Table of Contents
-
What is Section 194C of Income Tax Act?
-
Applicability of Section 194C in 2025
-
Who is Responsible to Deduct TDS under Section 194C?
-
TDS Rates under Section 194C (2025 Latest)
-
Threshold Limit for Deduction under Section 194C
-
Exemptions under Section 194C
-
Difference between Contractor vs Sub-Contractor TDS
-
Due Dates for Depositing TDS under Section 194C
-
Penalty & Consequences of Non-Compliance
-
Checklist for Businesses under Section 194C
-
FAQs on Section 194C of Income Tax Act
What is Section 194C of Income Tax Act?
Section 194C of Income Tax Act mandates deduction of TDS (Tax Deducted at Source) on payments made to a contractor or sub-contractor for carrying out any work, labour, or service contract.
It ensures tax collection at the source and prevents tax evasion by contractors.
Applicability of Section 194C in 2025
-
Applicable to any person (payer) other than an individual/HUF not liable to tax audit.
-
Deductor can be: Company, Firm, Co-operative society, Trust, or Individual/HUF (if tax audit applicable u/s 44AB).
-
Deductee: Any resident contractor or sub-contractor.
✅ Example: A company outsourcing transportation of goods must deduct TDS from the payment made to the transporter if it exceeds the threshold.
Who is Responsible to Deduct TDS under Section 194C?
-
Any specified person (Company, Partnership Firm, Cooperative Society, Trust, Government, Local Authority, or Individual/HUF covered under Tax Audit) making payment to a resident contractor.
💡 Pro Tip: If you are a small business or an individual not covered under Tax Audit, you are not required to deduct TDS under Section 194C.
TDS Rates under Section 194C (2025 Latest)
| Nature of Payee | TDS Rate u/s 194C |
|---|---|
| Individual / HUF contractor | 1% |
| Other than Individual/HUF | 2% |
| Sub-contractor (any type) | 1% |
| Transporter (having ≤10 goods carriages & PAN furnished) | Exempt |
Threshold Limit for Deduction under Section 194C
| Particulars | Threshold (2025) |
|---|---|
| Single contract payment | ₹30,000 |
| Aggregate payments in a year | ₹1,00,000 |
Exemptions under Section 194C
TDS is not applicable if:
-
Payment made by individuals/HUF not liable to tax audit.
-
Payment to a transporter who owns 10 or fewer goods carriages and provides PAN.
-
Payment for personal purposes of individual/HUF.
Difference Between Contractor vs Sub-Contractor TDS
| Basis | Contractor | Sub-Contractor |
|---|---|---|
| Meaning | Person who undertakes the work contract | Person engaged by contractor to execute part of work |
| Applicable Rate | 1% (Individual/HUF), 2% (Others) | 1% |
| Responsibility | Deductor deducts TDS before paying contractor | Contractor deducts TDS before paying sub-contractor |
Due Dates for Depositing TDS under Section 194C
-
7th of next month (for all months except March).
-
30th April (for March payments).
TDS return must be filed in Form 26Q on a quarterly basis.
Penalty & Consequences of Non-Compliance
-
Interest @ 1% per month for late deduction.
-
Interest @ 1.5% per month for late deposit.
-
Disallowance of expenses u/s 40(a)(ia) – 30% of expense not allowed as deduction.
-
Penalty u/s 271C – Equal to amount of TDS not deducted/deposited.
Checklist for Businesses under Section 194C
✔️ Identify whether payer is covered under Section 194C.
✔️ Verify PAN of contractor/sub-contractor.
✔️ Apply correct TDS rate (1% / 2%).
✔️ Check threshold limits (₹30,000 / ₹1,00,000).
✔️ Deduct and deposit TDS within due dates.
✔️ File TDS returns in Form 26Q.
✔️ Issue TDS Certificate (Form 16A) to contractor.
FAQs on Section 194C of Income Tax Act
Q1. What is Section 194C of Income Tax Act in simple terms?
Ans: It requires deduction of TDS when a specified person makes payment to a resident contractor or sub-contractor for carrying out any work contract.
Q2. What is the TDS rate under Section 194C for individuals in 2025?
Ans: 1% for individual/HUF contractors, 2% for others, and 1% for sub-contractors.
Q3. Is TDS applicable on transporters under Section 194C?
Ans: No, if the transporter owns 10 or fewer goods vehicles and provides PAN, TDS is not deducted.
Q4. What is the threshold limit for deduction u/s 194C?
Ans: ₹30,000 per contract or ₹1,00,000 in aggregate during the financial year.
Q5. What happens if TDS under Section 194C is not deducted?
Ans: The payer faces interest, penalty, and disallowance of expense under section 40(a)(ia).
