Section 194C of the Income Tax Act governs the deduction of tax on payments made to contractors or subcontractors for carrying out any work, including the supply of labour.
What is Considered as ‘Work’ Under Section 194C?
The term ‘work’ includes the following activities:
- Advertising
- Broadcasting and Telecasting: Includes production of programs.
- Carriage of Goods and Passengers: By any mode of transport except railways.
- Catering Services
- Customized Manufacturing: Where the material is supplied by the customer.
However, contracts for manufacturing using materials not supplied by the customer are excluded from this definition.
Who is Liable to Deduct TDS Under Section 194C?
This section applies to payments made to resident contractors or subcontractors by specified persons such as:
- Central or State Government
- Company
- Co-operative Society
- Local Authority
- Corporation
- Trust
- Registered Society under the Societies Registration Act
- HUF/AOP/BOI
- Firm
- University
Note: Any individual, Hindu undivided family, association of persons, or body of individuals with total sales, gross receipts, or turnover not exceeding one crore rupees for business or fifty lakh rupees for profession in the preceding financial year may credit or pay the contractor’s account.
TDS Rates Under Section 194C
| Nature of Payment | TDS Rate | TDS Rate (Without PAN) |
| Payment to Individuals or HUFs | 1% | 20% |
| Payment to Other Residents | 2% | 20% |
| Payment to Transporters (with conditions) | Nil | 20% |
Note: Transporters are exempt from TDS if they own 10 or fewer goods carriages during the previous year and provide their PAN with a declaration.
When to Deduct TDS Under Section 194C?
TDS must be deducted:
- At the time of crediting the payment to the contractor’s account.
- Or, at the time of actual payment by cash, cheque, or other modes—whichever is earlier.
Threshold for TDS Deduction
TDS is not required to be deducted if:
- A single payment is less than ₹30,000.
- Aggregate payments in a financial year are less than ₹1,00,000.
For example:
- Payment 1: ₹25,000 – No TDS
- Payment 2: ₹32,000 – TDS applies (exceeds ₹30,000)
- Total payments exceeding ₹1,00,000 in a year trigger TDS.
Examples of TDS Calculation
Case 1: Payments Exceeding Thresholds
- 1st Payment: ₹25,000 (No TDS)
- 2nd Payment: ₹30,000 (No TDS)
- 3rd Payment: ₹25,000 (No TDS)
- 4th Payment: ₹28,000
- Aggregate: ₹1,08,000 → TDS applies at 1% = ₹1,080
Case 2: Exempt Transporters
A transporter with valid PAN and owning ≤10 goods carriages is exempt from TDS.
Exceptions to TDS Deduction
TDS under Section 194C is not applicable in the following scenarios:
- Payments for personal use by individuals or HUFs.
- Payments to transport contractors fulfilling the conditions mentioned above.
- Payments below the specified thresholds (₹30,000 per payment/₹1,00,000 annually).
Special Considerations
- Composite Contracts: In contracts involving both goods and labour, TDS is deducted on the labour component if the invoice separates the cost of materials. If not, TDS is applied to the entire invoice value.
- GST Amounts: If GST is separately mentioned on the invoice, TDS is deducted only on the base value, excluding GST.
- Travel and Courier Services: Payments to travel agents (except for chartered services) and couriers for goods carriage are subject to TDS.