TDS on contract is required to be deducted at the time of making any payment by the person who is making the payment for the contract. Under the Section 194C of Income tax which deals with any TDS on payment of contractor & Sub-Contractor.

Section 194C: TDS on Contract

If any individual is liable for paying any sum to a resident contractor for carrying out any work (including the supply of labour). In completion of a contract between the contractor and the following:

  1. The Central Government and State Government
  2. Any local authority
  3. Any corporation established by or under a Central, State or Provisional Act
  4. Any company
  5. Any co-operative society
  6. Any Indian authority engaged either for the purpose of dealing with or satisfying the needs for housing accommodation or for the purpose development or improvement of cities, towns, and villages.
  7. Any society registered under the Society Registration Act, 1980 or under any such corresponding law to the Act in any Part of India
  8. Any trust
  9. Any university or deemed university;
  10. Any firm

The TDS on contract or the  Payment of  Contractor under Section 194C shall be deducted at the below-mentioned rates:-

  • 1% if the payment is being made to Individual or HUF
  • 2% in all other cases (i.e. cases except payment to Individual or HUF)

Meaning of work under Section 194C

 Under the section 194C of Income Tax Act: the Meaning of “work” would include:-

  1. Advertising
  2. Broadcasting and telecasting of production of programs
  3. Goods and passengers carried by any means of transportation except railways
  4. Catering
  5. Manufacturing or Supplying a product according to the requirements or specifications of a customer

But section 194C does not include manufacturing or supplying of the products by using the materials bought from a person, other than the customer.

TDS to Sub-Contractor

As per the provisions of Income Tax Act, any person (being a contractor and not being an individual or a Hindu Undivided Family),

  • Responsible for paying any sum to any resident.
  • In the fulfillment  of a contract with the sub-contractor or for the supply of labor for carrying out the whole part of the work taken by the contractor or for supplying whether wholly or partly any labor which the contractor has taken to supply shall,
    1. Time of credit of the amount in the account of the subcontractor
    2. Time of payment in cash
    3. By issue of a cheque/ draft or by any other mode, whichever is earlier,
  • Deduct an amount equal to 1 % of the sum as income-tax on income comprised therein.

Conditions for Payment to Sub-Contractor

  1. Payment is made to a sub-contractor who is resident within the meaning of Section 6 of the Income Tax Act, 1961.
  2. Payment is only done by the contractor
  3. Payment is made to carry out any work, including the supply of labour.
  4. The amount of consideration of the contract in respect to which payment is made should not be less than Rs.30,000.
  5. The amount should be credited or paid by the contractor itself of a contract undertaken by him with the specified bodies.

TDS on contract is deducted under Section 194C 

The person who is  responsible for making any  payment to resident contractor/sub-contractor should deduct TDS

  • At the time of crediting such Amount to the payee account
  • At the time of payment in cash or by issuing a check or by any other means, whichever is faster mode of payment,
  • The tax has to be deducted even if the amount payable to resident contractor/subcontractor is transferred to suspense account by the payer in his books.

Rate of TDS

S. No Nature of Payment TDS Rate if PAN available TDS Rate if PAN not available
1 Payment / Credit to resident individual or HUF 1% 20%
2 Payment/Credit to any resident person other than individual / HUF 2% 20%
3 Payment/ credit to Transporters NIL 20%

Note: – No Surcharge, Education Cess, and SHEC shall be added so because of this, TDS will be deductible at basic rates.

Minimum Amount of Payment for Deduction of TDS

If the payment that is being made to the contractor does not exceed Rs. 30,000, No TDS on payment to the contractor is required to be deducted. However, if the total of all such payments made or to be made during a financial year exceeds Rs. 1,00,ooo earlier it was Rs.75,000 in FY(2016-17).

Case 1 Single contract of Rs. 30,000 No
Case 2 Two contracts of Rs. 30,000 each in the year No
Case 3 Three contracts of Rs. 40,000 each in the year Yes  (TDS to be deducted on Rs. 1,20,000)
Case 4 Single contract of Rs. 40,000 in a year Yes
Case 5 Five contracts of Rs. 15,000 each in the year No
Case 6 Seven contracts of Rs. 15,000 each in the year Yes, TDS to be deducted on Rs. 105,000

Conditions when TDS u/s 194C is not deductible

No tax is needed to be deducted in the following cases:

  1. Where the amount paid or credited in pursuance of any contract does not greater than Rs. 30,000.
  2. Where the amount of money credited or paid or likely to be credited or paid does not increase Rs. 1,00,000 during the financial year.
  3. A person or HUF not to deduct tax if the payment or amount credited to the contractor is for personal use.
  • No person or HUF shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid only for the personal purpose.
  • No deduction will be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, on furnishing of his PAN, to the person paying or crediting such amount.

Time Limit within TDS on contract is to Deposited

  • Payment is made on behalf of the Government – On the same day.
  • Payment is made other than the government:
  1. If the amount is credited in the month of March – On or before April 30th
  2. In another month – Within 7 days from the end of the month in which the deduction is made.

Note: The payer is the person responsible for TDS.

Issue of TDS on contract certificate

TDS certificates are to be issued on quarterly basis in As per rule 31,

Form 16A. – Payments other than salary, every person responsible for deduction of tax from payments other than salary has to issue a quarterly TDS certificate in Form 16A.

The certificate is issued by the following dates:

Quarter Due date for Non-Government deductor Due date for Government deductor
April to June 30th July 15th August
July to September 30th October 15th November
October to December 30th January 15th February
January to March 30th May 30th May

It is mandatory for all the deductors to issue TDS certificate in Form No. 16A by generating the certificate through TIN central system by downloading the certificate from the TIN Website with a unique TDS certificate number. These provisions are applicable in respect of all sums deducted on or after 1-4-2012. The certificate so issued can be authenticated either by using the digital signature or manual signature.

TDS at a Lower Rate

Under the section 194C, where the assessment officer is pleased that the net income of the contractor or sub-contractor justifies the deduction at any lower rate or non-deduction of income-tax, the AO shall, on application made by the contractor or sub-contractor in this behalf give to him such certificate as may be appropriate.

In case you are confused about TDS Return Filing as a deductor, feel free to consult the experts at LegalRaasta. You can get comprehensive assistance with our TDS Return filing software which supports TDS on Salary payments Form 24Q, Rent, Interest, Commission and other Non-salary transactions (Form 26Q), NRI (Form 27Q) and TCS Form27EQ.