Broadcasting and Production of Programs
  • Transport of goods or passengers (excluding railways)
  • Catering
  • Product Manufacturing or Supply based on customer's material and specification. However, it doesn't cover manufacturing or supplying a product using material not purchased from the customer.

Contractor & Subcontractor Definition

A contractor is someone who signs a contract with a government or corporate entity to perform a job or supply manpower. 

A subcontractor, on the other hand, is a person who contracts with the main contractor to perform a portion of the work or supply manpower for the assigned job.

TDS rate u/s 194C

The tax deduction u/s 194C is: 

  • 1% for Individual/HUF payments
  • 2% for other payees

Deduction occurs at the earliest of: 

  • Credit of income to payee's account
  • Actual payment (any form)

194C TDS Rate Chart

Particular

TDS Rate (PAN available)

TDS Rate (PAN not available)

Individual/HUF resident payment

1%

20%

Payment to

  1. Trust
  2. Company, firm
  3. Cooperative Society
  4. Registered Society
  5. Government, Local Authority
  6. University, Cooperation

2%

20%

Transport business contractor*

Nil

20%

Transport business sub-contractor*

Nil

20%

*Refers to goods transport agencies with 10 or fewer carriages during the previous year. Contractor must submit a declaration and PAN.

194C Tax Deduction Limit

Under section 194C, TDS is deducted in these scenarios: 

Details

Sum

Single Contract Payment

Above Rs. 30,000

Total Contract Payment

Above Rs. 1,00,000

194C Applicability Example 

Scenario

Payment Date

Sum

TDS Deducted under 194C?

1

12-05-2019
28-06-2019
25-10-2019
20-12-2019

Rs.25,000/-
Rs.32,000/-
Rs.20,000/-
Rs.25,000/-

No
Yes
Yes
Yes

2

12-04-2019
25-05-2019
20-06-2019
20-12-2019

Rs.30,000/-
Rs.20,000/-
Rs.20,000/-
Rs.30,000/-

No
No
No
No

3

20-04-2019
25-05-2019

Rs.1,05,000/-
Rs.5,000/-

Yes
Yes

Exemptions to TDS payments under Section 194C

Here are the situations where TDS under Section 194C isn't required: 

  • Single contract payment to a contractor is under Rs.30,000, or the total yearly contract sum doesn't exceed Rs.1,00,000.
  • An individual or HUF pays a contractor for personal use work.
  • A goods transport agency owning 10 or less carriages gets paid, given they provide declaration with PAN.
  • A payment is made to a non-resident contractor or sub-contractor.

TDS Calculation under section 194C

TDS is calculated based on invoice value. Here's an example: 

A Ltd. makes the following payments to Mr. A, a contractor in FY 2022-23: 

  • Rs. 25,000 on 01-06-2022
  • Rs. 30,000 on 05-08-2022
  • Rs. 25,000 on 12-08-2022
  • Rs. 28,000 on 20-12-2022

Every individual payment is less than Rs. 30,000, so TDS is not deducted. However, when the total payment exceeds Rs. 1,00,000, TDS is deducted. 

Date

Amount

TDS Applicability

01-06-2022

25,000

No TDS

05-08-2022

30,000

No TDS

12-08-2022

25,000

No TDS

20-12-2022

28,000

TDS required since total payment is Rs. 1,08,000

TDS calculation: 

Details

Amount

Total payment

1,08,000

TDS @ 1%

1080

Net payment on 20-12-2022

26,920

Calculating TDS for Composite Work u/s 194C

When work involves manufacturing or supplying a product with customer-provided materials, TDS is deducted based on: 

  • The invoice value, excluding the cost of materials (when listed separately).
  • The total invoice value, if the material cost is not separately listed.

194C Applicability: Government Considerations

The CBDT has announced several special 194C implications: 

Travel Agent Payments : 

Passenger payments to travel agents or airlines for tickets are not subject to TDS u/s 194C. TDS does not apply when agents pay airlines, but is deducted for chartered transport hire payments. 

Courier Payments : 

Courier payments are subject to TDS as it involves goods carriage. 

Restaurant Food Serving Payments : 

Payments for food serving in restaurants are not subject to TDS. 

GST Amount TDS Deduction : 

TDS will be levied on the value excluding any separately indicated GST amounts on an invoice. 

Time Limit for TDS Deposit u/s 194C

The TDS amount must be deposited to the government within the deadline. 

Payment Time Frame

TDS Deposit Deadline

Payment made or credited in March

Before or on 30th April

Payment made or credited in any other month

Within 7 days from month end

Time limit for TDS return under section 194C

After depositing TDS, a quarterly TDS return in form 26Q needs to be filed. See below for due dates: 

Period

Due Date

April - June

31st July

July-September

31st October

October-December

31st January

January - March

31st May

TDS Statement Issuance and Responsible Party u/s 194C

The party required to deduct TDS issues the TDS statement. Form 16A is issued quarterly to the deductee. The due dates for issuing the TDS certificate are: 

Quarter

Due Date

April - June

15th Aug

July-September

15th Nov

October-December

15th Feb

January - March

15th June

Consequences of non-compliance with section 19C

Interest: If TDS is not deducted or not deposited on time, interest must be paid on the amount. 

Expense Disallowance: If TDS is not deducted on time, the person cannot claim the expense deduction from PGBP income. The amount of disallowed expenses is 30% of the payment. 

If TDS is deposited in later years, then expenses will be allowed in the TDS payment year. 

 

 

 

 

 

author

The Tax Heaven

Mr.Vishwas Agarwal✍📊, a seasoned Chartered Accountant 📈💼 and the co-founder & CEO of THE TAX HEAVEN, brings 10 years of expertise in financial management and taxation. Specializing in ITR filing 📑🗃, GST returns 📈💼, and income tax advisory. He offers astute financial guidance and compliance solutions to individuals and businesses alike. Their passion for simplifying complex financial concepts into actionable insights empowers readers with valuable knowledge for informed decision-making. Through insightful blog content, he aims to demystify financial complexities, offering practical advice and tips to navigate the intricate world of finance and taxation.

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