Section 194C Of The Income Tax Act: How Is TDS Calculated, Deduction & More

Income Tax

Section 194C of the IT Act, 1961 deals with the TDS that should be deducted if a person makes a payment to any resident contractor for carrying out any work. The existence of a contract between the specific individual and a resident contractor plays a huge role here and makes it mandatory to deduct TDS. 

The rate of TDS depends on the nature of payment made, and it is essential to be aware of the intricacies of Section 194C TDS deduction to avoid unwanted hassles. Read on to know more!

What Is a Sub-Contractor as per Section 194C?

Under Section 194C, a sub-contractor can be defined as any person who becomes a part of a contract with the principal or main contractor. For instance, let’s say Mr Singh signed a contract with an NGO to supply labour. He hires Mr Sharma to complete 40% of the work he has been contractually bound for with this NGO. In this scenario, Mr Singh will be the main contractor, and Mr Sharma will be the sub-contractor.

Note that the principal contractor will be deducting the TDS while paying the sub-contractor under Section 194C of the Income Tax Act. Note that the terms of the contract may require the sub-contractor to complete the entirety or a portion of the work that the main contractor has been assigned. 

Also Read – How To Use Income Tax Calculator

Limit to Section 194C TDS deduction

The maximum TDS deductions on contractors under Section 194C of the Income Tax Act is given below:

• In case the amount credited/paid under one contract does not exceed Rs. 30,000, TDS deduction is not necessary. 
• If the gross amount credited/paid during a financial year is more than Rs. 1,00,000, Section 194C TDS deduction becomes necessary. 

TDS Rate under Section 194C 

Here’s a tabular representation of different 194C TDS rates as per various types of contractors or sub-contractors:

Here, you must note that in case individuals do not provide their PAN details to the deductor, the TDS rate will be 20%. Furthermore, no surcharge, SHEC and education cess will be added to the above-mentioned TDS rates. Therefore, TDS must be deductible at basic rates. 

Circumstances under Which TDS Is Deductible under Section 194C

A person making payments to resident contractors/ sub-contractors for carrying out a particular work should deduct TDS,

• While paying, either in cheque, cash, draft or via other payment modes. 
• At the time of crediting the money to the account of the sub-contractor or main contractor.

Also Read – What Is 80C, And How Mutual Funds Can Help In Claiming Tax Exemptions Under This Section? 

Method of TDS Calculation under Section 194C

In order to understand the calculation of TDS under section 194C, you need to be aware of some intricacies associated with it. Note that you should always consider the value of your invoice (only the service component) while deducting TDS. The invoice value should exclude any consideration for the sale or purchase of any goods or materials. 

Now, to understand TDS calculation, let’s assume a scenario where Mr Gupta has signed a contract with Mr Dutt to supply construction materials. Here, Mr Dutt is the contractor who has issued an invoice of Rs. 90,000. He has also provided an invoice breakup of Rs. 50,000 as the value of goods and the remaining Rs. 40,000 as the labour charges. 

In this scenario,

1. Section 194C will be applicable as the value of invoice against the labour crosses Rs. 30,000.
2. In case of an individual contractor, the rate of TDS will be 1%, under Section 194C.
3. There will be a TDS deduction on Rs. 40,000 as the invoice clearly states the cost of services and goods separately. Therefore, the amount of TDS here is Rs. 400. 

While Section 194C TDS deductions are mandatory in specific cases, there are certain exemptions you should also know about. 

Section 194C TDS Exceptions

There are specific circumstances where deduction of TDS on contractor 194C will not be applicable. Let’s check them out!

• In case a person pays an amount not exceeding Rs. 30,000 to the contractor or sub-contractor at any given time, then he/she cannot deduct TDS.
• If a person pays an amount not exceeding Rs. 1,00,000 during an FY to the contractor or sub-contractor, then he/she will not be able to deduct TDS.
• An individual or a HUF will not be liable to deduct TDS in case the payment paid to a contractor was for personal purposes. 
• Deduction of TDS is not applicable on the payments made to travel agents or airlines for ticket purchases.
• No deduction shall be made from the contractor’s payment while leasing goods, business of plying, hiring, carriages, etc. 

Due Date for Depositing TDS under Section 194C 

As per Section 194C of Income Tax Act, TDS must be deposited on or before these due dates:

Final Word

With easy access to internet facilities, having complete information regarding Section 194C TDS deductions has become much easier. CBDT made it mandatory for deductors to issue TDS certificates in Form 16A by generating them through the TIN central system. Note that details of the TDS deposited can be checked in Form 26AS online. 

Frequently Asked Questions 

Will Section 194C be applicable on the renting of equipment?

No, TDS deduction under Section 194C will not be applicable on renting of equipment. This is because it does not involve any work. However, note that provisions of Section 194I will be applicable for such services. 

Does Section 194C apply to a person who resides outside India?

No, Section 194C is not applicable for individuals living outside India. Both the parties, such as contractors/ sub-contractors and the person they are entering into a contract with, must be residents of India.

How should the TDS be deposited with the Central Government?

The person who has entered into an agreement with a principal or sub-contractor for carrying out a particular work needs to deduct tax from the payment. That specific tax amount should be deposited with the Central Government via a challan before the due date.

What is the penalty for delayed or non-payment of TDS under Section 194C?

In case a deductor fails to deposit TDS, an interest of 1%/month will be applicable from the due date of deduction. If you delay paying TDS, an interest of 1.5%/month will be applicable from the actual deduction date. Furthermore, in case of delay in filing TDS return, a penalty of Rs. 200/day will be imposed. 

Do I need to have a written contract with a contractor to attract TDS under Section 194C?

No, it is not necessary to have a written contract with any principal contractor or sub-contractor to attract TDS under Section 194C. Even if both parties agree verbally regarding any work, TDS can be deducted.

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.