Section 194C of Income Tax Act: TDS on Contractors & Subcontractors in 2025

If you run a business or work as a contractor in India, you have likely come across the term TDS. One of the most important rules related to this is Section 194C of the Income Tax Act. This section provides the guidelines for deducting Tax at Source (TDS) on payments made for carrying out any "work" under a contract. It was introduced to ensure that the government collects tax upfront and to improve tax compliance. This guide will explain what is Section 194C of the Income Tax Act is in simple, easy-to-understand terms.

Who Is Liable to Deduct TDS under 194C?

The responsibility to deduct TDS under this section falls upon specific entities, referred to as "specified persons," when they make a payment to a resident contractor. This group includes:

• The Central or any State Government
• Any local authority (like a municipality)
• Companies (both private and public)
• Partnership firms
• Trusts and Co-operative Societies
• Individuals or a Hindu Undivided Family (HUF) whose business turnover exceeds ₹1 crore or professional receipts exceed ₹50 lakh in the preceding financial year.

TDS Rates under Section 194C

The tax rates for TDS under this section are straightforward and depend on the type of person or entity receiving the payment (the contractor or payee).

Payee (Recipient of Payment)	TDS Rate
Payment to an Individual or HUF	1%
Payment to any other entity (e.g., Company, Firm)	2%

Threshold Limits & Rates Under 194C

TDS is not required for every small payment. Section 194C of the Income Tax Act limits specifies thresholds below which no tax needs to be deducted. TDS is only triggered if the payment amount crosses these limits.

Payee Type	Single Payment Threshold	Annual Aggregate Threshold	TDS Rate (if PAN is provided)	TDS Rate (if PAN is NOT provided)
Individual / HUF	₹30,000	₹1,00,000	1%	20%
Others (Company, Firm, etc.)	₹30,000	₹1,00,000	2%	20%

This means you must deduct TDS if a single payment to a contractor is more than ₹30,000, OR if the total payments made to that same contractor in a financial year add up to more than ₹1,00,000.

When and How to Deduct TDS?

The rule for deducting TDS is simple: it must be deducted at the time of payment to the contractor or when the payment is credited to their account in your books, whichever event occurs first. The tax amount deducted must then be deposited with the government by the 7th day of the next month. For payments made in March, the due date for deposit is April 30th.

Exemptions under Section 194C

There are certain situations where TDS under the Income Tax Act section 194C is not applicable. No tax needs to be deducted if the payment is made by an individual or an HUF for work done for purely personal purposes, such as building or renovating their own house. Additionally, payments made to a transport contractor who owns ten or fewer goods carriages at any time during the year are also exempt, provided they furnish a self-declaration along with their PAN.

194C vs Other TDS Sections (e.g., 194J, 194H)

It is common for businesses to get confused between different TDS sections. The key is to understand the nature of the service being paid for.

Basis of Difference	Section 194C (Contractual Work)	Section 194J (Professional/Technical Fees)	Section 194H (Commission/Brokerage)
Nature of Service	Payment for carrying out "work" like construction, advertising, catering, or transport.	Payment for professional or technical services, like legal advice, consultancy, or software development.	Payment for services as an agent, like commission or brokerage (excluding insurance commission).
TDS Rates	1% for individuals/HUF, 2% for others.	2% for technical services, 10% for professional services.	5%
Example	Paying a company to build an office wall.	Paying a lawyer for legal advice on a business matter.	Paying a real estate broker their commission on a property deal.

Understanding these differences is crucial for applying the correct TDS rate and ensuring compliance. For other tax-related details, our guide on Introduction to Indian Property Tax provides additional context.

Penalties for Non-Compliance

Failing to comply with the rules of Section 194C of the Income Tax Act 1961 can lead to serious financial consequences for the person or business responsible for deducting the tax.

• Interest on Late Deduction/Payment: Interest is charged at 1% per month for not deducting TDS and at 1.5% per month for deducting TDS but not depositing it with the government.
• Disallowance of Expense: If you fail to deduct or pay TDS, 30% of the corresponding expense will be disallowed when calculating your business's taxable income, leading to a higher tax liability.
• Late Filing Penalty: A penalty of ₹200 per day is levied for the late filing of TDS returns (Form 26Q), up to the total TDS amount.
• Other Penalties: The Income Tax Department can also impose a penalty equal to the amount of tax that was not deducted or paid.

Examples of TDS Calculation Under Section 194C

Let's understand the calculation with a few practical examples.

Example 1: Single Payment ABC Ltd. hires Mr. Rohan, an individual contractor, for repair work and has to pay him ₹45,000.

• Is TDS applicable? Yes, because the single payment of ₹45,000 is greater than the ₹30,000 threshold.
• Payee: Mr. Rohan (Individual)
• Applicable TDS Rate: 1%
• TDS Amount = 1% of ₹45,000 = ₹450
• Net Amount Paid to Mr. Rohan = ₹45,000 - ₹450 = ₹44,550
• ABC Ltd. must deposit ₹450 with the government.

After deduction, it is the deductor's responsibility to file the TDS return. To understand this process better, you can refer to our simple guide on How to File an ITR.

How Can NoBroker Help with Legal Services?

Compliance with the TDS section 194C Income Tax Act always starts with a clear and legally sound contract. Before any payment is made, having a well-drafted agreement that defines the scope of work, payment terms, and other liabilities is essential. NoBroker’s network of legal experts can assist businesses and contractors in creating robust work agreements, ensuring that both parties have a clear understanding and that the transaction remains smooth and compliant.

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