TDS on Contractor Payments under Section 194C – Individual vs. Company Rates (FY 2025-26)

Introduction

Tax Deducted at Source (TDS) is an important compliance mechanism under the Income-tax Act, 1961. Businesses making payments to contractors and subcontractors are required to deduct TDS under Section 194C, subject to prescribed conditions and threshold limits.

A common area of confusion is whether the TDS rate differs depending on whether the contractor is an individual, HUF, partnership firm, LLP, or company. This article explains the applicable TDS rates, threshold limits, due dates, exemptions, and compliance requirements under Section 194C.

What is Section 194C?

Section 194C of the Income-tax Act requires specified persons to deduct TDS while making payments to a resident contractor or subcontractor for carrying out any work, including the supply of labour.

The objective is to ensure timely collection of taxes on payments made under works contracts.

Who is Required to Deduct TDS under Section 194C?

The following persons are liable to deduct TDS:

• Central Government
• State Government
• Local Authorities
• Companies
• Partnership Firms
• Limited Liability Partnerships (LLPs)
• Trusts
• Co-operative Societies
• Statutory Corporations
• Universities
• Individuals and HUFs whose business or profession was liable to tax audit under Section 44AB in the immediately preceding financial year

Individuals and HUFs not covered under tax audit provisions are generally not required to deduct TDS under this section.

Payments Covered under Section 194C

TDS is applicable on payments made for:

• Construction contracts
• Civil work contracts
• Labour contracts
• Fabrication work
• Repair and maintenance contracts
• Advertising contracts
• Catering services
• Transportation contracts (subject to specific exemptions)
• Manufacturing using material supplied by the customer
• Supply of manpower

TDS Rates under Section 194C

The TDS rate depends upon the legal status of the contractor.

Category of Contractor	TDS Rate
Individual	1%
Hindu Undivided Family (HUF)	1%
Partnership Firm	2%
LLP	2%
Private Limited Company	2%
Public Limited Company	2%
Trust / Society / AOP	2%

Summary

• Individual & HUF Contractors: 1% TDS
• Companies, Firms, LLPs & Other Entities: 2% TDS

Threshold Limit for TDS Deduction

TDS is required only if:

• A single payment exceeds ₹30,000, or
• Aggregate payments to the same contractor exceed ₹1,00,000 during the financial year.

If both conditions are not met, no TDS is required.

When Should TDS be Deducted?

TDS must be deducted at the earlier of:

• Credit of the amount to the contractor’s account, or
• Actual payment (whether by cheque, bank transfer, cash, or any other mode).

Due Date for Depositing TDS

The deducted TDS should generally be deposited:

• On or before the 7th day of the following month
• For deductions made in March, on or before 30th April

TDS Return Filing

The deductor must:

• File Quarterly TDS Return in Form 26Q
• Issue Form 16A to the contractor within the prescribed timeline.

Examples

Example 1 – Payment to an Individual Contractor

ABC Pvt. Ltd. pays ₹5,00,000 to Mr. Raj (an individual contractor).

Particulars	Amount
Contract Value	₹5,00,000
TDS Rate	1%
TDS Amount	₹5,000
Net Payment	₹4,95,000

Example 2 – Payment to a Company

XYZ Ltd. pays ₹5,00,000 to Buildtech Construction Pvt. Ltd.

Particulars	Amount
Contract Value	₹5,00,000
TDS Rate	2%
TDS Amount	₹10,000
Net Payment	₹4,90,000

Higher TDS in Certain Cases

A higher rate of TDS may apply if:

• The contractor does not furnish a valid PAN.
• Other applicable provisions of the Income-tax Act require deduction at a higher rate.

Businesses should verify the contractor’s PAN and compliance status before making payments.

Important Exemptions

Certain payments may not attract TDS under Section 194C, including:

• Payments below the prescribed threshold limits.
• Certain payments to transport contractors who satisfy the prescribed conditions and furnish the required declaration and PAN.
• Payments that are otherwise exempt under the Income-tax Act.

Consequences of Non-Compliance

Failure to comply with Section 194C may result in:

• Interest for late deduction or late payment of TDS.
• Late filing fees for delayed TDS returns.
• Penalty under the Income-tax Act.
• Disallowance of eligible expenditure in specified circumstances.
• Prosecution in serious cases of default.

Timely compliance helps businesses avoid unnecessary litigation and financial exposure.

Best Practices for Businesses

To ensure proper compliance:

• Verify the legal status of every contractor.
• Obtain PAN and KYC documents before making payments.
• Monitor the annual payment threshold.
• Deduct TDS at the correct rate.
• Deposit TDS within the due dates.
• File quarterly TDS returns accurately.
• Issue Form 16A within the prescribed timeline.
• Maintain complete records of contracts, invoices, and TDS deductions.

Conclusion

Section 194C is one of the most commonly applicable TDS provisions for businesses making payments to contractors. While the compliance framework is straightforward, applying the correct TDS rate based on the contractor’s legal status is essential.

As a simple rule:

• Individual and HUF Contractors: 1% TDS
• Partnership Firms, LLPs, Companies, Trusts, and Other Entities: 2% TDS

Businesses should also monitor threshold limits, comply with deposit and return filing deadlines, and maintain proper documentation to avoid interest, penalties, and disputes with the tax authorities.