Introduction

Every business faces the challenge of understanding the intricacies of tax law. This blog attempts to clarify the requirements under Section 194C of the Income Tax Act, which relates to TDS on contractor payments.

What Is Section 194C and Why It Matters

Section 194C of the Income Tax Act applies to the deduction of tax at source (TDS) for payments made to resident contractors and subcontractors for the carrying out of particular works. One of the objectives of Section 194C of the Income Tax Act is to collect tax at the source of the income in order to limit tax evasion and to ensure a steady flow of revenue to the government. For businesses, an understanding of the Section 194C rules India is essential, in order to limit liability for unnecessary penalties and also to be able to include TDS on contractor payments regularly into your accounting processes.

Who Is a “Specified Person” Under Section 194C?

Not everyone is obliged to deduct TDS. Under the Section 194C of the Income Tax Act, such responsibility falls on “specified persons”. This includes:

The Central or State Government.
Any Local Authority.
Companies and Corporations.
Firms and Trusts.
Co-operative Societies.
Registered Societies and Universities
Individuals or Hindu Undivided Families (HUF) whose accounts are audited under section 44AB in the preceding financial year.

A key exception is that Individuals or HUF are not required to deduct TDS on payments meant for personal purposes. This provision under Section 194C rules India provides significant relief for personal expenses.

What “Work” Is Covered Under Section 194C?

The term "work" under Section 194C of the Income Tax Act has a specific definition and is not limited to just construction activities. It also includes a variety of other activities or services, which are:

Advertising.
Broadcasting and telecasting, and production of programs meant for broadcasting or telecasting.
Carriage of goods or passengers by any mode of transport other than railways.
Catering.
Manufacturing a product or supplying it on the basis of a customer’s specification using material purchased from that customer.

However, a contractor who manufactures a product using materials acquired from a third party (not the customer) is considered to be in a contract of sale. Such transactions are outside the scope of TDS on contractor payments under this section.

Conditions & Thresholds for TDS Under Section 194C

There are specific monetary conditions for which a TDS deduction is not required to be made under Section 194C of the Income Tax Act. There are no tax deduction requirements if:

A single payment made to the contractor does not exceed ₹30,000.
In a financial year, the aggregate amount paid to a single contractor does not exceed ₹1,00,000.

If either of these limits is exceeded, then TDS is required to be deducted on the entire amount. Section 194C rules India makes this a critical checkpoint.

TDS Rates & When to Deduct Under Section 194C

The TDS rates are standard. It is important to understand these to ensure accurate TDS on contractor payments.

1% for payments made to an Individual or HUF.
2% for payments made to any other person (like companies, firms, etc.).
20% if the contractor does not provide a Permanent Account Number (PAN).

TDS must be deducted at the time of crediting the amount to the contractor's account or at the time of actual payment, whichever is earlier.

Exemptions & Special Cases in Section 194C

Specific exemptions are provided in Section 194C of the Income Tax Act. The most important one is concerning payments to contractors who are engaged in the business of plying, hiring, or leasing goods carriages provided they own 10 or fewer carriages and provides a declaration along with their PAN. TDS on contractor payments for personal purposes made by an individual or HUF is also exempted.

Penalties for Non-Compliance with Section 194C

Failing to comply with the provisions of Section 194C of the Income Tax Act can have serious financial consequences such as:

Interest: Interest will be charged at 1% per month, if no TDS was deducted and at 1.5% per month if TDS was deducted, but not deposited.
Late Filing Fee: TDS returns (Form 26Q) should be properly and carefully filed, otherwise, a late filing fee of ₹200 will apply for each day that was filed late. The amount of the maximum penalty will not exceed the TDS amount.
Penalty: Penalties ranging from ₹10,000 to ₹1,00,000 can be imposed by the Assessing Officer for non-deduction or late depositing of tax.

How Lawfinity.in Can Help You Comply with Section 194C

Understanding Section 194C of the Income Tax Act can be very challenging. Lawfinity.in offers assistance and provides clearly defined solutions so that your business can be fully compliant with all Section 194C rules India. Our platform helps you have clarity on your compliances, assists you in TDS calculation, and files your returns on your behalf to avoid penalties or legal consequences regarding Section 194C of the Income Tax Act.