Section 194C: TDS on Payments to Contractors and Subcontractors
A practical guide to contractor TDS rates, the Rs. 30,000 and Rs. 1,00,000 thresholds, transporters, covered work, and the corresponding rules under the Income-tax Act, 2025.
What is Section 194C of the Income-tax Act, 1961?
Section 194C required a specified payer to deduct tax at source (TDS) when crediting or paying a resident contractor for carrying out work, including the supply of labour, under a contract. It applied to qualifying payments through 31 March 2026; from 1 April 2026, corresponding withholding rules are found in Section 393(1), Table serial number 6(i), of the Income-tax Act, 2025.
Tax is normally deducted at the earlier of credit to the contractor's account or actual payment. Crediting a suspense account or another account in the payer's books can count as credit to the contractor under the statutory deeming rule.
Contractor TDS rates and monetary thresholds
| Resident contractor | Standard TDS rate | Threshold |
|---|---|---|
| Individual or Hindu undivided family (HUF) | 1% | A single sum exceeding Rs. 30,000, or aggregate sums exceeding Rs. 1,00,000 during the relevant year |
| Company, partnership firm, LLP or another non-individual / non-HUF contractor | 2% |
The thresholds are applied to amounts credited or paid, including amounts likely to be credited or paid during the relevant period. Once the aggregate threshold is exceeded, withholding may be required even on smaller individual bills. The threshold is not an exemption from the contractor's income tax.
Rates shown are the statutory base rates for ordinary resident-contractor payments; other rules, including PAN-related provisions and any valid lower-deduction certificate, may change the amount to be withheld. Payments to non-residents must be tested under the separate applicable withholding framework.
Who is required to deduct tax?
Under the 1961 Act, the term specified person included the Central or State Government, local authorities, statutory corporations, companies, co-operative societies, firms, trusts, registered societies, certain universities, designated housing or development authorities, foreign governments and enterprises, and other categories listed in the statutory Explanation.
An individual or HUF carrying on business or profession was generally covered when the preceding year's turnover or gross receipts crossed the relevant Section 44AB(a) or 44AB(b) monetary limits, subject to the detailed statutory rule. An individual or HUF making a payment exclusively for personal purposes was excluded from the Section 194C deduction obligation. A separate provision for certain high-value payments by individuals or HUFs not otherwise covered may still require examination.
The 2025 Act uses the term designated person for the corresponding contractor withholding entry. Payers should check the current statutory definition rather than assuming every individual paying a contractor must deduct TDS.
Meaning of "work" under the contractor TDS provisions
The statutory definition of work covers more than building contracts. Under the 1961 Act, it expressly included:
- Advertising.
- Broadcasting and telecasting, including production of programmes for broadcasting or telecasting.
- Carriage of goods or passengers by any mode of transport other than railways.
- Catering.
- Manufacturing or supplying a product according to a customer's requirement or specification by using material purchased from that customer or its associate, subject to the statutory conditions.
In the specified manufacturing arrangement, where the material value is separately stated in the invoice, the withholding base is the invoice value excluding that separately stated material value; otherwise the entire invoice value is generally considered. Contracts for the ordinary sale of goods using materials purchased from unrelated parties are not automatically treated as work contracts merely because the buyer specifies product requirements.
For current transactions, read the definition of work in Section 402(27) of the Income-tax Act, 2025, together with amendments effective for the relevant tax year, including provisions concerning labour or manpower supply.
Exemptions and special cases
Goods-carriage transporters
Section 194C(6) excluded qualifying payments to a resident contractor engaged in the business of plying, hiring or leasing goods carriages where the contractor owned ten or fewer goods carriages at any time during the previous year and furnished the prescribed declaration along with PAN. The payer had reporting obligations under Section 194C(7). The exclusion is conditional; obtaining only a PAN without verifying the required declaration is insufficient.
Personal payments by individuals or HUFs
Section 194C(4) excluded payments made by individuals or HUFs exclusively for personal purposes. Business-related payments require a separate review of the payer's status and other applicable withholding provisions.
Payments to non-residents and professional services
Section 194C was directed at payments to resident contractors. Payments to non-residents may fall under other provisions and treaty rules. Professional or technical fees may be covered by a separate TDS category depending on the actual contract and services; the invoice label alone does not decide the section.
Income-tax Act, 2025: corresponding provision from 1 April 2026
For transactions with the earlier of credit or payment on or before 31 March 2026, apply the relevant provisions of the Income-tax Act, 1961. For the earlier event on or after 1 April 2026, use the corresponding provision of the 2025 Act. The Income Tax Department instructs deductors to quote Section 393(1), Table serial number 6(i) in applicable TDS reporting rather than continuing to quote Section 194C for new-law transactions.
The 2025 Act also has separate entries for certain high-value payments by individuals/HUFs and for professional or technical services. Always select the table entry that matches the payer, payee and nature of the transaction.
Examples of TDS on contractor payments
| Example | Illustrative result |
|---|---|
| A company pays Rs. 60,000 to a resident individual contractor for covered work. | At 1%, ordinary TDS is Rs. 600. |
| A company pays Rs. 80,000 to a resident partnership firm for covered work. | At 2%, ordinary TDS is Rs. 1,600. |
| A company pays an individual contractor four bills of Rs. 28,000 each during the same year. | The aggregate is Rs. 1,12,000, above the Rs. 1,00,000 threshold. Withholding obligations arise under the aggregate rule; earlier amounts may require adjustment. |
| A qualifying goods-carriage contractor submits PAN and the required declaration confirming ten or fewer goods carriages. | The statutory transporter exclusion may apply, subject to conditions and reporting. |
Illustrations exclude any special higher rates, valid certificates, and transaction-specific adjustments.
Deductor compliance checklist
- Confirm whether the contractor is a resident and identify the correct withholding category.
- Determine whether the payer is a specified/designated person and whether the arrangement is a covered work contract.
- Track individual invoices and the aggregate annual amount per contractor.
- Apply the appropriate 1% or 2% base rate at the earlier of credit or payment; check PAN and any valid certificate.
- Retain contracts, invoices, transporter declarations and other supporting records.
- Deposit deducted tax and file the applicable TDS statement within the prescribed time; issue TDS certificates and reconcile reporting.
- For credits or payments from 1 April 2026, use the correct Section 393(1) table entry in TDS filings.
Official legislation and guidance
Frequently asked questions
What is the TDS rate for payments to contractors?
Generally 1% for a resident individual or HUF contractor and 2% for other resident contractors, subject to statutory conditions.
Is TDS required on every contractor invoice?
No. The relevant threshold is a single payment exceeding Rs. 30,000 or aggregate payments exceeding Rs. 1,00,000 in the year, subject to the detailed rules.
When must TDS be deducted?
At the earlier of credit to the contractor's account or payment. Crediting a suspense account can also trigger deduction.
Does Section 194C still apply after 1 April 2026?
For current-year transactions, the corresponding provision is Section 393(1), Table serial number 6(i), of the Income-tax Act, 2025. Section 194C remains relevant for transactions governed by the earlier Act.
Can a goods-carriage transporter receive payment without TDS?
Yes, where the transporter satisfies the statutory ownership condition and provides PAN and the required declaration, with the payer meeting applicable reporting duties.
This article is general legal information. Confirm the applicable statute, rules, amendments and notifications for the transaction and tax year before acting.