[Section 194C]: TDS on Payments to Resident Contractors

Section 194C of the Income Tax Act, 1961, mandates Tax Deducted at Source (TDS) on payments made to resident contractors or subcontractors for carrying out work (including labor supply). Below is a detailed breakdown of its provisions, compliance requirements, and exceptions.

1. Applicability of Section 194C

Who Must Deduct TDS?

• Specified Persons(Deductors) include:
  • Central/State Governments
  • Local Authorities
  • Companies, Firms, Co-operative Societies
  • Trusts, Universities, Registered Societies
  • Individuals/HUFs with business turnover > ₹1Cror professional receipts > ₹50L in the previous FY .

Who Receives Payment?

• Resident Contractors/Subcontractors(individuals, HUFs, firms, companies, etc.).
• Excluded: Non-residents (covered under Section 195).

What Constitutes “Work”?

• Advertising, Broadcasting, Catering
• Transportation of goods/passengers (except railways)
• Manufacturing as per customer specifications (if materials supplied by customer)
• Supply of labor (e.g., manpower agencies).

2. TDS Rates & Thresholds

Conditions for Transporters:

• Must own ≤10 goods carriagesin the previous year.
• Must submit PAN + declarationto the payer.

Threshold Limits

• Single Payment ≤ ₹30,000: No TDS.
• Aggregate Payments in FY ≤ ₹1,00,000: No TDS.
• If any single payment > ₹30,000or total exceeds ₹1,00,000, TDS applies to all subsequent payments.

3. When to Deduct TDS?

TDS must be deducted at the earlier of:

• Credit to contractor’s account(even if in a “Suspense Account”).
• Actual payment(cash, cheque, online transfer, etc.).

Deposit & Filing Deadlines

4. Exceptions & Special Cases

No TDS Required If:

• Payment is for personal use(not business).
• Transporters meet exemption criteria (≤10 goods carriages + PAN declaration).
• Composite Contracts(Materials + Labor):
  • If material cost is separately mentioned, TDS applies only to the service component.
  • If not specified, TDS applies to the entire invoice value.

GST & TDS

• If GST is separately charged, TDS is deducted on the base amount(excluding GST).

5. Penalties for Non-Compliance

• Late Deduction: Interest @ 1% per month.
• Late Payment: Interest @ 5% per month.
• Late Filing (Form 26Q): Penalty up to ₹1 lakh.

6. Example Scenarios

Case 1: Single Payment Exceeds Threshold

• Payment: ₹40,000 (Individual Contractor).
• TDS: ₹400 (1%).

Case 2: Aggregate Payments Trigger TDS

• Payments: ₹25,000 (Jan), ₹35,000 (Feb), ₹30,000 (Mar).
• Total: ₹90,000 (No TDS until Feb).
• TDS on Feb Payment: ₹350 (1% of ₹35,000).

Case 3: Transporters Exemption

• Payment: ₹50,000 to a transporter (owns 8 trucks + PAN provided).
• TDS: Nil.

7. Key Takeaways

✅ Verify PAN to avoid 20% TDS.

✅ Track Aggregates (₹30K single / ₹1L annual limit).

✅ Separate Material Costs in invoices to reduce TDS liability.

✅ File TDS Returns quarterly to avoid penalties.