TDS on Payments to Contractors: Section 194C / Section 393 Guide for FY 2026-27
Key Takeaways
- TDS on contractor payments is 1% for individual and HUF contractors, 2% for all other entities (companies, firms, co-operatives, etc.).
- No TDS is required if a single payment does not exceed Rs 30,000 AND the aggregate of all payments to that contractor in the financial year does not exceed Rs 1,00,000.
- Under the Income Tax Act 2025 (effective April 1, 2026), Section 194C is now part of the consolidated Section 393 table-driven TDS framework. Rates and thresholds remain the same. Payment codes in TDS returns have changed.
- Failure to deduct or deposit TDS triggers a 30% disallowance of the payment under Section 40(a)(ia), plus interest at 1% to 1.5% per month.
- Transport contractors who own 10 or fewer goods carriages and furnish their PAN are exempt from TDS deduction.
If your business pays a contractor, a sub-contractor, a transporter, a caterer, or an advertising agency, you are almost certainly required to deduct TDS before releasing the payment. Section 194C of the Income Tax Act 1961 (now consolidated into Section 393 of the Income Tax Act 2025) governs this obligation. Getting it wrong does not just create a compliance notice. It disallows 30% of the entire payment as a business expense.
This guide covers the rates, thresholds, exemptions, and filing requirements as they apply from FY 2026-27 onward.
Looking for expert help with TDS on contractor payments Section 194C rates thresholds India FY 2026-27? The team at Tax Garden helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.
Who Must Deduct TDS Under Section 194C
Any of the following persons making a payment to a resident contractor or sub-contractor must deduct TDS:
- Central Government or State Government (or any local authority)
- Any body established under a Central or State Act, or any Government-owned or controlled company
- Any company (private or public)
- Any partnership firm (including LLPs)
- Any co-operative society
- Any trust, university, or educational institution
- Any individual or HUF whose total sales, gross receipts, or turnover exceeded Rs 1 crore (business) or Rs 50 lakh (profession) in the immediately preceding financial year
The last point is critical for SME owners. If your business turnover crossed Rs 1 crore in FY 2025-26, you are obligated to deduct TDS on contractor payments starting FY 2026-27. If your turnover was below this limit and you were not subject to tax audit, the obligation does not apply to you.
What Qualifies as "Work" Under Section 194C
The section defines "work" broadly. It covers:
| Category | Examples |
|---|---|
| Advertising | Payments to agencies for print, digital, or broadcast advertising; hoarding and signage contracts |
| Broadcasting and telecasting | Payments for airtime, production of content for broadcast |
| Carriage of goods | Payments to transporters, logistics providers, courier companies |
| Carriage of passengers | Payments for chartered transport (bus, car, air charter). Does not include payments to Indian Railways |
| Catering | Payments under a catering contract for events, offices, or institutional catering |
| Manufacturing or supply | Payments for manufacturing a product using raw materials provided by the customer |
| Supply of manpower | Payments for contract staffing, labour supply, housekeeping, and security services |
The definition specifically excludes manufacturing or supplying a product according to the requirement of the customer where the contractor uses their own materials. If a contractor buys raw materials themselves and delivers a finished product, the payment is for a purchase (sale of goods), not "work" under 194C.
This distinction matters. If you order 1,000 printed cartons and the printer uses your paper stock, TDS applies at 194C rates. If the printer sources their own paper, it is a purchase and 194C does not apply.
TDS Rates
| Payee Type | TDS Rate |
|---|---|
| Individual or HUF contractor/sub-contractor | 1% |
| Any other entity (company, firm, AOP, co-operative, trust) | 2% |
| No PAN furnished by contractor | 20% |
These rates apply to the gross payment amount (inclusive of GST, unless the GST component is separately shown in the invoice and the payment is made separately for the GST portion).
If the contractor has not furnished their PAN, the deductor must withhold TDS at 20% under Section 206AA, regardless of the nature of payment or the applicable rate.
Threshold Limits: When TDS Is Not Required
| Threshold | Limit |
|---|---|
| Single payment to one contractor | Rs 30,000 |
| Aggregate of all payments to one contractor in the financial year | Rs 1,00,000 |
TDS is not required if:
- The single payment does not exceed Rs 30,000, AND
- The total of all payments to that contractor during the financial year does not exceed Rs 1,00,000.
Once the aggregate crosses Rs 1,00,000, TDS must be deducted on the entire amount paid or payable from that point forward, including on future payments that individually fall below Rs 30,000.
Worked Example
Your business makes the following payments to a contractor during FY 2026-27:
| Month | Payment | Running Aggregate | TDS Required? |
|---|---|---|---|
| April | Rs 25,000 | Rs 25,000 | No (single < Rs 30,000 and aggregate < Rs 1,00,000) |
| June | Rs 28,000 | Rs 53,000 | No (single < Rs 30,000 and aggregate < Rs 1,00,000) |
| August | Rs 35,000 | Rs 88,000 | Yes (single > Rs 30,000, so TDS on Rs 35,000 at applicable rate) |
| October | Rs 20,000 | Rs 1,08,000 | Yes (aggregate now exceeds Rs 1,00,000, TDS on all future payments regardless of amount) |
| December | Rs 15,000 | Rs 1,23,000 | Yes (aggregate has crossed Rs 1,00,000) |
If the contractor is an individual, TDS at 1% on the August payment would be Rs 350.
Transport Contractor Exemption
A specific exemption exists for payments to transport contractors. No TDS is required on payments made to a contractor engaged in the business of plying, hiring, or leasing goods carriages if:
- The contractor furnishes their PAN to the deductor, AND
- The contractor does not own more than 10 goods carriages at any time during the previous year.
