194C of Income Tax Act (A Comprehensive Explanation)

Section 194C of Income Tax Act is a crucial section about payments to contractors. Usually, any kind of service availed privately by any individual in exchange of money under an agreement is subject to tax at source. 

The TDS is deducted when the amount received by the contractor is more than 1 lakh for a fiscal year. It will be deducted by the person crediting the money at the rate specified for a tax deduction. And, the TDS must be deposited at the time of credit of money or within a month from the date it was deducted. 

Let’s learn more about this act in this article. 

You will get to know the following things about section 194C of Income Tax Act: The 7 sub-sections under 194C of the Income Tax Act. These sections define who is liable to pay TDS, what comes under work, TDS limit, TDS exemption limit, who can’t deduct TDS, and when TDS is not deducted. 

Section 194C statement-

According to the 194C statement: Any person paying any amount to a contractor for doing any work or supplying labor under a written or verbal contract between the specified person and the contractor, and the amount paid is credited in form of cash, cheque, or digital transfer, is liable for a TDS deduction at the time of credit.

A. The rates at which the TDS is deducted are given below:

• The TDS will be 1% of the amount paid if the contractor is an individual or a HUF, and
• It will be 2% if it is paid to any person other than the individual and HUF.

B. The TDS on the amount paid to the contractor by the specified person for the work must be recorded. It can be recorded as any of the two options given below. 

• On the invoice, where the TDS is levied on the amount excluding the material value; or
• On the whole invoice, in case the value of materials is not distinguished. 

C. No TDS is deducted if the amount is paid for personal purposes to an individual or HUF.

D. No TDS is deducted if the amount paid to the contractor is less than INR 30,000 and the aggregated amount paid does not exceed INR 75,000 in a financial year.

E. No TDS is deducted if the amount is paid during the previous year to the account of a contractor during the course of plying, hiring, or leasing goods carriages while furnishing PAN, to the person paying.

F. The person referred to as the “specified person” can be any of the following;

1. the Central Government or any State Government; 
2. any local authority; 
3. any corporation established by or under a Central, State, or Provincial Act; 
4. any company; 
5. any cooperative society; 
6. 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 the purpose of planning, development, or improvement of cities, towns, and villages, or for both; or
7. any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India; 
8. any trust; 
9. any university established or incorporated by or under a Central, State, or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956); 
10. any Government of a foreign State or a foreign enterprise, or any association or body established outside India; 
11. any firm; 
12. any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals if such person,—

(A) does not fall under any of the preceding sub-clauses; and

(B) is liable to audit 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;

The contract enforced must include a sub-contract.

“Work” referred to in this section means any of the following;

• Advertisement
• Any type of broadcasting or telecasting for programs
• Transporting of goods or people by any means other than railways
• Catering services
• Manufacturing or providing a product as per the customers’ requirement, which is made using materials provided by the customer. An example would be tailoring!

This was all about section 194C. Now, we will quickly cover the most important queries related to this section. 

FAQ: 194C of Income Tax Act

1. What is the Limit to Deduct TDS u/s 194C?

The limit to deduct TDS under this section is 1% to 2% of the total amount paid to the contractor for carrying out the work, excluding the material charges paid. A TDS will be deducted only if the amount paid within a financial year exceeds INR 75,000. Any amount more than this will be charged at 1% if the contractor is an individual or HUF and at 2% in the case of other contractors.

2. What is the Rate of TDS on Contract?

The TDS rates applicable on the payments of the contract as per section 194C is 1% to 2% of the total amount to be paid, only if the total payment is more than INR 75,000 in a financial year.

3. Is it Mandatory to Cut TDS?

Yes, it is mandatory to cut TDS only if the amount paid exceeds the TDS threshold limit, which is INR 75,000 in a financial year.

4. What is New Rule For TDS?

A TDS of 1% will be levied if the amount paid to the contractor is more than INR 1 lakh.

5. Who is Eligible For Deduct TDS?

The following are eligible to deduct TDS as specified under section 194C:

the Central Government or any State Government, any local authority, any corporation, any company, any cooperative society, any authority, any firm, any registered society, any trust, or any recognized university- for more details, read this article.

6. What is the Minimum Amount to Deduct TDS?

The minimum amount at which no TDS is deducted is INR 30,000 for a single transaction and INR 75,000 within a financial year.

7. Is 194C Applicable on Purchase of Goods?

No, section 194C is not applicable to the purchase of goods.

8. How is TDS Calculated Per Month?

TDS calculation per month is based on the gross salary of the employee. The TDS is deducted per month on the basis of the income tax slab rate by the employer. 

9. How Can I Deduct TDS on Contractor?

You can deduct TDS on any amount paid to a contractor if the amount paid in a single transaction is more than INR 30,000 or is more than INR 1 lakh within a financial year at the rate of 1%.

10. What Are Some Examples of TDS?

A few examples of the incomes on which TDS is deducted are salary, any dividends, LIC maturity, contractor payment, interest attained on FDs, etc.

Conclusion

Summing this up! Section 194C of income tax describes the provisions for payments to contractors. Any amount of money paid for the work done under an agreement or contract between a resident individual and any person is chargeable to a TDS. This TDS is charged at the rate of 1% or 2% on the amount paid. 

Also, the TDS collected has to be submitted within 30 days of crediting the money to the contractor. This section covers all types of work, including an advertisement, entertainment, small services, labor outsourcing, etc.  

For further queries write to us or comment below!

Recommended Articles

Form 10 IE Income Tax (Unlimited Guide)

Residential Status In Income Tax (Unlimited Guide)