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TDS on payment to contractor or sub-contractor – Section 194C

Persons required to deduct TDS under this section

Any specified person responsible for paying any sum to any resident contractor for carrying out any work is required to deduct tax at source. TDS is also required to be deducted for payment to sub contractor.

Tax is to be deducted even if contract is for supply of labour.

Time of Deduction

Tax is to be deducted when the amount is paid to or credited to the account of such contract or sub-contractor, whichever is earlier.

When TDS not deductible

  1. Contract amount below specified limits
    1. Amount of any single sum credited or paid doesn’t exceed thirty thousand.
    2. Aggregate amount of such sums credited or paid doesn’t exceed and doesn’t likely to exceeds rupees one lakh.
  2. Payment or credit to transporter for transportation
    If recipient is a transport operator  and he furnishes PAN to the deductor then TDS is not to be deducted. Such deductors will be required to intimate these PAN details to the Income tax Department in the prescribed format.Only transport operators who owns ten or less goods carriages at any time during the financial year is allowed such exemption. Transport operator has to furnish a declaration to this effect to the person paying him to get such exemption.
  3. Personal purposes
    Payment by an individual or HUF to a resident contractor for personal purposes is not subject to TDS.
  4. Payment is made to bank listed in the Second schedule to the RBI act excluding foreign bank for
    1. Bank guarantee commission
    2. Cash management service charges
    3. Depository charges on maintenance of DEMAT accounts
    4. Charges for warehousing services for commodities
    5. Underwriting service charges
    6. Clearing charges (MICR charges)
    7. Credit card or debit card commission for transaction between the merchant establishment and acquirement bank – Notification no. 56/2012, dated 31st December, 2012
  5. Payment is made for purchasing products according to the payer’s requirement or specification. If the product is manufactured using material purchased by the payer then TDS is required to be deducted.

Also Read – TDS on Payment to Google/Facebook for Advertisement

Rate of TDS under section 194C

Payment ToRate of TDS if
PAN Furnished
Rate of TDS if
PAN NOT Furnished
Resident Individual or HUF1%20%
Company, Firm, LLP, or to any other resident person other than Individual/HUF2%20%
Transporters (Less than 10 Vehicle)NIL20%
Transporters (More than 10 Vehicle)1% or 2% according to
recipient status as above
20%

No surcharge or education cess is levied on payment to resident.

Assessee can apply to assessing officer for no TDS or TDS at lower rate under Section 197.

Threshold Limit in section 194C

 Threshold Limits
Single payment or credit Rs. 30,000
Aggregate amount paid or credited or likely to paid during the year Rs. 1,00,000

Work shall include—

(a)  advertising
(b)  broadcasting and telecasting including production of programmes for such broadcasting or telecasting
(c)  carriage of goods or passengers by any mode of transport other than by railways
(d)  catering
(e)  manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer
but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.

Other points

  • Tax is deductible on the amount excluding GST, if the amount of GST shown separately. Notification no. 01/2014
  • There is no surcharge, education cess or secondary and higher education cess payable under section 194C.
  • In case of contract of manufacturing or supplying product, TDS shall be deductible on the value excluding the value of material, if such value is mentioned separately in the invoice. If not mentioned separately then TDS shall be deducted on the whole amount of invoice.

Specified person under Section 194C who are required to deduct TDS

  1. any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,—
    • does not fall under any of the preceding sub-clauses and
    • is liable to audit of accounts under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum is credited or paid to the account of the contractor.In other words, only assessee who are liable to audit due to turnover or receipts greater than rs. 1 crore or Rs. 25 lakh as the case may be.
  2. any partnership firm
  3. the Central Government or any State Government
  4. any local authority
  5. any corporation established by or under a Central, State or Provincial Act
  6. any company
  7. any co-operative society
  8. any authority, constituted in India by or under any law, engaged either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both
  9. any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act in force in any part of India
  10. any trust
  11. any university established or incorporated by or under a Central, State or Provincial Act and an institution declared to be a university under section 3 of the University Grants Commission Act, 1956 (3 of 1956)
  12. any Government of a foreign State or a foreign enterprise or any association or body established outside India

Income Tax Department’s Guide

About Rohit Pithisaria

Rohit Pithisaria is a Practicing Chartered Accountant from Jaipur and been in practice for more than 7 years. He is actively writing from very beginning of his professional career and is author of various tax articles and blogs.

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