TDS (Tax Deducted at Source) on contracts, governed by Section 194C of the Income Tax Act, 1961, is primarily deductible when a single payment to a contractor exceeds INR 30,000 or when the aggregate of all payments made to a contractor in a financial year crosses INR 1,00,000.
Understanding TDS on Contracts (Section 194C)
Section 194C mandates that any person responsible for paying a sum to a resident contractor for carrying out any work (including supply of labour for carrying out any work) must deduct tax at source. This provision aims to collect tax at the very stage of income generation.
The "work" covered under this section is broad and includes:
- Advertising
- Broadcasting and telecasting
- Carriage of goods or passengers by any mode of transport (excluding railways)
- Catering
- Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer (but not if the material is purchased from a person other than such customer)
Key Conditions and Monetary Thresholds for TDS Deduction
TDS on contracts becomes applicable based on specific payment thresholds:
- Single Payment Threshold: If a single payment made to a contractor exceeds INR 30,000, TDS must be deducted on that payment. Conversely, if a single payment is INR 30,000 or less, no TDS is required on that specific payment.
- Aggregate Payment Threshold: Even if individual payments are INR 30,000 or less, if the total of all payments made or to be made to the same contractor during a financial year exceeds INR 1,00,000, TDS shall be deducted under Section 194C. This means that once the cumulative payments cross the annual limit, TDS becomes applicable on all subsequent payments (and often, on the payment that causes the cumulative total to exceed the limit).
Example:
- You pay a contractor INR 25,000 for a small job. No TDS on this payment.
- Later in the same financial year, you pay the same contractor INR 20,000 for another job. The cumulative total is INR 45,000. Still no TDS on the second payment.
- You make a third payment of INR 60,000 to the same contractor. The cumulative total now becomes INR 25,000 + INR 20,000 + INR 60,000 = INR 1,05,000. Since the aggregate has exceeded INR 1,00,000, TDS will be applicable on this third payment of INR 60,000 (or potentially on the entire INR 1,05,000 depending on how the accounting software handles the threshold crossing).
When Exactly to Deduct TDS
The tax must be deducted at the earlier of the following two events:
- At the time of credit of such sum to the account of the payee (contractor). This includes "suspense account" credit.
- At the time of payment thereof, whether in cash, by issue of a cheque, draft, or by any other mode.
This "earlier of" rule ensures that tax is collected promptly, irrespective of when the actual cash transaction takes place.
Applicable TDS Rates under Section 194C
The TDS rates depend on the type of contractor:
| Payee Type | TDS Rate |
|---|---|
| Individual or Hindu Undivided Family (HUF) | 1% of the payment |
| Any other person (e.g., Company, Firm, LLP) | 2% of the payment |
Note: If the contractor does not provide a Permanent Account Number (PAN), TDS will be deducted at a higher rate of 20%.
Who is Liable to Deduct TDS?
The following entities are generally liable to deduct TDS under Section 194C:
- 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 dealing with or 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, or under any law corresponding to that Act in force in any part of India
- Any trust
- Any university or an educational institution
- Any firm
- Any individual or HUF whose total sales, gross receipts or turnover from business or profession exceeds INR 1 Crore (for business) or INR 50 Lakh (for profession) in the immediately preceding financial year.
Exemptions from TDS Deduction
Certain payments are exempt from TDS under Section 194C:
- Personal Use: Payments made by an individual or HUF for personal purposes.
- Transport Contractors: Payments made to a transport contractor (engaged in the business of plying, hiring or leasing goods carriages) who furnishes a declaration that they own 10 or fewer goods carriages at any time during the previous year and furnishes their PAN.
- Payments to Non-Residents: Section 194C applies only to payments made to resident contractors. Payments to non-residents are covered under Section 195.
Compliance and Penalties
Deducting TDS correctly is crucial for compliance with income tax laws. Deductors must:
- Obtain a Tax Deduction and Collection Account Number (TAN).
- Deposit the deducted TDS to the government within specified due dates.
- File quarterly TDS returns (Form 26Q).
- Issue TDS certificates (Form 16A) to the contractors.
Failure to comply with these provisions can lead to interest, penalties, and even disallowance of expenses in the deductor's tax assessment. For detailed guidelines, always refer to the official Income Tax Department website or consult a tax professional.
