Section 194C TDS Explained with Examples, Applicability & Calculation

Introduction to Section 194C TDS

If you run a business in India and pay contractors, vendors, or labour suppliers, Section 194C of the Income Tax Act likely applies to you. This guide covers applicability, rates, thresholds, and the Income-tax Act, 2025 transition, with worked examples. You can also run your own numbers instantly using the free TDS Calculator at StartBusiness.

Quick Answer

Section 194C requires specified persons — companies, government bodies, co-operative societies, and audited individuals/HUFs — to deduct TDS when paying a resident contractor or subcontractor for "work," including labour supply, advertising, transport, and catering. The rate is 1% for individual/HUF contractors and 2% for all others, rising to 20% without a valid PAN. TDS applies once a single payment exceeds ₹30,000 or the year's total to that contractor exceeds ₹1,00,000. From 1 April 2026, the same rule is numbered Section 393(1), Table Serial No. 6(i) under the Income-tax Act, 2025 — the rate and thresholds are unchanged.

Section 194C at a Glance

What Is Section 194C TDS?

Section 194C of the Income-tax Act, 1961 requires "specified persons" to deduct tax at source when they pay a resident contractor or subcontractor for carrying out "work" under a contract — including a contract to supply labour. It's one of the most frequently triggered TDS provisions in India because almost every business, at some point, pays someone else to build, transport, advertise, cater, or staff something for it.

For payments credited or paid up to 31 March 2026, Section 194C of the 1961 Act applies. For payments credited or paid on or after 1 April 2026, the same obligation is carried by Section 393(1), Table Serial No. 6(i) of the Income-tax Act, 2025 — see the dedicated section below for what actually changed.

"Work" under Section 194C specifically includes:

•   Advertising

•   Broadcasting and telecasting

•   Carriage of goods or passengers by any mode of transport, including air

•   Catering

•   Manufacturing or supplying a product to the buyer's specification using material purchased from that buyer

•   Labour contracts and supply of labour

It does not include a manufacturing contract where the contractor uses material purchased from a person other than the buyer — that falls outside 194C's definition of "work."

Section 194C TDS Rate (2026)

The Section 194C TDS rate is 1% when the contractor is an individual or Hindu Undivided Family, and 2% for every other type of payee — companies, partnership firms, LLPs, trusts, and AOPs/BOIs. If the contractor does not furnish a valid PAN, the rate rises to 20% under the no-PAN rule.

No surcharge or cess is added to the 1% or 2% base rate for domestic contractor payments. TDS is calculated on the invoice value excluding GST, provided GST is shown as a separate line item — if the invoice bundles GST into a single figure, TDS applies to the full amount. Use the GST Calculator to split an invoice into its base value and GST component before applying the TDS rate. Where the contractor holds a lower-deduction certificate, deduct at the certified rate instead; with a nil-deduction certificate, deduct nothing.

Section 194C TDS Limit and Threshold

Two independent thresholds decide whether TDS applies — crossing either one triggers deduction.

In practice:

•   A single payment of ₹28,000 attracts no TDS — it's below the ₹30,000 single-payment limit.

•  A single payment of ₹35,000 attracts TDS on the full ₹35,000, not just the excess over ₹30,000.

•   Four payments of ₹20,000, ₹25,000, ₹25,000, and ₹30,000 to the same contractor in one year total ₹1,00,000 — TDS becomes due once the aggregate crosses that figure, and applies to the payments already made in that year, not only future ones.

Who Has to Deduct TDS Under Section 194C?

The obligation falls on "specified persons," a defined list that covers most organised payers:

•   Central or State Government

•    Local authorities

•    Central or State statutory corporations

•    Companies, public or private

•    Co-operative societies

•    Housing Finance Companies

•    Trusts registered under Section 12AA or 12AB

If you're an individual or HUF whose business turnover was under ₹1 crore, or professional receipts under ₹50 lakh, in the preceding year, you are not required to deduct TDS under Section 194C, since your accounts weren't subject to Section 44AB audit. Large personal payments above ₹50 lakh may still trigger Section 194M — covered below. Companies registering for the first time — see private limited company registration — should build 194C deduction into their vendor onboarding process from day one, since the obligation applies to every company regardless of size.    

What Payments Are Covered Under Section 194C?

Section 194C for Subcontractors

Section 194C of the Income Tax Act, 1961 mandates the deduction of TDS on payments made to any resident contractor or sub-contractor for carrying out any work — including supply of labour — in pursuance of a contract between the contractor and a specified person.

