# Section 194C – TDS on Payments to Contractors

## 1. Applicability

Any specified person paying any sum to a resident contractor/sub-contractor for carrying out any work (including supply of labour).

### Specified Payers

Central/State Government, Local Authority.
Central/State/Provincial Corporation.
Company, Firm, Trust.
Registered Society, Co-operative Society.
University established/incorporated under Central/State/Provincial Act.
Government/Foreign State or foreign enterprise.
Individual/HUF/AOP/BOI whose total sales/gross receipts/turnover in immediately preceding F.Y. exceeded ₹1 crore (business) or ₹50 lakhs (profession).

### Personal Use Exemption

An Individual/HUF need NOT deduct tax if sum is credited/paid exclusively for personal purposes of the individual/HUF.

## 2. Threshold Limit

Single sum > ₹30,000, OR
Aggregate sums in F.Y. > ₹1,00,000.

## 3. Rate of TDS

Payee	Rate
Individual or HUF contractor	1%
Any other contractor (Firm/Company/AOP/etc.)	2%

## 4. Time of Deduction

Earlier of:
Credit of such sum to the contractor's account (including suspense), OR
Payment.

## 5. Transporter Exemption

No TDS on payments to a contractor engaged in plying, hiring or leasing of goods carriages, owning ≤ 10 goods carriages at any time during the year, provided the contractor furnishes PAN along with a declaration.

## 6. Definition of 'Work' (Section 194C)

Includes:

(a) Advertising.
(b) Broadcasting and telecasting including production of programmes.
(c) Carriage of goods/passengers by any mode of transport other than railways.
(d) Catering.
(e) Manufacturing/supplying a product to customer's specification using material purchased from such customer or its associate [as defined u/s 40A(2)(b)].

Exclusion: 'Work' does NOT include manufacturing/supplying a product to customer's specification using material purchased from a person other than the customer/associate – that is a contract for sale, not 'work'.

## 7. Invoice Value Rule

Where material is purchased from the customer/associate, TDS is on invoice value excluding material value, IF the material value is shown separately.
If not separately mentioned, TDS is on the whole invoice value.

## 8. Important Exclusion

Contracts for rendering professional services by lawyers, doctors, surgeons, engineers, accountants, architects, consultants etc. are NOT 'work' under 194C – they fall under Section 194J (Fees for Professional/Technical Services).

## Snapshot

```

Payer : Specified persons (Govt, Co., Firm, Big Ind/HUF)

Payee : Resident contractor

Limit : Single >₹30,000 OR Aggregate >₹1,00,000

Rate : 1% (Ind/HUF payee), 2% (others)

Time : Earlier of credit or payment

No TDS : Transporter with ≤10 vehicles + PAN; Personal use by Ind/HUF

```

Worked example

### Example 1

Example 1 – Single payment threshold:

ABC Ltd. pays ₹35,000 to a partnership firm contractor for installation work.

Single sum > ₹30,000 → TDS @ 2% = ₹700.

### Example 2

Example 2 – Aggregate threshold:

XYZ Ltd. pays three bills of ₹25,000, ₹28,000, and ₹50,000 in F.Y. to an individual contractor. Aggregate = ₹1,03,000.

Exceeds ₹1,00,000 aggregate → TDS on all ₹1,03,000 @ 1% = ₹1,030.

### Example 3

Example 3 – Transporter exemption:

Mr. T, transporter with 8 trucks, raises a bill of ₹2,00,000 and furnishes PAN with declaration.

No TDS required.

### Example 4

Example 4 – Sale vs work:

A company places an order with a furniture vendor to make chairs using vendor's own wood per the company's design.

This is a 'contract for sale' (raw material not from customer) → No TDS u/s 194C.

### Example 5

Example 5 – Material from customer:

Customer supplies cloth to a tailor and pays ₹1,50,000 for stitching. Invoice shows stitching ₹50,000 + cloth value ₹1,00,000 separately.

TDS on ₹50,000 only (material excluded since shown separately).
If not separately shown, TDS on full ₹1,50,000.

⚠️ Common exam mistakes

Treating professional services (CAs, lawyers, doctors) as 'work' under 194C – they fall under 194J.
Applying 2% rate to individual/HUF contractor – correct rate is 1%.
Applying TDS only when each bill is individually large – aggregate >₹1,00,000 also triggers TDS.
Allowing transporter exemption without obtaining declaration with PAN – the relaxation requires both.
Including value of customer-supplied material in TDS base when shown separately on invoice.
Forgetting that contracts for SALE (raw material not from customer) are excluded from 'work'.
Deducting TDS on payments by Ind/HUF for personal purposes – such payments are exempt.

Bare-Act text 194C(5) – Explanation · ICAI Saransh – TDS, TCS and Advance Tax · click to expand

Definition of work – Work includes – (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 or its associate, being a person related to the customer in such manner as defined u/s 40A(2)(b). However, 'work' shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person, other than such customer or associate of such customer, as such a contract is a contract for 'sale'.

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