Section 194C - TDS on Payment to Contractor explained

Think of Section 194C as the government’s way of collecting a small advance on taxes whenever a business pays someone for a job. Whether you’re hiring a catering team for a corporate event, a courier service for deliveries, or a contractor to renovate an office, this section is what governs the tax part of that deal. In the 2025-26 fiscal year, the rules are designed to be quite straightforward: you deduct a small slice (1% or 2%) from the payment and send it to the tax department on the contractor's behalf. It’s not an extra cost for you, but it is a vital responsibility that keeps your business records clean and helps your contractors stay on the right side of the law.

What exactly is Section 194C?

In simple terms, Section 194C requires you to deduct Tax Deducted at Source (TDS) when you pay a resident contractor for any work.

While work sounds like it might just be construction, under the tax law, it’s much broader. It covers everything from advertising your products to transporting your goods. The logic is simple: by taking a tiny bit of tax out at the moment of payment, the government ensures a steady flow of revenue and makes sure the income is tracked properly.

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What counts as Work in 2025-26?

The tax department has a wide definition of what a contract looks like. Here are the most common services that trigger Section 194C:

• Advertising: Paying an agency for your social media ads, billboards, or newspaper spots.
• Catering: Hiring a food service for a factory canteen or a company event.
• Transport: Paying for a truck or courier service to move your goods (but not the railways).
• Broadcasting: Producing content for TV, radio, or digital streaming.
• Customized Goods: If you give a manufacturer the materials and tell them exactly how to make a product for you (Job Work).
• Labor Supply: Hiring an agency to provide security guards, cleaners, or factory workers.

The TDS Rates: How much do you deduct?

The rate of tax depends entirely on who you are paying. For the current 2025-26 year, here is the simple breakdown:

Type of Contractor (The Payee)

TDS Rate (with PAN)

TDS Rate (No PAN)

Individuals or HUFs

1%

20%

Partnerships, Companies, or Others

2%

20%

Transporters (with ≤10 trucks & declaration)

NIL

20%

Pro Tip: Never skip the PAN. If a contractor doesn't give you their PAN card details, the law forces you to deduct a whopping 20%. That’s a huge chunk that can lead to bad blood and financial disputes, so always get the PAN upfront!

When do you actually have to deduct? (The Limits)

You don’t have to worry about TDS for every tiny expense. Section 194C only kicks in when the payments cross certain thresholds:

1. The Single Bill Limit: You pay more than ₹30,000 for one specific job or invoice.
2. The Annual Total Limit: You pay the same contractor more than ₹1,00,000 in total throughout the financial year (April to March).

Example: * If you pay a printer ₹20,000 in June, you don't deduct TDS.

• If you pay them another ₹20,000 in August, still nothing.
• But once your total payments to them hit ₹1,00,001 in December, you must deduct TDS on the entire ₹1,00,001 not just the extra amount!

Who is responsible for deducting the tax?

Not everyone has to be a tax collector. You are only required to deduct TDS under Section 194C if you are:

• A Company, Partnership Firm, or Trust.
• The Central or State Government.
• A Local Authority or Cooperative Society.
• Individuals or HUFs: Only if you are in business and your turnover was above ₹1 Crore (or ₹50 Lakh for professionals) in the previous year.

Personal Task Exemption: Even if you run a huge company, if you hire a contractor to paint your personal home, you do not need to deduct TDS under this section. It’s strictly for business-related work.

The Compliance Checklist: Deadlines & Forms

To keep things running smoothly, you need to follow this cycle:

Step

Action

The Deadline

1. Deduct

Deduct the 1% or 2% from the bill.

When you pay or credit them (whichever is earlier).

2. Deposit

Pay the tax to the government.

By the 7th of the next month (March tax by April 30th).

3. Report

File your quarterly TDS return (Form 26Q).

End of the month following the quarter (July, Oct, Jan, May).

4. Certificate

Give the contractor Form 16A.

Within 15 days of filing your return.

What happens if you miss a step?

The tax department is quite strict about these rules. If you forget to deduct or deposit, the costs can add up:

• Late Deduction Interest: 1% per month.
• Late Deposit Interest: 1.5% per month.
• Late Return Fee (Section 234E): ₹200 per day for every day the return is late.
• The 30% Hit: If you don't deduct TDS, the government won't allow you to claim 30% of that expense as a business deduction. This means you end up paying more income tax on your own profits!

Conclusion

At the end of the day, Section 194C is just about being organized. For 2025-26, the rates haven't changed, making it easy to build into your accounting routine. Collect the PAN, keep an eye on the ₹30k/₹1L limits, and make sure your payments to the government are on time. Doing this doesn't just keep you safe from penalties it builds a professional relationship with your contractors, as they’ll be able to see their tax credits in their own records (Form 26AS) without any hassle.