Section 194C applies at each stage of a contracting chain. When a main contractor engages a subcontractor to execute part or all of the work, the main contractor becomes the deductor for payments to that subcontractor, under the same rate and threshold rules as any other 194C payment: 1% if the subcontractor is an individual or HUF, 2% otherwise, subject to the same ₹30,000 / ₹1,00,000 thresholds.

Do not assume the subcontractor is exempt because the main contract has already had TDS deducted at the top level — each payer-payee leg in the chain is assessed independently.

When Is TDS Deducted Under Section 194C?

TDS must be deducted at whichever happens earlier:

•   At the time the amount is credited to the contractor's account (including a suspense account — a credit there still counts)

•   At the time of actual payment, by cash, cheque, draft, NEFT, or any other mode

This means TDS can become due before the contractor is actually paid, simply because the amount was booked/credited in your accounts first.

Section 194C Exemptions and Exceptions

•   Payments below both the ₹30,000 single-payment and ₹1,00,000 annual thresholds — no TDS.

•   Goods transport contractors who are individuals/HUFs owning 10 or fewer goods carriages during the year, and who furnish a declaration and valid PAN — exempt under Section 194C(6).

•   Payments to non-residents — not covered by 194C at all; assessed under Section 195 instead.

•   A contractor holding a nil-deduction certificate under Section 197 (Section 395 from 1 April 2026) — no TDS.

•   A contractor holding a lower-deduction certificate — deduct at the certified rate, not 1%/2%.

Do not treat the transporter exemption as a blanket rule for all logistics payments — it applies specifically to individual/HUF owner-operators within the 10-carriage limit, with PAN on file. A transport company, or an owner-operator with more than 10 vehicles, is taxed normally under 194C.

Section 194C TDS Examples

Five worked scenarios covering the situations businesses actually run into.

Five worked scenarios covering the situations businesses actually run into.

Example 1: Company pays a contractor firm

ABC Pvt. Ltd. hires XYZ Constructions, a partnership firm, to renovate its office. Contract value ₹2,50,000 + 18% GST (₹45,000), shown separately on the invoice. Total invoice: ₹2,95,000.

•   Threshold check: ₹2,50,000 > ₹30,000 — TDS applies

•   Payee type: partnership firm — rate 2%

•   Taxable base: ₹2,50,000 (GST excluded, shown separately)

•   TDS: ₹2,50,000 × 2% = ₹5,000

•   Net paid to contractor: ₹2,50,000 − ₹5,000 + ₹45,000 GST = ₹2,90,000; ₹5,000 deposited as TDS

Example 2: Instalment payments crossing the annual threshold

A freelance architect whose accounts were audited last year (making them a specified deductor) pays an individual labour contractor across the year: ₹20,000 in April, ₹25,000 in July, ₹25,000 in October, ₹35,000 in January.

•   April–October cumulative: ₹70,000 — below ₹1,00,000, no TDS yet

•   January payment takes the cumulative total to ₹1,05,000 — the annual threshold is crossed

•   TDS rate (individual payee): 1%

•   TDS on the ₹70,000 already paid, now liable: ₹70,000 × 1% = ₹700

•   TDS on the January payment: ₹35,000 × 1% = ₹350

Total TDS liability for the year: ₹1,050; all further FY payments to this contractor are subject to 1% TDS

Example 3: PAN not furnished

A startup pays ₹80,000 to an advertising agency (a company) for social media management. The agency does not provide its PAN.

•    Threshold check: ₹80,000 > ₹30,000 — TDS applies

•    No PAN — the higher-rate rule applies: 20%

TDS: ₹80,000 × 20% = ₹16,000 (versus ₹1,600 at the standard 2% company rate if PAN had been furnished)

Example 4: Transporter exemption

A trading company pays ₹5,00,000 to an individual truck owner-operator for moving goods across the year. The operator owns 8 goods vehicles and furnishes PAN along with the Section 194C(6) declaration.

•   Owner-operator, individual, ≤10 goods carriages, PAN furnished — conditions for the Section 194C(6) exemption are met

•   No TDS is deductible on this payment, regardless of the amount

If this operator owned 12 trucks, or hadn't furnished PAN, the exemption would not apply and normal 194C rates would kick in once the thresholds were crossed.

Example 5: Subcontractor payment

A construction company (the main contractor on a client project) engages an individual labour subcontractor for a single payment of ₹45,000 for finishing work.

