Section 194C

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Introduction

Section 194C of the Income Tax Act, 1961 mandates the tax deducted at source (TDS) on payments to resident contractors or sub-contractors. Under this provision, individuals or entities making these payments must ensure TDS deductions to remain compliant and avoid penalties. Here’s everything you need to know about Section 194C, including applicability, rates, exceptions, and more.

Who Qualifies as a ‘Person’ Under Section 194C?

A “person” in the context of Section 194C can refer to any individual, firm, trust, company, society, government, or any local or authorized governing body involved in a contract for services or supplies. Entities paying contractors for such services are required to deduct TDS.

Definition of ‘Work’ Under Section 194C

Section 194C defines “work” as any tasks associated with:

Advertising
Broadcasting and Telecasting
Catering Services
Transporting Passengers/Goods (excluding railways)
Manufacturers or suppliers produce goods based on client requirements, provided they purchase materials from the client or associates.

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TDS Deduction Criteria Under Section 194C

Entities deduct TDS under Section 194 C only when:

The contractor is a resident as per Section 6 of the Income Tax Act.
Payments are made by specified individuals/entities to complete a job or supply the workforce.
The contractual terms are agreed upon, either written or oral.
Payment per contract exceeds Rs. 30,000 or cumulative payments exceed Rs. 75,000 in a financial year.

Note: TDS is deducted when the payment is credited, paid in cash, or through cheque, whichever is earlier.

TDS Rate Under Section 194C

Here are the standard TDS rates under Section 194 C:

Entities (excluding HUF or Individuals): 2%
HUF or Individuals: 1%

If the contractor does not provide a valid PAN, the payer deducts TDS at 20%. However, the payer does not deduct TDS on payments to goods transport contractors who meet specific conditions.

Exceptions to TDS Under Section 194C

Some scenarios exempt TDS under Section 194 C:

Composite Deductions: When materials are provided by the government, or in cases where a contractor is only supplying labor.
Supply of Materials by the Payer: The payer does not deduct TDS if they supply raw materials directly for contract fulfillment.

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When is TDS Not Deducted Under Section 194C?

TDS deductions are exempt in situations such as:

Payment is below Rs. 30,000 per contract or under Rs. 1 lakh annually.
Declaration with PAN: Contractors with a valid PAN declaration.
Specific Transport Contractors: Those with less than 10 goods carriages in the prior year.

TDS Deposit Timeline Under Section 194 C

It must be deposited promptly as per the following timelines:

Government Payers: TDS should be deposited on the same day as payment.
Other Payers: Taxpayers must deposit payments made in March by April 30, while they must deposit payments for other months within a week after the month ends.

Issuing TDS Certificates

Payers must issue TDS certificates (Form 16A) to contractors quarterly on the following dates:

For payments in April-June: By August 15
For payments in July-September: By November 15
For payments in October-December: By February 15
For payments in January-March: By May 30

Conclusion

Section 194C of the Income Tax Act ensures transparency and accountability in contractor payments through timely TDS deductions. Understanding these rules allows both payers and contractors to maintain tax compliance and optimize tax-related benefits.

Frequently Asked Questions

Who qualifies for TDS under Section 194C?

Any resident contractor or sub-contractor working with a specified individual or entity falls under Section 194C, provided they meet certain contract payment thresholds.

What is the TDS rate for individual contractors?

The TDS rate for individual contractors or HUF under Section 194C is 1%.

Can TDS be deducted if the contractor doesn’t provide a PAN?

Yes, without a PAN, TDS must be deducted at 20% instead of the usual 1% or 2% rates.

When is TDS under Section 194C not required?

No TDS deduction is needed if the payment is below Rs. 30,000 per contract or Rs. 1 lakh annually, or if the contractor provides a PAN declaration.

What are the TDS timelines under Section 194C?

For government entities, TDS is due on the payment day itself. For others, TDS for March payments is due by April 30, and for other months, it’s due within one week of month-end.

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