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Income Tax · TDS/TCSTDS on contractor payments (Section 194C / Section 393): rates, limits and examples
Every business that pays for a job – printing, catering, transport, labour supply, repairs, advertising – must check TDS under Section 194C, now an entry in Section 393 of the Income-tax Act, 2025. Here are the rates, thresholds, exceptions and worked examples.
Section 194C of the Income-tax Act, 1961 requires any person responsible for paying a resident contractor for carrying out work (including supply of labour) under a contract to deduct TDS. From 1 April 2026, the same obligation is an entry in the table under Section 393(1) of the Income-tax Act, 2025, with the same rates and thresholds.
Who must deduct
All payers other than individuals and HUFs not liable to tax audit. An individual or HUF whose business turnover exceeded ₹1 crore (or professional receipts ₹50 lakh) in the previous year is a deductor. Individuals not covered can still have obligations under the separate entry for large contract payments (old Section 194M – 2% above ₹50 lakh a year).
What counts as "work"
- Advertising, broadcasting and telecasting;
- Carriage of goods or passengers by any mode other than railways;
- Catering;
- Manufacturing or supplying a product to the customer's specification using material bought from the customer (job work);
- Supply of labour / manpower;
- Repairs, maintenance, construction contracts, housekeeping, security services.
It does not include outright purchase of goods from the contractor's own material (a sale), which may fall under the purchase-of-goods entry (old Section 194Q) instead.
Rates and thresholds
| Payee | Rate | Threshold |
|---|---|---|
| Individual / HUF | 1% | Single payment > ₹30,000, or aggregate in the year > ₹1,00,000 |
| Any other person (firm, company, LLP, AOP) | 2% | Same |
| No PAN / inoperative PAN | 20% | — |
| Transporter with ≤ 10 goods carriages, declaration + PAN | Nil | Report in statement |
Material component
If the invoice separately shows the value of material supplied by the contractor, TDS is deducted on the labour/service part only. If not shown separately, TDS applies on the whole invoice value (excluding GST shown separately).
Worked example 1: annual maintenance
Example: Sharma Industries (company, Bawana) pays a housekeeping agency (a partnership firm) ₹25,000 a month plus 18% GST.
| Month | Payment (excl. GST) | Cumulative | TDS? |
|---|---|---|---|
| April | ₹25,000 | ₹25,000 | No (single ≤ ₹30,000, aggregate ≤ ₹1 lakh) |
| May | ₹25,000 | ₹50,000 | No |
| June | ₹25,000 | ₹75,000 | No |
| July | ₹25,000 | ₹1,00,000 | No (not exceeding ₹1 lakh) |
| August | ₹25,000 | ₹1,25,000 | Yes – aggregate crosses ₹1 lakh |
In August, TDS at 2% is deducted on the entire ₹1,25,000 paid so far – ₹2,500 – because the aggregate limit has been crossed. From September, deduct ₹500 on each ₹25,000 payment. TDS for August is deposited by 7 September.
Worked example 2: transporter
Example: A Delhi trader pays ₹4,80,000 in the year to a truck owner who owns 6 trucks, has given PAN and a declaration. No TDS is required; the trader reports the payments with the declaration code in the quarterly statement. If the truck owner had 12 trucks, TDS at 1% (₹4,800) would apply.
Worked example 3: printing job
Example: A school pays a printer ₹2,40,000 for printing its prospectus using paper bought by the printer, with no separate material value on the invoice. As it is a work contract to the school's specification and the material is not shown separately, TDS of 1% (individual printer) applies on ₹2,40,000 = ₹2,400. If the printer shows paper ₹1,40,000 and printing charges ₹1,00,000 separately, TDS applies on ₹1,00,000 – but only if the aggregate threshold is crossed.
Timing and deposit
- Deduct at the time of credit to the contractor's account or payment, whichever is earlier.
- Deposit by the 7th of the next month (30 April for March).
- File quarterly statements (Form 26Q, and the new-Act statement for Tax Year 2026-27) by 31 July, 31 October, 31 January and 31 May.
- Issue TDS certificates to the contractor within 15 days of the statement due date.
Consequences of default
| Default | Consequence |
|---|---|
| Not deducted | Interest 1% per month; 30% of the expense disallowed until TDS is paid (old Section 40(a)(ia)) |
| Deducted, paid late | Interest 1.5% per month |
| Statement late | Fee ₹200 per day up to TDS amount |
| Statement not filed / incorrect | Penalty ₹10,000 to ₹1 lakh |
See TDS defaults and interest.
Old vs new references
For payments up to 31 March 2026, cite Section 194C; for payments from 1 April 2026, cite the Section 393(1) table entry for contract work. Update your accounting software's TDS masters. Our TDS rate finder lists the new references.
Common mistakes
- Waiting for a single bill above ₹30,000 and ignoring the ₹1 lakh aggregate.
- Deducting on the GST amount.
- Treating a sale of goods as a contract (or vice versa).
- Not collecting transporter declarations every year.
- Applying the 10% professional rate to manpower supply.
Key takeaway
Contractor TDS is 1% or 2%, triggered at ₹30,000 per bill or ₹1 lakh a year. Track cumulative payments vendor-wise, collect PAN and transporter declarations, and deposit by the 7th. Our TDS compliance service handles monthly deductions, returns and corrections for businesses in Delhi.
Official references
Provisions discussed (summaries in our Law Library):
- Income-tax Act, 2025 – Section 393(1) (corresponds to 194C): TDS – contractors
- Income-tax Act, 1961 – Section 194C (corresponds to 393(1)): TDS – contractors
Official sources to verify the current text, notifications and circulars:
Frequently asked questions
What is the TDS rate on contractor payments?
1% where the payee is an individual or HUF and 2% for others (firms, companies, LLPs). Without a valid PAN, TDS is 20%.
When is TDS on contractors not required?
When a single payment does not exceed ₹30,000 and the total payments to that contractor in the year do not exceed ₹1,00,000. Once either limit is crossed, TDS applies.
Is TDS required on payments to transporters?
Not if the transporter owns ten or fewer goods carriages at any time during the year and furnishes a declaration with PAN. The payer must report such payments in the TDS statement.
Is TDS deducted on the GST component?
Where GST is shown separately in the invoice, TDS is deducted on the amount excluding GST, as clarified by CBDT.
Is manpower supply covered as a contract?
Yes. Supply of labour is "work" for contractor TDS; Budget 2026 expressly included manpower supply within the definition of work, removing disputes about applying the professional-fees rate.
Is TDS required on payments to a courier company?
Courier and transport of goods are carriage contracts, so contractor TDS applies once the ₹30,000 single or ₹1 lakh annual threshold is crossed (2% for companies/firms).
Does contractor TDS apply to advertising agencies?
Yes, for advertising contracts (production and placement). Commission retained by the agency may instead fall under the commission provisions, depending on the arrangement.
Can a contractor ask for a lower TDS certificate?
Yes. A contractor whose actual tax is lower than TDS can apply for a lower or nil deduction certificate, which the payer must then apply.
This article is general information on the law as on 10 November 2026, written for educational purposes. It is not professional advice for your case. Section numbers under the Income-tax Act, 2025 should be confirmed with the official section mapping on the Income Tax Department website before use in filings.
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