•   Threshold check: ₹45,000 > ₹30,000 — TDS applies

•   Payee type: individual subcontractor — rate 1%

TDS: ₹45,000 × 1% = ₹450

How to Calculate 194C TDS

Five steps cover every case:

1. Check whether the single payment exceeds ₹30,000, or the year's cumulative payments to that contractor exceed ₹1,00,000.

2. Identify the payee type: individual/HUF (1%) or any other person (2%). No PAN overrides both at 20%.

3. Determine the taxable base: invoice value excluding GST where GST is billed separately; the gross amount otherwise.

4. Multiply the taxable base by the applicable rate.

5. Deduct and deposit — by the 7th of the following month, or 30 April for March payments.

TDS = Taxable payment value (excl. GST) × applicable rate (1%, 2%, or 20%)

Rather than working this out manually for every invoice, run the numbers through the free TDS Calculator at StartBusiness — enter the payment amount, contractor type, and PAN status, and it returns the deduction and net payable instantly.

Section 194C vs Section 194J

Rule of thumb: 194C is for paying someone to produce a defined piece of work or output; 194J is for paying someone for their professional judgement or specialised expertise.

Section 194C vs Section 194M

194M exists specifically to catch large personal or non-business payments by individuals and HUFs who fall outside 194C because their accounts weren't audited.

If you're already deducting under 194C or 194J for a payment, 194M does not additionally apply to that same payment — it's designed to fill the gap for payers who aren't otherwise required to deduct at all.

Section 194C TDS Due Dates and Compliance

Late deposit attracts interest at 1.5% per month (or part month) under Section 201(1A). Non-filing of the quarterly return attracts a fee of ₹200 per day under Section 234E, capped at the TDS amount, and a further penalty of ₹10,000 to ₹1,00,000 under Section 271H is possible for continued default. Failure to deduct or deposit TDS correctly can also lead to 30% of the payment being disallowed as a business expense under Section 40(a)(ia).

These quarterly and monthly due dates are unchanged in substance under the Income-tax Act, 2025 — only the return form number and the reporting section reference change from 1 April 2026, as set out below.

Businesses already tracking ROC annual compliance deadlines often fold TDS deposit and return dates into the same calendar. If you'd rather hand the deduction, deposit, and quarterly filing off entirely, Biztree Outsourcing — StartBusiness's CA-led accounting arm — runs TDS/TCS compliance services that cover calculation, deposit, return filing, and TDS certificate issuance end to end.

Section 194C and the Income Tax Act, 2025

This is the change most 194C guides online have not caught up with yet, and it's the reason a page published on 1 April 2026 needs to address it directly.

What actually changed

Section 194C has not simply been "renamed." The Income-tax Act, 2025 replaced the Income-tax Act, 1961 with effect from 1 April 2026, and restructured all non-salary TDS provisions — 194A, 194C, 194H, 194I, 194J, and others — into a single consolidated provision: Section 393, sitting in the new Chapter XIX (previously Chapter XVII-B). Contractor-payment TDS specifically is now covered by Section 393(1), Table Serial No. 6(i), with sub-parts for individual/HUF contractors and other contractors.

The Income Tax Department has confirmed that the substantive rule for contractor payments is unchanged: the 1%/2% rates and the ₹30,000/₹1,00,000 thresholds carry over exactly. What changed is the numbering, the reporting form, and the internal Chapter structure — not the tax outcome.

Old law vs new law — mapping table

   

The no-PAN section reference (397(2)) and the lower/nil-deduction certificate reference (395) are drawn from consistent professional commentary (multiple independent practitioner sources) rather than a page I could pull directly from incometaxindia.gov.in in this research pass. Confirm both against the notified Income-tax Rules, 2026 or with your CA before publishing — everything else in this table is confirmed directly against incometax.gov.in / incometaxindia.gov.in.

What this means for filing

A payment credited or paid on or before 31 March 2026 stays governed by Section 194C of the 1961 Act, reported on Form 26Q. A payment credited or paid on or after 1 April 2026 is governed by Section 393(1) [Table Sl. No. 6(i)] of the 2025 Act, reported on Form No. 140. The old forms are not withdrawn — they remain the correct forms for original, belated, or correction statements relating to pre-1 April 2026 transactions, so a single deductor can legitimately file on both series within the same calendar year without mixing them on one statement.

