Section 194C - TDS on Payment to Contractor

Are you aware of the taxes levied on payments made to contractors? Anyone who hires contractors for work must understand the rules related to the Tax Deducted at Source (TDS) as per Section 194C of the Income Tax Act of 1961. This section has been renumbered to Section 393 in the Income Tax Act of 2025. This article outlines TDS compliance for payments to contractors and the penalties for failing to comply with the regulations.

TDS, or Tax Deducted at Source, refers to the system of collecting tax from the very source of income. It is governed by the Income Tax Act of 2025. The system mandates that any individual or entity engaged in paying a sum of money to a resident or contractor for carrying out work must deduct tax at the applicable rates. The deducted amount is then remitted to the government. The Section 393 TDS rates can vary depending on the recipient’s status and the nature of the payment. The concept of TDS was introduced to ensure a regular revenue inflow for the government and broaden its tax net. TDS also enables taxpayers to comply with their tax obligations, as tax is deducted before receiving a payment, and the need to pay a large amount at the end of the financial year, the TDS deducted is eliminated. The deductor must issue a TDS certificate to the payee. Please note that TDS is not applicable if the payment is made for personal purposes.

Section 393 of the Income Tax Act mandates the payment of deductions under TDS if the total payment credited to a contractor or subcontractor in a financial year exceeds ₹30,000 in a single payment or amounts to ₹1 lakh in the aggregate. In other words, there will be no deduction as TDS if the payment is less than these amounts. The applicable TDS percentage varies, with 1% for individuals and Hindu Undivided Families and 2% for others. The TDS collected is to be deposited with the government within a specified time limit. A TDS certificate was issued to the contractor/subcontractor, who can claim tax benefits and a TDS refund while filing income tax returns. TDS applies in respect of contracts for performing any work. The section mentions that work will entail activities like advertising, catering, broadcasting and telecasting, manufacturing or supply of a product, transportation of goods or passengers, etc. TDS deductions apply only when the payer pays a sum of money to the contractor or subcontractor for working or providing services. There is no TDS on the purchase of goods. If the TDS amounts collected are not deposited into the government’s account within the specified dates, the payer has to pay late filing fees as per Section 427 (234E of Income Tax Act of 1961) and a penalty as per Section 461 (271H under Income Tax Act of 1961).

According to Section 393 of the Income Tax Act, TDS will be applicable for payments to contractors if all of the following conditions are satisfied:

• The payer belongs to the list of "specified" persons—this includes governments, companies, firms, trusts, local authorities, and individuals/HUFs with turnover exceeding ₹1 crore or receipts of ₹50 lakh.
• The recipient of the payment is either the resident contractor or subcontractor—TDS u/s 393 will not apply if the payment is being made to a non-resident (under some other section of the Act).
• The payment is for the execution of "work".
• The aggregate payment crosses threshold limits—₹30,000 per single payment or ₹100,000 for the whole financial year.
• There is a contract between the two.

TDS is deducted at the time the amount is credited to the contractor's account or actually paid to him, whichever is earlier.

Various types of contracts come under Section 393 of the Income Tax Act, such as the following:

• Work contracts—work to be done, including supply of labour.
• Advertising contracts—publishing advertisements in newspapers and magazines or other platforms.
• Broadcasting & Telecasting – creating TV serials, radio programs, web videos, etc.
• Carriage of Goods and Passengers—Transporting things and people via rail, air, and other modes of transport except railways.
• Catering – providing food for any occasion.
• Supply of Labour - Supplying labour force for the purpose of doing any work.

"Subcontractor" refers to any person with whom the contractor signs a direct contract to do the work, but not the client. For instance, a civil construction contractor signs a contract with a subcontractor who supplies labour or electrical supplies for the work. TDS under Section 393 shall be applicable to subcontractors as well in the same manner. For subcontractors, the tax rate is 1% for individual contractors/HUF and 2% for all others.

The TDS collected must be remitted to the government under Section 393 within the time frame:

• For payments made by the government or on its behalf, TDS must be remitted on the same day.
• In case of any other payment –

For amounts credited in March of any year, TDS must be remitted on or before 30 Apr. For TDS deducted in any other month, it must be remitted within seven days from the end of the month.

TDS returns for Section 393 shall be filed using Form 26Q quarterly. Let us see how.

Step 1 - Collect necessary data for filing the form.

Names, addresses and PAN of the contractor

Invoice details and amounts paid.

Amount of TDS deducted and deposited.

Step 2 - Log in to the online portal for TDS filing on the website of the Income Tax Department and fill in the Form 26Q for Non-salary TDS

Step 3 - Quarterly TDS Filing Deadlines

Step 4 - Provide Form 131 to the contractor within 15 days of filing the TDS return.

According to the Act, any entity, be it a company, firm, or individual, paying a resident contractor/subcontractor for any work or services must deduct TDS under Section 393.

The Act mandates entities to deduct tax on payments to contractors for the services they provide. If the payer misses TDS on contractor payments, it can lead to penalties. In addition, contractors who cannot show TDS deductions on payments received encounter problems while filing their income tax returns. They may be liable to deposit additional taxes or penalties. If the payer does not deduct TDS on contractor payments, the consequences and penalties vary based on the amount of payment and the nature of the contract.

