What is 194C in TDS?

What is Section 194C in TDS?
Section 194C of the Income Tax Act mandates the deduction of Tax Deducted at Source (TDS) on payments made to contractors and sub-contractors for carrying out various types of work.

Understanding Section 194C of the Income Tax Act

Section 194C is a crucial provision within the Indian Income Tax Act that governs the deduction of tax at source on payments made under a contract. Its primary purpose is to ensure that tax is collected at the point of income generation when businesses or individuals make payments to contractors and sub-contractors for services rendered or work performed. This encompasses a wide array of activities, from construction and advertising to catering and the supply of labour.

The core principle behind Section 194C is to bring contractors and sub-contractors within the tax net by making the payer responsible for deducting a small percentage of the payment as tax before it reaches the payee. This deducted tax is then remitted to the government.

Who Needs to Deduct TDS Under Section 194C?

Section 194C applies to specific types of payers (deductors) and payments made to contractors and sub-contractors (deductees).

The Deductor (Payer)

A deductor under Section 194C typically includes:

The Central or 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 planning, development, or improvement of cities, towns, and villages, or for both.
Any society registered under the Societies Registration Act, 1860.
Any trust.
Any university or deemed university.
Any firm.
Any individual, Hindu Undivided Family (HUF), or Association of Persons (AOP) whose total sales, gross receipts, or turnover from business or profession exceeds ₹1 crore (for business) or ₹50 lakh (for profession) in the financial year immediately preceding the financial year in which the payment is made.

The Deductee (Contractor/Sub-Contractor)

Payments liable for TDS under Section 194C are those made to:

Contractors: Any person who enters into a contract with a specified payer for carrying out any work.
Sub-contractors: Any person who enters into a contract with a contractor for carrying out, or for the supply of labour for carrying out, the whole or part of the work undertaken by the contractor.

This broad coverage ensures that TDS is deducted on payments for "carrying out any work, including the supply of labour, under a contract between the payer and the contractor," as specified by the Income Tax Act.

TDS Rates and Threshold Limits for Section 194C

The rates at which TDS is to be deducted under Section 194C depend on the nature of the deductee (contractor) and the payment amount.

Section 194C TDS Rates & Thresholds

Payee Type (Deductee)	TDS Rate (with PAN)	Single Transaction Threshold	Aggregate Annual Threshold
Individual or Hindu Undivided Family (HUF) Contractor	1%	₹30,000	₹1,00,000
Other than Individual or HUF (e.g., Company, Firm)	2%	₹30,000	₹1,00,000
If PAN is not provided by the Deductee	20%	-	-

Single Transaction Threshold: If a payment for a single contract exceeds ₹30,000, TDS must be deducted.
Aggregate Annual Threshold: If multiple payments to the same contractor during a financial year cumulatively exceed ₹1,00,000, TDS must be deducted even if individual payments are below ₹30,000.
No PAN: If the contractor fails to furnish their Permanent Account Number (PAN), the TDS will be deducted at a higher rate of 20%, irrespective of the actual rate applicable.

For detailed information on TDS provisions, you can refer to the official Income Tax Department website.

What Constitutes "Work" Under Section 194C?

The term "work" under Section 194C is broadly defined to cover a variety of services, specifically including:

Advertising
Broadcasting and telecasting, including production of programs for such broadcasting or telecasting
Carriage of goods or passengers by any mode of transport other than railways
Catering
Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer (not sale of goods). This includes the supply of labour for such manufacturing or supply.

It's critical to note that the supply of labour for carrying out any work is explicitly covered under this section, reinforcing the act's mandate to deduct tax at source on such payments.

Key Exemptions from Section 194C TDS

While Section 194C has broad applicability, certain payments are exempt from TDS deduction:

Payments for personal use: If the payment is made by an individual or HUF for work carried out exclusively for personal purposes (not related to their business or profession), no TDS is required.
Payments below the threshold limits: As mentioned, if a single payment does not exceed ₹30,000 and the aggregate payments in a financial year do not exceed ₹1,00,000, no TDS is to be deducted.
Payments to certain transport operators: No TDS is to be deducted on payments made to a contractor for the plying, hiring, or leasing of goods carriages, if the contractor furnishes a declaration that they own ten or less goods carriages at any time during the financial year and also furnishes their PAN.
Payments to non-residents: Payments made to non-resident contractors are typically covered under Section 194DA or Section 195, not Section 194C.

Compliance Requirements for Deductors

Any entity or individual liable to deduct TDS under Section 194C must adhere to specific compliance procedures:

Deduction of TDS: TDS must be deducted at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier.
Deposit of TDS: The deducted TDS must be deposited with the government within the prescribed due dates. Generally, for government deductors without Challan, it's on the same day. For others, it's by the 7th of the next month (except for March, which is April 30th).
Filing of TDS Returns: Deductors must file quarterly TDS returns in Form 26Q for payments covered under Section 194C.
Issuance of TDS Certificate: After depositing the TDS and filing the return, the deductor must issue a TDS certificate in Form 16A to the deductee. This certificate serves as proof that tax has been deducted and deposited on the payee's behalf.

Practical Examples of 194C in Action

To further illustrate the application of Section 194C, consider these scenarios:

Example 1: A Marketing Agency Payment
- Scenario: "TechSolutions Pvt. Ltd." hires "Creative Ads LLP" for an advertising campaign. The total contract value is ₹1,50,000.
- Application of 194C: Since "Creative Ads LLP" is a firm (other than individual/HUF) and the payment exceeds both the ₹30,000 single transaction and ₹1,00,000 aggregate annual threshold, TechSolutions Pvt. Ltd. must deduct TDS at 2% on ₹1,50,000, which amounts to ₹3,000.
- Action: TechSolutions will pay ₹1,47,000 to Creative Ads LLP and deposit ₹3,000 as TDS with the government.
Example 2: Construction Work Payment
- Scenario: Mr. Sharma, whose business turnover exceeds ₹1 crore, hires a local independent contractor, Mr. Verma (an individual), to construct an extension for his business premises. The payment for the work is ₹80,000.
- Application of 194C: Mr. Sharma is a deductor because his business turnover exceeds the threshold. Mr. Verma is an individual contractor. The payment of ₹80,000 exceeds the ₹30,000 single transaction threshold (and potentially the ₹1,00,000 aggregate if it's not the first payment for the year). Therefore, Mr. Sharma must deduct TDS at 1% on ₹80,000, which is ₹800.
- Action: Mr. Sharma will pay ₹79,200 to Mr. Verma and deposit ₹800 as TDS.

Understanding and complying with Section 194C is vital for businesses and individuals making payments to contractors, ensuring timely tax collection and avoiding penalties for non-compliance.