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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!
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':
According to Section 194C (1) of the Income Tax Act, the terminology of 'work' connotes to any of the following:
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 -
A sub-contractor denotes a person who has a contract with a contractor for the following purposes –
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.
TDS deduction on payments made to contractors is applicable when the following conditions of Section 194C(1) are fulfilled:
The contractor (payee) must be a resident 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 ₹ 1,00,000, 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.
TDS deduction on payments made to sub-contractors is applicable when the following conditions of Section 194C(2) are fulfilled:
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 person making payment to a sub-contractor or contractor must deduct TDS in the following times as per the 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 apart from HUF or individual |
2% |
20% |
There are a few pointers that individuals must note related to TDS rates under 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. |
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 |
Here are some exceptions to TDS while making payments to contractors as per Section 194C:
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 without 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.
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.
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