Note - Always collect PAN before paying the contractor. If not, the TDS rate increases to 20%.

If the payment to a contractor does not exceed either of these two thresholds, no TDS deduction is required.

• Payment made in a financial year up to ₹30,000 in a single payment
• Aggregate payment in a financial year up to ₹1,00,000 in total payments

Let's understand how this threshold will work with examples.

• A person pays a contractor ₹28,000 during April—No TDS (because the total payment is ₹28,000, which is less than ₹30,000)
• He pays ₹25,000 to the same contractor during June—the total payment becomes ₹53,000; still, no TDS (as the total is less than ₹1 lakh)
• During September, he pays another ₹50,000 to the contractor. As the total amount goes above ₹1 lakh, TDS shall be applicable.
• Once the aggregate limit is crossed, TDS deduction will be applicable until the end of that financial year.

TDS shall be deducted from contractor payments when either of these two occurs:

• The amount is credited to the contractor's account or
• The actual payment is made to the contractor.

The simplest explanation would be that you should calculate and hold back the TDS at the time of recording it in the books of account or crediting the amount to his bank account.

Deposit deadlines:

Before paying a contractor or a subcontractor, you need certain essential documents:

1. Contract or agreement: An essential document required for TDS calculations is the contract or agreement between the entity and the contractor/subcontractor. It must mention the scope of work, duration, amount payable, and other relevant details.
2. PAN card: The contractor’s PAN (Permanent Account Number) is necessary for making TDS deductions under Section 393. The PAN card details must be verified before making a payment. The TDS rate increases to 20% if PAN card details are unavailable.
3. Invoice: The contractor must raise an invoice for the project completed or services rendered. It should mention the contractor’s name and address, the nature of the work, the amount payable, and the GST information.
4. Challan: After deducting tax from the payments you make, remit it to the government. To do so, generate a challan using Form 26Q and deposit the TDS amount with the authorised bank.
5. TDS certificate: After you have deducted and deposited the tax amount, you must provide the contractor with a TDS certificate. Also known as Form 16A, this certificate must include details such as the TDS amount, the contractor’s PAN information, and the nature of the work performed.

The steps for calculating TDS on payments to contractors are as follows:

1. Understanding the nature of a payment: is important because TDS rates vary depending on the type of payment. Payments for work contracts attract a different TDS rate from those for professional services. The rates also vary based on whether the contractor is an individual or a company.
2. Find out the TDS rates: Section 393 of the Income Tax Act specifies TDS rates for different types of contractors. Determine the TDS rate that is suitable for your payment type.
3. Compute the TDS amount: Once you know the TDS rate, calculate the TDS amount that will be deducted. For example, if the contractor payment is ₹ 60,000 and the TDS rate is 1%, then ₹ 600 is deducted as TDS while making the payment.
4. Deposit the TDS amount: Once the TDS is collected, it must be remitted to the Central Government’s account within a specified time limit.
5. Issue a TDS certificate: The payer must issue a TDS certificate to the contractor after depositing the TDS amount with the government. It is vital to issue the TDS certificate within 15 days after the end of the quarter for which TDS is deposited.

Example 1 - Individual contractor (PAN available):

• Payment to a painter (individual): ₹80,000
• TDS rate: 1%
• TDS to deduct: ₹800
• Payment to contractor: ₹79,200

Example 2 - Company contractor (PAN available):

• Payment to a construction company: ₹5,00,000
• TDS rate: 2%
• TDS to deduct: ₹10,000
• Payment to contractor: ₹4,90,000

Example 3 - Contractor without PAN:

• Payment to a labour contractor: ₹60,000
• No PAN provided
• TDS rate: 20%
• TDS to deduct: ₹12,000
• Payment to contractor: ₹48,000

Example 4 - Composite contract (work + material): If a contractor charges ₹3,00,000 for work and ₹1,00,000 for materials (clearly mentioned in the invoice separately), TDS is calculated only on the ₹3,00,000 work component:

• TDS (at 2% for company): ₹6,000

Note on GST: TDS is always calculated on the base amount excluding GST. If an invoice shows ₹1,00,000 + ₹18,000 GST, TDS applies only on ₹1,00,000.

It's quite common for confusion among business owners as to whether the GST portion of the payment needs to be subject to TDS deduction. It doesn't.

As per the Income Tax Act and the notification issued by the the CBDT, TDS on contractor payments under Section 393 will be deducted on the gross amount, excluding GST. Suppose the invoice raised by the contractor shows ₹1,00,000 GST + ₹18,000; in that case, TDS is to be done only on ₹1,00,000.

Importance of This Question

• GST is the Government tax collected on behalf of the government
• Deduction of GST will make double taxation of the same portion of the invoice
• CBOT has clarified this matter through a circular.

Now, what about TDS under GST?

Note: that under GST law, the GST TDS has its own provisions (section 51 of the CGST Act). These will apply alongside income tax TDS u/s 393, depending on the type of contract.

