Section 194C provides for deduction of Tax at source on payment made for contract.
In day to day business activities we get work done from other persons.
If we employ them then they are considered as our employee and TDS will be deducted under section 192 – TDS on Salary.
In other case, if we do not employ them, it is a case of contract.
However, this section only applies for work contacts and labor contracts and will not cove contract for sale of goods. This section also not covers hiring of professionals, for which TDS is deducted under section 194J.
The term contract has given inclusive definition under section 194C.
It means the word ‘contract’ will include the following activities specifically.
- Broadcasting and telecasting
- Transportation of Goods and passengers except by railways.
- Manufacturing or supply of any product according to the requirement or specification of the customer by using the material purchased from the customer. It will not apply if material is purchased from other than customer it will be case of sale.
Please note that above list is in addition to the normal meaning given by the section 194C to the word ‘Contract’.
Sub-contract shall be included in contract.
Section 194C Applicability
When any person responsible for paying any sum to a resident contractor for carrying out any work in connection with a contract, including sub contract, shall deduct tax at source under this section.
The tax deduction at source under this section shall be made either at the time of payment or credit whichever is earlier.
In the books of the person liable to pay income, the amount credited can be by any name like “suspense account” and will attract section 194C
Who needs to deduct TDS On Contract.
For the purpose of this section, the payer may be;
- Central gov. or any state gov.
- Local authority
- Central/state provincial corporation
- Cooperative societies
- Housing board
- Any foreign government /foreign enterprise or any association or body established outside India
- HUF/Individual/AOP/BOI subject to tax audit under section 44AB in the immediately preceding FY
Exception for Individual and HUF
After reading above, are you worrying that next time you will have to deduct TDS for your personal contract payments like payment for interior designing contract of your home etc.
You need not to worry.
There are some exceptions for Individuals and HUF.
- Where the payer is an individual, HUF, AOP or BOI, the provisions of section 194C are not applicable where the total sales, gross receipts or turnover of such individual, HUF, AOP or BOI from the business or profession carried on by them does not exceeds the monetary limits specified u/s 44AB( Rs. 1 crore in case of business and Rs. 50 lakh in case of profession) during th financial year in which sum is credited or paid- As per explanation to section 194C(7).
- Where any sum paid or credited to the account of the contractor by an individual or HUF, and such sum is incurred exclusively for personal purposes of such individual or any member of HUF, tax need not be deducted at source-Sec 194C(4).
TDS Rates for Section 194C
Nature of Payee
Rate of Taxes
Rate from 14.05.20 to 31.03.21
In case of Payee is an individual or HUF
1% of the contract value
Other than individual and HUF
2% of the contract value
- Where the payee has not furnished PAN, tax @20% shall be deducted.
- TDS on Payment to transporter will not be applicable if PAN is available, in case of non availability of PAN deduction will be 20%
- The rates are reduced due to COVID-19 situtation by press realease. Click here.
TDS Limit for Section 194C
The payer is responsible to deduct tax at source where:
- The amount of any single sum credited or paid to the contractor exceeds Rs. 30,000; or
- The aggregate amount of such sums credited or paid or likely to be credited or paid to the contractor during the financial year exceeds Rs.1,00,000.
Calcualtion of TDS on Contract
Tds is calculate on gross value of invoice excluding GST amount.
For example- Mr. A purchased services of Mr. B, a plumber for Rs.70,000 and GST charge is 5,000. So, the total value of the invoice is 75,000 and tds will be deducted on Rs. 70,000 @ 1%.
If the contract is made according to the specification and the material purchased from the customer then TDS will be deducted on the Invoice value after separation of cost of material purchased and if such distinction is not available then TDS will be deducted on the whole Invoice Value]
Check here for the full Section on TDS on Contract u/s 194C
Section 194(6): TDS on Contract exemptions
In case of plying, hiring or leasing goods carriage, no deduction is required from the sum paid/credited during the previous year, if the contractor provides PAN to the deductor
This exemption is applicable only in the nature of transport charges, after fulfilling the following three conditions
- Contractor is engaged in business of plying, hiring or leasing goods carriages
- Own 10 or less than 10 goods carriage at any time during the previous year
- Has furnished a declaration and PAN is made available
Lower TDS Certificate
The contractor can also obtain a lower or NIL TDS certificate from the AO if he satisfies the conditions applicable in this regard.
In this case, a person can make an application to Assessing Officer for deduction of tax at low rates.
If the Assessing officer is satisfied that the person has income with no tax or lower rate of tax, then he may issue such certificate.
The person shall give such certificate to the deductor and the deductor can deduct TDS at low rates.