Section 194C is a rule in the Indian Income Tax Act.
It says that if a person or business pays a contractor, they must deduct TDS (Tax Deducted at Source) before making the payment.
In simple words, it means:
“If you hire someone to do a job and pay them, you must first cut a small portion as tax and give it to the government.”
Who Needs to Deduct TDS Under Section 194C?
The following people must deduct TDS when paying contractors:
- Individuals or HUFs (only if their business turnover is over ₹1 crore or professional income is over ₹50 lakh)
- Companies
- Firms
- Government bodies
- Cooperative societies
When Does Section 194C Apply?
It applies when you pay for:
- A contract to do work (like building, cleaning, manufacturing)
- Supply of labor
- Transport services (if vehicle is not owned by transporter)
TDS Rates Under Section 194C
| Type of Payee | TDS Rate |
|---|---|
| Individual or HUF | 1% |
| Company or Firm | 2% |
No TDS if:
- Single payment is less than ₹30,000
- Total payment in a year is less than ₹1 lakh
How to Calculate TDS Under Section 194C
Formula:
TDS = Total Payment × TDS Rate
Example 1:
- You pay a contractor ₹1,00,000
- Contractor is an individual
- TDS = 1% of ₹1,00,000 = ₹1,000
- You pay ₹99,000 to contractor and ₹1,000 to the government as TDS
Example 2:
- You hire a company for ₹2,00,000 work
- TDS = 2% of ₹2,00,000 = ₹4,000
TDS Certificate (Form 16A)
After deducting TDS, you must give the contractor a TDS certificate (Form 16A). This helps them claim credit for the tax paid on their behalf.
Why Section 194C is Important
- Ensures tax is collected early
- Prevents tax evasion
- Keeps track of large contract payments
