Section 194C requires TDS on payments to a contractor or sub-contractor at 1% where the payee is an individual or HUF, and 2% for other payees. TDS applies if a single payment exceeds Rs.30,000 or the aggregate in a year exceeds Rs.1,00,000.
Rates and thresholds
| Payee | Rate |
|---|---|
| Individual / HUF | 1% |
| Any other person (company, firm, etc.) | 2% |
TDS triggers if a single payment exceeds Rs.30,000 or the aggregate in the year exceeds Rs.1,00,000. Once either limit is crossed, TDS applies on all qualifying payments.
What 194C covers
194C applies to a 'work' contract — advertising, broadcasting, carriage of goods/passengers, catering, and manufacturing/supplying a product to a customer's specification using the customer's material. Pure supply of goods, and manufacture using the contractor's own material as a sale, are outside 194C.
Transporter exemption
No TDS under 194C is required on payment to a goods-transport operator owning up to 10 goods carriages who furnishes a declaration with PAN. Keep the declaration on file to support non-deduction.
194C vs 194J
- Routine contractual/annual maintenance work → usually 194C.
- Services requiring professional/technical expertise → 194J.
- Misclassification (deducting 1% instead of 10%) is a common audit issue.
- Non-deduction triggers 30% disallowance under Section 40(a)(ia).
The two-threshold test, worked through
Section 194C triggers on the earlier of two limits: Rs.30,000 per single payment/credit, or Rs.1,00,000 aggregate in the year. Rates: 1% where the payee is an individual or HUF, 2% for others.
| Scenario | TDS? | Computation |
|---|---|---|
| One invoice of Rs.28,000, nothing else in the year | No | Below both limits |
| One invoice of Rs.45,000 (partnership firm payee) | Yes | 45,000 × 2% = Rs.900 |
| Four invoices of Rs.28,000 each (Rs.1,12,000 aggregate) | Yes, from the invoice crossing Rs.1,00,000 | Deduct on the full Rs.1,12,000 |
| Transporter with ≤10 carriages furnishing declaration + PAN | No | 194C(6) exemption |
What is (and is not) "work"
"Work" covers advertising, broadcasting, carriage of goods and passengers (other than railways), catering, and job-work style manufacturing — supplying a product made to customer specification using material purchased from that customer. Manufacture using material purchased from third parties is a sale, outside 194C entirely. Where the customer-supplied-material test is met, TDS applies on the invoice value excluding the material value if separately stated.
- 194C vs 194J: routine outsourced execution (housekeeping, security, logistics) is 194C; engagements requiring professional/technical expertise are 194J. The wrong choice in either direction is a default for the differential.
- Composite AMCs: pure maintenance with spare parts is generally 194C; specialised technical support tips into 194J — examine the dominant character.
- Advertising chain: payment to the ad agency is 194C at 1%/2%; the agency's payment to media is also 194C. Direct payment to print/TV media for space/time is not "work" per the CBDT's long-standing position.
Compliance mechanics and failure cost
Deduct at credit or payment, whichever is earlier — including provisions made at year-end where the payee is identifiable. Deposit by the 7th of the next month (30 April for March), report in 26Q quarterly, issue Form 16A. Failure costs: interest at 1%/1.5% per month under 201(1A), 30% expense disallowance under 40(a)(ia), and a penalty equal to the tax under 271C in egregious cases. The Form 26A route (payee has paid tax on the income) cures the principal, not the interest. From 1 April 2026, 194C operates as part of Section 393 of the Income-tax Act 2025 — same rates, same thresholds. Confirm figures at incometax.gov.in.
Year-end provisions, PO hygiene and survey exposure
March provisioning is where 194C discipline is tested. Where work is complete and the contractor identifiable, TDS is due on the provision entry itself — "no invoice received" is not a defence, because credit to any account (including a provision for expenses account) triggers the section. Where the payee is genuinely unidentifiable (a pooled estimate), document that fact; deduct in the month the invoice crystallises.
- Force TDS-section capture on every purchase order: a PO raised as "supply of goods" that is actually job-work with customer material is the classic survey finding.
- Reconcile the 26Q with the expense ledgers quarterly — the gap report (expenses in 194C-mapped GLs with no corresponding deduction) is exactly what the TDS officer will run in a spot verification.
- Sub-contractor chains: the main contractor deducts on payments to sub-contractors as well — both legs of the chain carry independent 194C obligations.
- GTA payments: carriage of goods is 194C, but collect the 194C(6) declaration (≤10 goods carriages + PAN) from small transporters each year; without it, deduct — and note the declaration must be contemporaneous, not reconstructed at assessment.
Key takeaways
- 194C: 1% (individual/HUF), 2% (others).
- Threshold: Rs.30,000 single or Rs.1,00,000 aggregate.
- Small transporters with PAN declaration are exempt.
- Distinguish 194C work from 194J professional/technical services.