TDS on Contractor Payments — Section 194C Complete Guide FY 2025-26
TDS on contractor payments under Section 194C is 1% when the contractor is an individual or HUF, and 2% when the contractor is a company, firm, or LLP. TDS is triggered when a single contract payment exceeds Rs.30,000 or when aggregate payments to the same contractor in a financial year exceed Rs.1,00,000. Transport contractors providing PAN and owning ten or fewer goods carriages are fully exempt from TDS.
TDS rates under Section 194C remain 1% and 2% for FY 2025-26. The Income Tax Department has increased scrutiny on businesses making contractor payments via UPI, NEFT, and mobile wallets without deducting TDS. The threshold applies regardless of payment mode — a contractor paid Rs.35,000 via UPI is fully subject to 1% or 2% TDS. Businesses must track all digital payments to contractors and ensure TDS compliance from the first payment that breaches the threshold.
Frequently Asked Questions
Under Section 194C, TDS on contractor payments is 1% when the contractor is an individual or HUF, and 2% when the contractor is a company, firm, LLP, AOP, or BOI. TDS is triggered when a single payment exceeds Rs.30,000 or aggregate annual payments to the same contractor exceed Rs.1,00,000. If the contractor does not furnish PAN, TDS is deducted at 20% under Section 206AA regardless of the contractor's legal status.
No. Section 194C applies to individuals and HUFs only when their business or professional turnover exceeded Rs.1 crore or Rs.50 lakh respectively in the preceding financial year, making their accounts auditable under Section 44AB. Individuals making contractor payments for personal purposes such as home renovation or domestic repairs are not required to deduct TDS under Section 194C.
Transport contractors are exempt from TDS under Section 194C(6) if they satisfy two conditions simultaneously: furnish their valid PAN to the deductor, and provide a written declaration that they owned ten or fewer goods carriages at any time during the financial year. Both conditions must be met — PAN alone is insufficient. The deductor must retain both the PAN and declaration on record for seven years.
Yes. TDS under Section 194C is triggered at the time of credit to the contractor's account in the deductor's books or at the time of actual payment, whichever is earlier. An advance payment credited in the books or paid via bank transfer is subject to TDS if it crosses Rs.30,000 per payment or when combined with other payments crosses Rs.1,00,000 for the year.
If a contractor refunds a payment on which TDS was deducted and deposited, the deductor can adjust the excess TDS in subsequent quarterly Form 26Q returns by reducing the TDS amount for that contractor in the same or subsequent quarter. If the TDS has already been deposited and the quarter's return filed, a correction return on TRACES can be filed to reverse the entry.
No. TDS under Section 194C is deducted on the base contract amount excluding GST. If a contractor invoices Rs.1,00,000 for services plus Rs.18,000 GST, TDS at 1% or 2% is deducted only on Rs.1,00,000. The GST component is a tax collected by the contractor on behalf of the government and is not income of the contractor — therefore it is excluded from the TDS base per CBDT circulars.
Form 26Q must be filed by 31 July for Q1 (April to June), 31 October for Q2 (July to September), 31 January for Q3 (October to December), and 31 May for Q4 (January to March). Late filing attracts Rs.200 per day mandatory fee under Section 234E of the Income Tax Act 1961. The return is filed on the income tax e-filing portal using validated FVU files.
Yes. A contractor can apply to their jurisdictional Assessing Officer for a nil or lower deduction certificate under Section 197 by filing Form 13. If the AO is satisfied that the contractor's estimated tax liability is lower than the standard TDS rate, a certificate specifying the reduced rate is issued. The deductor must honour this certificate and deduct TDS at the rate specified. Certificates are valid for specific financial years only.
Contractor TDS Compliance — Zero Defaults, Zero Penalties
Legal Suvidha manages complete Section 194C compliance for businesses of all sizes — contractor PAN collection, threshold tracking, monthly TDS deposit via Challan ITNS 281, quarterly Form 26Q filing, and Form 16A certificates for all contractors. 500+ businesses served across India.
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This guide is for informational purposes only, updated for FY 2025-26 / AY 2026-27. Tax and compliance laws change frequently. Always verify applicable rates, thresholds, and procedures with a qualified Chartered Accountant before filing or making compliance decisions. Legal Suvidha Providers LLP is not liable for decisions taken based on this content without professional verification.
