- What is Section 194C of Income Tax Act?
- What is the meaning of work for the purpose of Section 194C?
- What is a Sub-Contractor as per Section 194C of Income Tax Act?
- What is the limit to deduct TDS u/s 194C?
- TDS rate on Payment to Contractors Under Section 194C
- When to Deduct TDS Under Section 194C?
- How is TDS calculated under Section 194C of Income Tax Act?
- Exception to TDS Deduction Under Section 194C
- What is the due date to deposit the TDS deducted?
- What is the due date for the issuance of the TDS certificate?
- TDS at a Lower Rate
- Frequently Asked Questions
What is Section 194C of Income Tax Act?
As per section 194C of the Income Tax Act, 1961 if any person pays an amount to any resident contractor in pursuance of a contract between the contractor and a specified person then the specified person needs to deduct TDS. Here, the existence of a contract plays a crucial role and defines the necessity of deduction of TDS.
In simple words, if you are making a payment to a contractor and you both have drawn a contract for such work then you need to deduct TDS. Further, 2 parties are involved i.e. the contractor and the deductor of TDS with whom the contract is made and who is responsible for paying income to the contractor.
The following persons are covered under ‘specified persons’ and they must deduct TDS u/s 194C:
- the Central Government or any State Government
- any local authority
- any corporation established by or under a Central, State, or Provincial Act
- any company
- any co-operative society
- any authority constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development, or improvement of cities, towns, and villages or for both.
- any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India.
- any trust
- any university established or incorporated by or under a Central, State, or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956).
- any Government of a foreign State or a foreign enterprise or any association or body established outside India.
- any firm
- an individual or a HUF Hindu undivided family or an AOP association of persons or a BOI body of individuals, who:
- does not fall under any of the above and
- The total sales, gross receipts, or turnover from business or profession exceeds Rs 1 crore (business income) or Rs 50 lakh (professional income). The limit is applicable on income earned during the financial year immediately preceding the financial year in which a payment is credited or paid to the account of the contractor.
Check Out Section 194H of Income Tax Act
What is the meaning of work for the purpose of Section 194C?
The term “work” for the purpose of Section 194C of Income Tax Act, 1961 includes the following:
- broadcasting and telecasting including production of programs for such broadcasting or telecasting;
- carriage of goods or passengers by any mode of transport other than by railways;
- manufacturing or supplying a product according to the requirement or specification of a customer. Such manufacturing or supplying a product is done by using material purchased from such a customer or its associate. However, Section 194C is not applicable if the contractor manufactures or supplies a product according to the requirement or specification of the customer. Such manufacture and supply is done by using material that is purchased from a person who is neither the customer himself/ herself nor his/ he associate.
For the purpose of section 194C, goods carriage has the meaning as defined in section 44AE. The definition of goods carriage under section 44AE is as follows:
- Goods vehicle, goods carriage, or heavy goods vehicle shall have the meaning as assigned to each term under section 2 of the Motor Vehicles Act, 1988 (59 of 1988).
- Section 2 of the Motor Vehicles Act, 1988 (59 of 1988) defines goods carriage as any motor vehicle that is 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.
- Lastly, a heavy goods vehicle is any goods carriage, a tractor, or a road-roller whose gross unladen weight exceeds 12,000 kilograms.
What is a Sub-Contractor as per Section 194C of Income Tax Act?
Section 194C includes a deduction of TDS on payment to a contractor or a subcontractor. Now, who is a subcontractor, and which work is included in such a subcontract?
- A subcontractor is any person who enters into a contract with the principal or main contractor. For example- Mr. Arun entered into a contract with a trust for the supply of labour. Mr. Ram enters into a contract with Mr. Ajay to fulfill 30% of Mr. Arun’s contract requirements with the trust. Here, Mr. Arun is the principal or main contractor while Mr. Ram is the subcontractor.
- Any principal contractor who enters into a contract with a subcontractor needs to deduct TDS while making a payment to the subcontractor.
- The subcontract could be to carry out the whole or part of the work undertaken by the principal contractor or for the supply of labour for such work.
What is the limit to deduct TDS u/s 194C?
The following is the deduction limit on TDS for a contractor applicable under section 194C:
- The amount paid or credit is a single contract that exceeds Rs 30,000
- The amount paid or credit during the financial year altogether exceeds Rs 1,00,000.
TDS rate on Payment to Contractors Under Section 194C
Once the conditions under section 194C are met, the deductor needs to deduct TDS on payment to contractor at the following rate.
|Type of Contractor/ Subcontractor||Rate of TDS|
|Any person who is an individual or a HUF||1%|
|Any person other than an individual or a HUF||2%|
|Any person who is a transporter||NIL|
Points to remember:
- If the person does not quote his/ her PAN number to the deductor then the deductor must deduct TDS at a rate of 20%
- Do not add a surcharge, education cess, or secondary and higher education cess to the above TDS rates. TDS must be deducted at the basic rates.
Check out: Current Tax Slabs and Rates FY 20-21
When to Deduct TDS Under Section 194C?
If the conditions mentioned under section 80C then the deductor or payer of contractual income must deduct TDS:
- At the time of credit of sum to the account of the contractor or subcontractor, or
- At the time of payment in cash or cheque or draft or any other mode to such contractor or subcontractor
Whichever is earlier
How is TDS calculated under Section 194C of Income Tax Act?