The Income Tax Department has specifically flagged the practical risk here: citing the old section number — Section 194C — instead of Section 393(1) [Table: Sl. No. 6(i)] on a return for a post-1 April 2026 transaction can cause processing errors, requiring a correction statement to fix the section reference. Update your accounting software, invoice templates, and vendor contracts to reference Section 393 for any transaction dated on or after 1 April 2026.

Practical example

A company pays a partnership-firm contractor ₹2,00,000 on 15 April 2026 for completed work. Because the payment falls after 1 April 2026, it is governed by Section 393(1), Table Sl. No. 6(i): TDS at 2% (₹4,000), reported in Form No. 140 for Q1 FY 2026-27, with the section reference recorded as 393(1) — not 194C — to avoid a return-processing mismatch.

Common Mistakes to Avoid

Applying the wrong rate

Using 2% for an individual contractor, or 1% for a company, because the payee's legal form wasn't checked. Verify the contractor's constitution — not just their trade name — before applying a rate.

Missing the annual aggregate threshold

Tracking only the ₹30,000 single-payment limit and missing the ₹1,00,000 annual limit. Once the annual figure is crossed, TDS is due on the entire year's payments to that contractor, not just the amount going forward.

Not collecting PAN before payment

Skipping PAN collection forces a 20% deduction under the no-PAN rule — collect PAN as part of vendor onboarding, before the first payment.

Deducting TDS on the GST component

TDS should apply to the base contract value only, where GST is shown as a separate line on the invoice — not to the GST-inclusive total. Insisting on GST-compliant invoicing from contractors also matters for your own GST registration compliance, since input credit and TDS both depend on a correctly itemised invoice.

Missing the 1 April 2026 section-reference change

Continuing to cite Section 194C on TDS returns for transactions dated on or after 1 April 2026, instead of Section 393(1) [Table Sl. No. 6(i)] — this can trigger a return-processing error and force a correction filing.

Conclusion

Section 194C is one of the most frequently triggered TDS provisions in India, and from 1 April 2026 it runs under a new section number — 393(1), Table Sl. No. 6(i) — with the same rates and thresholds. Get the payee classification, the threshold check, and the GST treatment right, and the calculation itself is simple: run it through the TDS Calculator for an instant number, and use the Income Tax Calculator or Advance Tax Calculator to see how TDS credit feeds into your broader tax position. For hands-on help with deduction, filing, or the 2025 Act transition, talk to the StartBusiness team.

Frequently Asked Questions

What is 194C in TDS with an example?

Section 194C is the Income Tax Act provision requiring TDS on payments to resident contractors for carrying out work. Example: ABC Ltd pays Rs.5,00,000 to XYZ Press, a printing firm, for brochures. Since XYZ is a company, ABC deducts TDS at 2% = Rs.10,000, pays XYZ Rs.4,90,000, and deposits Rs.10,000 with the government. XYZ claims credit for this TDS when filing its return.

What is the TDS limit for 194C?

Two thresholds apply. A single payment above Rs.30,000 attracts TDS on that payment. If total payments to the same contractor in the financial year exceed Rs.1,00,000, TDS applies to all payments made that year, even if each was individually below Rs.30,000. If neither threshold is crossed, no TDS is required.

What is the Section 194C TDS rate?

1% where the contractor is an individual or HUF, and 2% for any other payee such as a company, firm, LLP, or trust. If the contractor does not furnish PAN, the rate rises to 20% regardless of payee type.

Is there a Form 194C?

No. Section 194C is a section of the Income Tax Act, not a form. The related compliance forms are Form 26Q (quarterly TDS return, up to 31 March 2026) or Form No. 140 (from 1 April 2026), Form 16A or Form No. 131 (TDS certificate to the contractor), and Challan ITNS 281 for depositing the tax.

What is the difference between Section 194C and Section 194Q?

Section 194C covers TDS on contract work — paying someone to build, transport, advertise, or supply labour — at 1% or 2%. Section 194Q covers TDS on the purchase of goods, applying when a buyer with turnover above Rs.10 crore buys goods worth over Rs.50 lakh from a resident seller, at 0.1% on the amount exceeding Rs.50 lakh.

Is TDS under 194C applicable on GST?

No. TDS is deducted on the base contract value excluding GST, provided GST is shown as a separate line item on the invoice. If the invoice does not separate GST, TDS is deducted on the entire gross amount, including GST.

When should TDS under 194C be deposited?

By the 7th of the month following the month of deduction. For example, TDS deducted in October is due by 7 November. TDS deducted in March has an extended deadline of 30 April.