194C of Income Tax Act

What is Considered ‘Work’ Under Section 194C?

The term 'work' under Section 194C includes various activities. These include:

• Advertising: Payments for advertising services, including print, digital, or broadcast media.
• Broadcasting and Telecasting: This includes payments for the production of television, radio, and other media programs.
• Carriage of Goods and Passengers: Payments for transportation services involving goods and passengers, excluding rail transport.
• Catering Services: This includes payments made for catering at events or institutions.
• Customized Manufacturing: If the material for manufacturing is supplied by the customer, such contracts are covered under Section 194C.

However, manufacturing contracts involving materials not supplied by the customer are excluded from the definition of ‘work’ under this section.
 

Who Must Deduct TDS Under Section 194C?

The provision applies to specified persons who are liable to deduct TDS on payments to contractors. These specified persons include:

• Central or State Government
• Local Authorities and Municipalities
• Companies and Corporations
• Cooperative Societies
• Registered Societies under the Societies Registration Act
• Hindu Undivided Families (HUFs)
• Partnerships, Firms, and LLPs
• Universities and Trusts

However, individuals, HUFs, or AOPs/BOIs with an annual turnover or gross receipts of less than ₹1 crore (₹50 lakh for professions) in the preceding financial year are not required to deduct TDS under Section 194C.
 

TDS Rates Under Section 194C

The TDS rates under Section 194C depend on the nature of the contractor and whether they have provided a valid Permanent Account Number (PAN). The rates are:

• For Individuals or Hindu Undivided Families (HUFs): TDS is deducted at 1% if a valid PAN is provided.
• For Other Residents (companies, firms, etc.): TDS is deducted at 2% if a valid PAN is provided.
• For Transport Contractors: If a transporter owns fewer than 10 goods carriages in the previous year and submits a declaration with their PAN, no TDS is applicable. Otherwise, the TDS rate is 20%.

If the contractor does not provide a PAN, the TDS rate increases to 20% in all cases.
 

When Should TDS Be Deducted?

TDS must be deducted at the earlier of the following two events:

• When the payment is credited: This is when the payment is recorded in the books of the payer, even if the actual payment has not been made.
• When the payment is made: This occurs when the actual payment is made to the contractor, whether by cash, cheque, or another mode.

In either case, the TDS must be deducted at the earlier of these two events.
 

Threshold Limits for TDS Deduction

DS is only applicable if the payment exceeds certain threshold limits:

Single Payment Limit: If the payment to a contractor is less than ₹30,000, no TDS is required for that payment.

Annual Aggregate Limit: If the total payments made to a contractor in a financial year are less than ₹1,00,000, TDS is not applicable. Once the total exceeds ₹1,00,000, TDS must be deducted.

For example, if a contractor receives four payments of ₹25,000 each during the year, no TDS will be deducted. However, when the total payments exceed ₹1,00,000, TDS will apply.
 

TDS Calculation under Section 194C

includes both goods and services, TDS is only applicable to the labour portion of the invoice. If GST is separately mentioned, TDS is calculated on the base value excluding GST.

For example, if the contractor issues an invoice of ₹1,00,000 (excluding GST) and the GST is ₹18,000, TDS will be calculated only on ₹1,00,000, excluding the ₹18,000 GST.
 

Documents required for the deduction of TDS under Section 194C

To keep Section 194C compliance clean, businesses typically maintain:

• PAN of the contractor/sub-contractor
• Contract / work order / agreement (scope, pricing, terms)
• Invoices raised by the contractor
• Payment proofs (bank statements, payment advice)
• TDS workings (rate applied, base amount, threshold tracking)
• TDS challan details (proof of deposit)
• TDS return acknowledgement (quarterly filing evidence)
• TDS certificate issued (proof provided to the payee)

For transporters, additional declarations or PAN-based exemptions may be relevant depending on the case, so supporting documentation becomes especially important.

Time Limits for TDS Deposit

Once TDS is deducted, it must be deposited with the government within specified timelines:

Government Deductors: TDS must be deposited on the same day the deduction is made.

Non-Government Deductors: TDS must be deposited by the 30th of the next month. For payments made in March, TDS must be deposited by the end of the same month.
 

Exceptions to TDS Deduction

TDS under Section 194C is not applicable in certain cases:

• Personal Payments: Payments made by individuals or HUFs for personal purposes are not subject to TDS under this section.
• Transport Contractors: If the transporter owns fewer than 10 goods carriages in the previous year and provides a declaration along with their PAN, TDS is not applicable.
• Payments Below Threshold: If a single payment is less than ₹30,000 or the total annual payment is less than ₹1,00,000, TDS is not deducted.
• Composite Contracts: In cases where both goods and services are involved, TDS is only deducted on the labour component, provided the invoice separates the cost of materials. If no separation is made, TDS is deducted on the entire amount.
   

Conclusion

Section 194C of the Income Tax Act is an important provision for businesses and individuals engaged in contracts or services requiring payments to contractors. By mandating the deduction of TDS, it ensures tax compliance and reduces the risk of tax evasion. It is crucial for businesses to understand the scope of work under this section, the TDS rates, and the threshold limits to ensure proper compliance.

Whether you are a contractor or a payer, adhering to the provisions of Section 194C ensures timely tax deductions and avoids penalties. Understanding when and how TDS should be deducted, along with the exemptions and exceptions, helps businesses navigate the tax landscape more effectively.