TDS on Payments to contractors and sub-contractors [Section 194C] – Tax Rate, Exemptions

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TDS on Payments to contractors and sub-contractors [Section 194C]: Any person responsible for paying to any of the contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract shall, at the time of credit of such sum to the account of the contractor 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 deduct income-tax thereon.

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TDS on Payments to contractors and sub-contractors [Section 194C]

TDS on Payments to contractors and sub-contractors [Section 194C] - Tax Rate, Exemptions

Section 194C provides for deduction of tax at source from the payment made to resident contractors and sub-contractors.

Any specified person responsible for paying any sum to any resident-contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract.

Applicability of TDS under section 194C

Tax has to be deducted at source under section 194C by any person responsible for paying any sum to a resident contractor for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and the following specified persons.

  1. the Central Government or any State Government; or
  2. any local authority; or
  3. any statutory corporation; or
  4. any company; or
  5. any co-operative society; or
  6. any statutory authority dealing with housing accommodation; or
  7. any society registered under the Societies Registration Act, 1860; or
  8. any trust; or
  9. any university established under a Central, State or Provincial Act and an institution declared to be a university under the UGC Act, 1956; or
  10. any firm; or
  11. any Government of a foreign State or foreign enterprise or any association or body established outside India; or
  12. any person, being an individual, HUF, AOP or BOI, who has total sales, gross receipts or turnover from the business or profession carried on by him exceeding ₹1 crore in case of business and ₹50 lakhs in case of profession during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor.

Rate of TDS under Section 194C

The rate of TDS on Payments to contractors and sub-contractors [Section 194C] is 1% for Individual or HUF & 2% for Other Payee.

  • 1% where the payment is being made or credit is being given to an individual or a Hindu undivided family;
  • 2% where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein.
Payee Rate as a % of amount paid or payable
Individual or HUF 1% [From 14-05-2020 to 31-03-2021: 0.75%]
Other Payee 2% [From 14-05-2020 to 31-03-2021: 1.5%]

– No surcharge, cess shall be added from 1st October, 2009.

– When the payee does not furnish his PAN to deductor, tax will be deducted @ 20%.

– No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family.

– No deduction shall be made from the amount of any sum credited or paid to, the contractor, if such sum does not exceed Rs. 30,000

Provided that where the aggregate of the amounts credited or paid during the financial year exceeds Rs. 1,00,000 the person responsible for paying shall be liable to deduct income-tax.

Further, no deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less than ten goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.

Time of deduction

Tax has to be deducted at the time of payment of such sum or at the time of credit of such sum to the account of the contractor, whichever is earlier.

Where any such sum is credited to any account in the books of account of the person liable to pay such income, such crediting is deemed to be credit of such income to the account of the payee and the tax has to be deducted at source. The account to which such sum is credited may be called “Suspense account” or by any other name.

However, no tax has to be deducted at source in respect of payments made by individuals/HUF to a contractor exclusively for personal purposes.

Threshold limit for TDS under section 194C

No deduction will be required to be made if the consideration for the contract does not exceed ₹30,000. However, to prevent the practice of composite contracts being split up into contracts valued at less than ₹30,000 to avoid tax deduction, it has been provided that tax will be required to be deducted at source where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor exceeds ₹30,000 in a single payment or ₹1,00,000 in the aggregate during a financial year.

Therefore, even if a single payment to a contractor does not exceed ₹30,000, TDS provisions under section 194C would be attracted where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid to the contractor during the financial year exceeds ₹1,00,000.

Explanation. – For the purposes of this section, –

Any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person, –

    • is not covered above and
    • is liable to audit of accounts under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor; shall be liable to deduct income tax from such sum paid or credited.

Contract & Work includes

  • “contract” shall include sub-contract;
  • “work” shall include –
    1. advertising;
    2. broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
    3. carriage of goods or passengers by any mode of transport other than by railways;
    4. catering;
    5. manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.

Exemption or relaxation from the provision

Exemption or relaxation from the Sec. 194C is When the recipient applies to the Assessing Officer in Form 13 and gets a certificate authorising the payer to deduct tax at lower rate or deduct no tax. [Refer sec.197]