To make deductions under Section 393, the contractor must satisfy the following criteria:

• He must be a resident of India. The TDS provisions for non-resident contractors are a different section of the Income Tax Act.
• The contractor must carry out any kind of work. It cannot be the salary or other employment-related payments.
• A contract must exist between the contractor and the payer.
• The payment must not include GST.

There are certain exemptions available from TDS on payments made to contractors.

1. Threshold limit exemption: When the total amount paid or payable to the contractor in a financial year is equal to or below ₹ 30,000 in a single payment or ₹ 1,00,000 in aggregate, TDS is not applicable.
2. Taxable limit: When the contractor’s income is below the taxable limit, they can claim a TDS exemption certificate.
3. Nature of payment: No TDS is applicable on payments made to contractors for personal purposes.
4. Government contractors: TDS does not apply to payments made to government contractors, such as those who provide services to the central or state government.
5. Purchase of goods: No TDS is applied to contractor payments made for the purchase of goods and materials. The payment for the purchase of goods falls under Section 194Q, with the 194Q TDS rate as 0.1 per cent for a value exceeding ₹ 50 lakhs.

To claim these exemptions, the contractor must provide a valid PAN and a declaration in Form 15G/15H, if applicable.

The following are some exceptions where Section 393 of the Income Tax Act won't apply to contractor payments:

• Payment for the purchase of the goods—not work.
• Payment to railways for transportation – as a special exemption
• Personal payments by individuals for personal use.
• To transporters who have fewer than 10 goods carriages, furnish the declaration with the PAN number.
• Payments whose aggregate amounts remain within ₹1 lakh in the whole financial year.

If the payee doesn't provide a PAN number, then the TDS rate jumps to 20%. This rule is applicable in both cases:

• The payee is an individual or a firm
• The payee is a company, trust or other entity

The only thing that changes is the threshold limits, as discussed in previous sections. In the case of an individual/HUF, it would become ₹6,000; otherwise, ₹20,000.

Note - Always get the PAN of the payee before making payment to him for the first time.

Section 393 of the Income Tax Act regulates the provisions for TDS on payments to contractors. This section covers different types of contracts:

1. Work contracts for carrying out any work, including the supply of labour for the execution of a project.
2. Advertising contracts: These cover the publication of advertisements in newspapers, journals, magazines, or any other media.
3. Broadcasting and telecasting contracts. Production of programs, serials, or any other content for broadcast or telecast falls under this.
4. Carriage of goods and passengers’ contracts. These may include transport by road, air, or waterways.
5. Supply of labour contracts may include the provision of manpower for any purpose.

The contract for sale primarily deals with the transfer of property and the delivery of possession of movable property, like the sale of a property. The contract for work, on the other hand, deals with work and labour, like the construction of a road.

This is one of the most common confusions businesses face. Here's how to tell them apart:

Rule of Thumb:

• Any contract for performing the work would come under Section 194C.
• If anyone is utilising his/her professional skill and expertise, then the payment will fall under Section 194J.

Whenever in doubt, consult a chartered accountant, or you may attract penalties and demands for short payment.

However, under the Income Tax Act of 2025, Sections 194C and 194J have been clubbed under Section 393.

The payer is required to file the TDS return every quarter in Form 26Q, furnishing details of TDS deducted, deposited, and other relevant information. Failing to comply with the provisions of Section 393 may attract penalties and late filing fees.

Late filing fees apply when the payer fails to make TDS deductions or deposit the deducted amount with the government by the due date, resulting in a liability to pay ₹ 200 for each day that the failure continues. However, the late filing fee amount cannot exceed the TDS amount.3

Penalty If the payer does not file the TDS return within the due dates suggested, a minimum penalty of ₹ 10,000, which can go up to ₹ 1,00,000, is levied.

Here are the mistakes most taxpayers make while paying TDS on contractors' payments:

• Incorrect Calculation of Threshold—Most often, taxpayers don't consider the cumulative payments while calculating TDS on contractor payments.
• Wrong Application of TDS Rate—Often, people think the TDS on contractor payment is to be calculated on the gross invoice, which includes GST as well.
• Mistaken Section Used for Payment – Paying a professional person under Section 393 instead of 194J.
• Not Collecting PAN—Without the PAN, the rate of TDS increases to 20% in most cases. Always collect it from the payee before the first payment.
• Missing the TDS Due Date – Even a single-day delay will attract interest from the department.
• Not Providing the Form 131: Contractors require this form from you to claim the tax credit in their tax returns.
• In composite contract cases, where both work and material costs are included, the TDS should only be applied to the work or labour.
• Forgetfulness about Subcontractors—Sometimes people only calculate the direct contractor payments and forget about the subcontractor payments.

TDS on payment to contractors under Section 393 of the Income Tax Act is an important tax implication for businesses and individuals making payments to residents when they carry out work or provide services. You must understand the provisions of this section and ensure timely compliance to avoid penalties and interest payments. By obtaining the contractor’s PAN, deducting TDS at the applicable rates, depositing the TDS, filing returns, and issuing TDS certificates, businesses and individuals can ensure compliance with the provisions of TDS.