Think of Section 194C as the government's way of collecting tax at the source whenever someone hires a contractor to do something — build, advertise, cater, transport, broadcast. Before the money even reaches the contractor, the payer must snip off a small percentage as TDS. This is one of the most frequently tested TDS sections in CA Inter — expect a 4-to-8 mark question almost every attempt.
Here's the core rule: if you are a specified person (companies, firms, trusts, governments, LLPs, and even individuals/HUFs who were subject to tax audit in the preceding year) and you pay a resident contractor for carrying out work, you must deduct TDS. The rate is 1% if the contractor is an Individual or HUF, and 2% for all other contractors (companies, firms, LLPs, etc.). Deduction happens at the time of credit or payment — whichever is earlier. Even a credit to a suspense account triggers TDS. The definition of 'work' is broad: advertising, broadcasting, carriage of goods/passengers (not railways), catering, and job work (manufacturing to customer specs using customer's material) all qualify.
Two threshold limits protect small payments. No TDS if a single payment does not exceed ₹30,000. But if the aggregate payments to the same contractor cross ₹1,00,000 in a financial year, TDS kicks in on every rupee from the very first payment. For job work contracts, if the material value is shown separately on the invoice, TDS applies only on the labour/service portion — not the material. If material is clubbed into one figure, TDS is on the whole invoice. Two important exemptions: (a) individuals/HUFs paying a contractor for personal purposes (like hiring a plumber for your home) are fully exempt, and (b) transport operators who own 10 or fewer goods carriages are exempt, provided they furnish a declaration with their PAN to the payer.
Example 1 — Basic TDS calculation for a contractor
Rajesh & Co. Pvt. Ltd. engages Mr. Arjun (individual) for interior decoration work. Payments made during the year: ₹28,000 in May, ₹40,000 in August, ₹35,000 in January.
| Payment | Cumulative Total | TDS? |
|---|---|---|
| ₹28,000 (May) | ₹28,000 | No — single payment < ₹30,000 |
| ₹40,000 (Aug) | ₹68,000 | Yes — single payment > ₹30,000 → TDS = 1% × ₹40,000 = ₹400 |
| ₹35,000 (Jan) | ₹1,03,000 | Yes — TDS = 1% × ₹35,000 = ₹350 |
Note: The May payment of ₹28,000 escaped TDS at the time, but once aggregate crossed ₹1,00,000, the company is also liable to deduct TDS on that ₹28,000 retroactively (at the time of the next payment). Total TDS for the year = 1% × ₹1,03,000 = ₹1,030.
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Example 2 — Job work with material
Ms. Iyer's firm gives raw material worth ₹3,00,000 to Sharma Fabricators Pvt. Ltd. to manufacture parts. Sharma raises an invoice showing: Material received from customer ₹3,00,000 + Labour/processing charges ₹80,000. Total invoice = ₹3,80,000.
Since material value is shown separately, TDS under 194C applies only on the labour portion.
TDS = 2% × ₹80,000 = ₹1,600
If the invoice had shown just ₹3,80,000 as a lump sum (material not separated), TDS = 2% × ₹3,80,000 = ₹7,600. Always ask for a split invoice — it saves the contractor from excess TDS!
📖 Bare Act text — Section 194C, Income Tax Act 1961
(click to expand)
(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to— (i) one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family; (ii) two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family, of such sum as income-tax on income comprised therein. (2) Where any sum referred to in sub-section (1) is credited to any account, whether called "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly. (3) Where any sum is paid or credited for carrying out any work mentioned in sub-clause (e) of clause (iv) of the Explanation, tax shall be deducted at source— (i) on the invoice value excluding the value of material, if such value is mentioned separately in the invoice; or (ii) on the whole of the invoice value, if the value of material is not mentioned separately in the invoice. (4) No individual or Hindu undivided family shall be liable to deduct income-tax on the sum credited or paid to the account of the contractor where such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family. (5) No deduction shall be made from the amount of any sum credited or paid or likely to be credited or paid to the account of, or to, the contractor, if such sum does not exceed thirty thousand rupees: Provided that where the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year exceeds one lakh rupees, the person responsible for paying such sums referred to in sub-section (1) shall be liable to deduct income-tax under this section. (6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum. (7) The person responsible for paying or crediting any sum to the person referred to in sub-section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed. Explanation.—For the purposes of this section,— (i) "specified person" shall mean,— (a) the Central Government or any State Government; or (b) any local authority; or (c) any corporation established by or under a Central, State or Provincial Act; or (d) any company; or (e) any co-operative society; or (f) 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; or (g) 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; or (h) any trust; or (i) 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); or (j) any Government of a foreign State or a foreign enterprise or any association or body established outside India; or (k) any firm; or (l) any person, being an individual or a Hindu undivided family or an association of persons or a body of individuals, if such person,— (A) does not fall under any of the preceding sub-clauses; and (B) 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; (ii) "goods carriage" shall have the meaning assigned to it in the Explanation to sub-section (7) of section 44AE; (iii) "contract" shall include sub-contract; (iv) "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.