What is TDS on Contractor Payments Under Section 194C?

Section 194C of the Income Tax Act in India deals with the Tax Deducted at Source (TDS) on payments made to contractors for carrying out work, including any manufacturing or supply of goods or labor. Here’s a summary of its key aspects:

Section 194C Overview

Applicability:

This section applies to individuals, Hindu Undivided Families (HUFs), companies, firms, and other entities making payments to contractors for executing contracts, including work contracts, supply contracts, and contracts for labor.

Types of Contracts Covered:

Payments for carrying out any work, such as advertising, broadcasting, transport, manufacturing, and labor supply.

Threshold Limits:

TDS must be deducted if the payment to a contractor exceeds Rs. 30,000 for a single contract or Rs. 1,00,000 for aggregate payments in a financial year.

Rate of TDS:

For Individual or HUF Contractors: 1% of the payment amount.

For Other Contractors (Companies, Firms, etc.): 2% of the payment amount.

Non-Applicability:

TDS is not applicable if the contractor is an individual or HUF not subject to tax audit under Section 44AB in the previous financial year.

Deposit and Filing:

The deducted TDS must be deposited with the government within the specified due dates. Additionally, the deductor must file a TDS return, usually on a quarterly basis.

Consequences of Non-Compliance:

Penalties for failure to deduct or deposit TDS can include disallowance of the related expenditure for income tax purposes and additional penalties as prescribed.

Section 194C ensures that tax is collected at the source of payment, facilitating tax compliance and reducing the chances of tax evasion.