For the purpose of deducting TDS, you must always consider the invoice value excluding any consideration for the purchase or sale of any materials or goods. Hence, consider only the service component excluding any value of goods. You must consider the following points while calculating the amount on which TDS must be deducted under section 194C:
- There might be a contract that involves a composite supply of goods as well as services. In such a case consider the invoice value excluding the price for the supply of goods. Here the invoice must clearly indicate the value of goods. However, in case the invoice does not indicate the value or price of goods supplied then you must deduct TDS on the total invoice value.
- Commission and brokerage on fixed deposits are not included under section 194C
- Section 194C includes any payment made to clearing and forwarding agent for carriage of goods
- Any payment made to an airline or a travel agent for the purchase of a ticket is not included. However, if the bus, aircraft, or any other travel mode is chartered then section 194C is applicable
- Any payment made to an electrician or a contractor for an electrician’s services is covered under section 194C.
Illustration on how to calculate TDS amount under section 194C
Mr. Ajay has contracted with Mr. Anil to supply a wielded gear as per the specifications and drawings are given by Mr. Ajay. Here, Mr. Ajay is the specified person and responsible for deducting TDS. Mr. Anil is the contractor who entered into a contract with Mr. Ajay.
Case-1: Material provided by Mr. Ajay to the contractor
Mr. Ajay supplies Mr. Anil with the necessary goods to work upon. The contractor issues an invoice of Rs 70,000 providing a break up of his services as Rs 30000 as goods value supplied by Mr. Ajay and the remaining Rs 40000 as the job work charges.
- Section 194C is applicable since the invoice value against the job work exceeds rs 30,000.
- TDS rate will be 1% as the contractor is an individual.
- TDS will be deducted on Rs 40,000 since the invoice specifically indicates the value of goods and services separately. Hence, the TDS amount will be Rs 400.
Case-2: Material purchased by the contractor
Mr. Ajay and XYC Ltd entered into a contract wherein XYC Ltd must deliver a rolling wheel as per Mr. Ajay’s specifications. XYC Ltd being the contractor buys the necessary goods for this contract and delivers the rolling wheel. XYC Ltd issues an invoice to Mr. Ajay for Rs 1,70,000. In the invoice, it states the value of goods as Rs 120,000 and the value of his processing on the material as Rs 50,000.
- Section 194C is applicable since the invoice value against the job work exceeds rs 30,000.
- TDS rate will be 2% as the contractor is a company.
- Mr. Ajay must deduct TDS of Rs 50,000 against the processing charges since the invoice specifically states the value of goods and services. Hence, the TDS amount will be Rs 1,000.
Exception to TDS Deduction Under Section 194C
The following are the cases wherein section 194C for TDS is not applicable:
- The amount paid or credited in a single contract is less than Rs 30,000
- The aggregate amount paid or credited during the financial year is less than Rs 1 lakh.
- An amount paid or credited by an individual or a HUF to any contractor for any work and the work is for personal purposes of such individual or any member of Hindu undivided family.
- An amount is paid or credited to the account of a contractor during the course of business of plying, hiring, or leasing goods carriages during the previous year. Such a contractor owns less than 10 goods carriages at any time during the financial year and furnishes a declaration to that effect along with his PAN. The contractor provides such a declaration to the person who is paying or crediting such amount to him/ her.
What is the due date to deposit the TDS deducted?
The time limit within which tax is to be deposited are as follows:
|TDS Deducted||Due Date for Deposit|
|TDS is deducted for the months April to February||On or before the 7th day of the following month|
|TDS is deducted for the month of March||On or before 30th April|
|TDS is Deducted for Any month and the payment is made by the Government or on behalf of the Government||Same Day|
What is the due date for the issuance of the TDS certificate?
The following is the due date for issuing TDS Certificate Form 16A by the deductor of TDS:
|Period||TDS is NOT Deducted by Government||TDS Deducted by Government|
|1st Quarter April to June||30th July||15th August|
|2nd Quarter July to September||30th October||15th November|
|3rd Quarter October to December||30th January||15th February|
|4th Quarter January to March||30th May||30th May|
Check Out TDS Payment Due Date
TDS at a Lower Rate
Under Section 194C, when the Assessing Officer (AO) is convinced that the contractor or sub-contractor’s total income warrants are at a reduced rate of income tax deduction or no deduction at all, they shall, upon the contractor’s or sub-contractor’s request, issue the relevant certificate. This certificate can then be provided by the contractor or sub-contractor to the deductor for lower or zero TDS purposes.
Frequently Asked Questions
No, the provisions of section 194C clearly state that ‘work’ does not include a contract for sale or manufacture of a product as per the specification of the buyer. Even while calculating the TDS amount in case of a composite job work you need to exclude the value of materials as indicated in the invoice.
No, if you are an individual or a HUF and you make a payment to a contractor for your personal use or any member of your HUF then section 194C is not applicable.
No, if you are a transporter and you have provided your PAN to the person who is responsible for paying you then sec 194C is not applicable. However, the person responsible for paying such income to the transporter must provide information about such payment to the transporter in a form and within the due date. The form and due date are provided by the income tax authority.
No, section 194C does not apply to hiring or renting equipment. Since such hiring or rent does not involve any work TDS under section 194C is not applicable. However, for such service section 194I is applicable.
No, section 194C is not applicable to an NRI. Both the parties i.e. contractors and the person responsible for paying to the contractor must be residents of India.
Yes, the primary requirement for the applicability of section 194C is that there must exist a contract between the 2 parties. In the absence of a contract between the main or principal contract and the subcontractor TDS is not applicable u/s 194C