A Detailed Discussion on Section 194C of the Income Tax Act

Section 194C of the Income Tax Act focuses on the mandatory deduction of TDS from payments made to resident sub-contractors and contractors. A 'person' making such payments to the concerned payee is responsible for deducting TDS. This Section bears essential provisions which contain vital information. Hence, interested individuals can keep scrolling to know more about it!

What Is the Meaning of 'Person' According to Section 194C?'

As per Section 194C (1) of the Income Tax Act, a person denotes an entity that has a contract with a contractor who will work in exchange for payment. Here are the following entities identified as 'person':

Trust
Local authority
Central or State Governments
Firm or company
Cooperative Society
Registered society under Society Registration Act, 1980 or any corresponding law of the Act
Deemed university or established university
Corporation instituted under Provisional, State or Central Act.
An authority that deals with fulfilling the requirement for housing accommodation or engaged in planning, improvement or development of towns, cities and villages or focuses on both

What Is the Meaning of 'Work' According to Section 194C?

According to Section 194C (1) of the Income Tax Act, the terminology of 'work' connotes to any of the following:

Advertising and catering
Telecasting and broadcasting covering production programmes required for telecasting or broadcasting
Carrying passengers and goods by any transportation mode, except railways
Producing or supplying a product as per the specifications and needs of customers by utilising materials bought from those customers. However, it does not cover the production and supply of products to meet the specifications and needs of customers by utilising materials bought from a 'person' other than those customers.

What Is the Meaning of Contractor & Sub-Contractor as Per Section 194C?

As per the Section 194C of the Income Tax Act, a contractor is a person who bears a contract with the following entities to carry out work, which also includes supplying labour to carry out such work -

State or Central Government
Local authority
Corporation instituted under or by a Provisional, Central or State Act
Any company or cooperative society

A sub-contractor denotes a person who has a contract with a contractor for the following purposes –

Carrying out work wholly or partly which a contractor has undertaken as per the contract
Supplying labour for conducting a whole or part of the work as agreed by the contractor in the contract

What Is the Applicability of Section 194C of the Income Tax Act?

Section 194C of the Income Tax Act is applicable for labour contracts and work contracts. However, it is not applicable for a contract that focuses on the sale or supply of goods.

Conditions for TDS Deduction on Payment to Contractors as Per Section 194C

TDS deduction on payments made to contractors is applicable when the following conditions of Section 194C(1) are fulfilled:

The contractor (payee) must be an Indian citizen as per Section 6 of the IT Act.
Payment must be completed by the 'person' as stated under Section 194C
A person should make payment in exchange for work, including supplying labour and the stipulation agreed between the payee and payer in an oral or written contract.
The maximum payment limit for TDS to get deducted under Section 194C must be above ₹ 30,000
If the total amount paid or to be paid to a contractor in a fiscal year is above ₹ 75,000, the payer must deduct TDS.
In the case of advance payment, a payer must deduct TDS if the aggregate payment is above ₹ 30,000.
If it appears that the total payment may not be above ₹ 30,000, however, later it is estimated that it will be more than ₹ 30,000, a payer must also deduct TDS on previous payments made.

Conditions for TDS Deduction on Payment to Sub-Contactors as Per Section 194C

TDS deduction on payments made to sub-contractors is applicable when the following conditions of Section 194C(2) are fulfilled:

Sub-contractor must be an Indian resident as per Section 6
A resident contractor must pay the sub-contractor to work or supply labour for carrying out such work
The amount to be paid to a sub-contractor as agreed in a contract should not be below ₹ 30,000
A resident contractor paid or credited this amount after 31st May 1972
A contractor should pay the total amount agreed in a contract with specified bodies

Conditions When TDS Deduction Is Not Applicable as Per Section 194C

Payers do not require to deduct TDS in the following circumstances as per Section 194C:

Hindu Undivided Families and individuals shall not deduct TDS if the payment is transferred to a contractor for meeting their personal purpose.
When the amount is paid before the first day of June 1972. Or else, the amount payable is transferred to the payee's account before the 1st day of June 1973 related to the contract agreed between a cooperative society and a contractor. Alternatively, it can be a contract between a sub-contractor and contractor for completing work for a cooperative society.
A payer shall not deduct TDS from payments made or to be made during a previous financial year to a contractor conducting business in hiring carriage goods, plying on providing PAN to the payer.

