The provisions relating to TDS on payments made to contractors for carrying out any work have been restructured under the Income-tax Act, 2025. The earlier Section 194C of the Income-tax Act, 1961 is now covered under Section 393(1) [Table: Sl. No. 6(i).D(a) and 6(i).D(b)], effective from 1st April, 2026.
This restructuring introduces classification based on the type of contractor while retaining the existing provisions relating to deduction of tax at source on contractual payments.
Quick Reference – Section Mapping & Reporting
- New Section (IT Act 2025): Section 393(1)
- Table Reference:
- Sl. No. 6(i).D(a) – Contractor being Individual/HUF
- Sl. No. 6(i).D(b) – Contractor other than Individual/HUF
- Nature of Payment: Any sum paid for carrying out any work, including supply of labour
- Earlier Section (IT Act 1961): Section 194C
- Return Form: 26Q
- Code (for return filing):
- 1023 – Individual / HUF contractor
- 1024 – Other contractors
Meaning of ‘Work’
The term ‘work’ includes the following activities carried out under a contract. It covers services such as:
- Advertising services
- Broadcasting and telecasting, including production of programs
- Carriage of goods or passengers by any mode of transport other than railways
- Catering services
- Manufacturing or supplying products according to customer specifications where material is provided by the customer
However, contracts involving manufacturing using materials not supplied by the customer are not covered under this definition.
Applicability of TDS on Contractor Payments
TDS is required to be deducted on payments made to resident contractors or subcontractors for carrying out work under a contract. This includes both labour contracts as well as composite contracts involving supply and services, ensuring that contractual payments are appropriately brought within the tax network.
Who is Required to Deduct TDS
The obligation to deduct TDS applies to specified persons making payments to contractors. These include:
- Central or State Government
- Company
- Co-operative Society
- Local Authority
- Corporation
- Trust
- Registered Society
- Firm
- University
- Hindu Undivided Family Business / AOP / BOI
Individuals and HUFs are required to deduct TDS only where they are liable for tax audit under Section 63 in the preceding financial year.
Time of Deduction
TDS shall be deducted at the earlier of the following events:
- At the time of credit of the amount to the contractor’s account
- At the time of payment by cash, cheque, draft or any other mode
This ensures that tax deduction is not delayed irrespective of the timing of accounting or payment.
Rate of TDS
The rate of TDS depends on the category of the contractor and is applied accordingly:
- Contractor being Individual or HUF → 1% of the payment
- Contractor other than Individual or HUF → 2% of the payment
In cases where PAN is not furnished, tax shall be deducted at 20% as per applicable provisions.
Threshold Limit
TDS is required to be deducted only when prescribed limits are exceeded.
- No TDS if a single payment does not exceed ₹30,000
- No TDS if aggregate payments during the financial year do not exceed ₹1,00,000
Once either of these limits is crossed, TDS becomes applicable on the relevant payments.
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
TDS Calculation:
- Individual/HUF → 1% of ₹1,08,000 = ₹1,080
- Others → 2% of ₹1,08,000 = ₹2,160
Case 2: Exempt Transporters
Where the transporter owns 10 or fewer goods carriages during the previous year and provides PAN along with declaration, such payments are not subject to TDS under this section.
Special Cases and Considerations
Certain situations require specific treatment under this section:
- Transporters: No TDS if prescribed conditions are satisfied
- Composite Contracts: TDS applies on labour component if separately mentioned; otherwise on full contract value
- Supply of Manpower Services (Proposed Clarification – Budget 2026-27): Covered under “work” and taxed at applicable contractor rates
- GST Component: TDS is deducted on amount excluding GST if shown separately
- Travel and Courier Services: Payments to travel agents (other than charter services) and courier services are subject to TDS
Cases Where TDS is Not Required
TDS is not required in the following situations:
- Payments made by individuals or HUFs for personal purposes
- Payments to eligible transporters fulfilling specified conditions
- Payments below prescribed threshold limits
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