When Is TDS Deducted Under Section 194C?

A person making payment to a sub-contractor or contractor must deduct TDS in the following times as per the Section 194C:

A person credits payment to the payee's bank account and
Payment is made via cash, cheque, or other modes
Payer transfers an amount aimed for the payee to a 'Suspense Account' or other accounts

What Are the TDS Rates as Per Section 194C?

The TDS rates under Section 194C are mentioned below:

Payment Type	TDS Rates If PAN Card Is Available	TDS Rates If PAN Card Is Unavailable (on/after 1st April 2010)
Payment made to HUF or resident individual	1%	20%
Payment made to other resident individuals apart from HUF or individual	2%	20%

There are a few pointers that individuals must note related to TDS rates under Section 194C:

The TDS rate is nil for transporters if they furnish PAN.
Payer will deduct TDS at base rates as no additional education cess, surcharges, and SHEC is applicable.
TDS rates from 14th May 2020 to 31st March 2021 was 0.75% for payments transferred to resident individuals or HUF and 1.5% for payments made to other residents besides HUF or individuals.

What Is the Time Limit to Deposit TDS as Per Section 194C?

The due date within which a taxpayer need to deposit TDS under Section 194C are stated below:

Payment Type	Due Date
When Government makes a payment or any other pays on behalf of the former	Same day on which the payment is made (without any challan form)
When the payment is credited or paid in March	On or before 30th April
When the payment is credited or paid in a month other than March	Within 7 days from the month's completion in which, a payer deducted TDS.

When to Issue TDS Certificate as Per Section 194C?

Payers must issue a TDS certificate while deducting TDS from payments except for salary in a quarter in Form No. 16A.

Due dates within which a payer must issue this certificate are:

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

What Are the Exceptions Under Section 194C of the Income Tax Act?

Here are some exceptions to TDS while making payments to contractors as per Section 194C:

TDS Deduction for Composite Contract

If the Government supplies materials, the decision to deduct TDS while making payments to a contractor rests on the contract and conduct of the parties involved.

When a constructor agrees to develop a dam or building, and the specified person or the Government supplies materials at agreed prices to carry out such work, the concerned payer will deduct TDS on gross payments removing adjustments related to material cost.

When a contractor agrees to offer labour to carry to work on a project, and the Government or specified person will supply materials for work, the payable amount to the contractor will be based on services or labour provided and will not cover the material cost.

Therefore, a payer will deduct TDS from payments made to a contractor is 2% or 1% on gross or net payments based on the contract. The TDS rate is 0.75% and 1.5% for payments made from 4th May 2020 to 31st March 2021.

TDS Deduction In Case a Party Provide Materials to Contractor

In this, no deduction of tax at source is applicable. However, a payer will deduct TDS if he or she pays in kind or cash to a sub-contractor or contractor.

Non-compliance to Section 194C of the Income Tax Act attracts a substantial interest on the payment paid and also disallows a taxpayer to claim a tax deduction on such expenditures. Therefore knowing about this Section is essential to remain tax compliant and avoid increasing tax liabilities.

Frequently Asked Questions

✓ Can a Hindu Undivided Family or an individual pay sub-contractors and deduct TDS under Section 194C?

No, as per Section 194C(2), HUF or individuals are not eligible to pay sub-contractors and deduct TDS under Section 194C.

✓ Can a payer deduct TDS lower than the prescribed rate under Section 194C?

Yes, if an Assessing Officer finds that the aggregate income of a sub-contractor and contractor is suitable for lower or no tax deduction, whichever the case, AO will issue a certificate against an application submitted by the payee. The payee can provide this certificate to a deductor to get lower or enjoy no tax deduction at the source.