If the transporter owns 11 or more goods carriages, TDS at the normal rate (1% for individual/HUF, 2% for others) applies regardless of PAN. The deductor should obtain a declaration from the transporter regarding the number of goods carriages owned.
Sub-Contractor Coverage
Section 194C covers both direct contracts and sub-contracts. If your business hires a contractor, and that contractor engages a sub-contractor to carry out part of the work, the contractor must deduct TDS when paying the sub-contractor. The TDS obligation flows down every level of the contracting chain.
As the principal payer, your TDS obligation is on the payment to your direct contractor. You do not need to track or deduct TDS on the sub-contractor's payments. That is the contractor's responsibility.
Timing of Deduction and Deposit
TDS must be deducted at the earlier of:
- The date of credit of the amount to the contractor's account (including a "suspense account" or any name given), or
- The date of actual payment.
After deduction, the TDS must be deposited with the government by:
| Deductor | Deposit Due Date |
|---|---|
| Government deductors | Same day as deduction |
| Non-government deductors | 7th of the month following the month in which TDS was deducted |
| March deductions | April 30 of the following year |
Late deposit attracts interest at 1.5% per month (or part of a month) from the date of deduction to the date of actual deposit.
Section 393 Under the Income Tax Act 2025: What Changed
From April 1, 2026, the Income Tax Act 2025 is in force. The old scattered TDS sections (192 to 196D, the entire 194-series) are now consolidated into a table-driven structure under Section 393 (for non-salary TDS) and Section 392 (for salary TDS).
For contractor payments, the practical impact is:
| What Changed | Detail |
|---|---|
| Section number | Old: 194C. New: Section 393 (specific table item/payment code for contractor work) |
| TDS rates | Unchanged. 1% for individual/HUF, 2% for others |
| Thresholds | Unchanged. Rs 30,000 single, Rs 1,00,000 aggregate |
| Return forms | Payment codes in Form 26Q have changed. The old 194C section code must be replaced with the new Section 393 payment code |
| Definition of work | Supply of manpower is now explicitly listed as "work." Previously it was established through judicial interpretation; now it is written into the statute |
The CPC (Centralized Processing Centre) will reject TDS returns that still reference old section codes for payments made on or after April 1, 2026. If your accounting software or TDS utility has not been updated, update it before filing the Q1 FY 2026-27 return.
For the full section-by-section mapping, see our Income Tax Act 2025 section mapping guide.
Consequences of Non-Deduction or Non-Deposit
Getting Section 194C wrong has real financial consequences:
30% Disallowance Under Section 40(a)(ia)
If TDS is not deducted on a payment where it was required, 30% of the expenditure is disallowed while computing business income. For a Rs 10,00,000 payment to a contractor where TDS was skipped, Rs 3,00,000 is added back to your taxable income. At a 25% corporate tax rate, that is Rs 75,000 in additional tax on a payment where the TDS itself would have been Rs 10,000 to Rs 20,000.
The disallowance applies if:
- TDS was not deducted at all, or
- TDS was deducted but not deposited with the government before the due date of filing the income tax return under Section 139(1).
Interest on Late Deduction/Deposit
| Default | Interest Rate |
|---|---|
| TDS not deducted when it should have been | 1% per month (from the date it should have been deducted to the date of actual deduction) |
| TDS deducted but not deposited with the government | 1.5% per month (from the date of deduction to the date of actual deposit) |
Interest is calculated on a per-month basis. Even a one-day delay in a new month counts as a full month.
Penalty Under Section 271C
The Assessing Officer can impose a penalty equal to the amount of TDS that should have been deducted. If TDS of Rs 20,000 should have been deducted, the penalty can be up to Rs 20,000 on top of the TDS amount, interest, and disallowance.
Filing Requirements
| Form | Purpose | Filing Frequency |
|---|---|---|
| Form 26Q | Quarterly TDS return for non-salary payments (covers 194C/393 contractor TDS) | Quarterly |
| Form 16A | TDS certificate issued to the contractor | After each quarter's return is processed |
Quarterly Due Dates for Form 26Q
| Quarter | Period | Due Date |
|---|---|---|
| Q1 | April to June | July 31 |
| Q2 | July to September | October 31 |
| Q3 | October to December | January 31 |
| Q4 | January to March | May 31 |
After filing Form 26Q, the deductor must issue Form 16A (TDS certificate) to each contractor within 15 days of the due date for filing the quarterly return. From FY 2026-27, Form 16A references must use the new Section 393 payment codes.
Common Mistakes to Avoid
-
Confusing 194C with 194J. Payments for professional or technical services (legal, accounting, engineering, consultancy) fall under Section 194J (now Section 393 with a different payment code), not 194C. TDS under 194J is 2% for technical services and 10% for professional services. Using the wrong code triggers notices.
-
Not tracking aggregate payments. Many businesses deduct TDS only when a single invoice crosses Rs 30,000. They miss the Rs 1,00,000 aggregate rule. If you pay a contractor Rs 20,000 per month for 6 months (Rs 1,20,000 aggregate), TDS should have been deducted from the payment that pushed the total past Rs 1,00,000.
-
Deducting TDS on GST component. If the invoice separately shows the base amount and the GST charged on it, TDS is deducted on the base amount only. If the invoice shows a single lump-sum amount without separating GST, TDS is on the full invoice value. Ask contractors to issue invoices with GST breakup clearly shown.
-
Not obtaining PAN from transporters. The transport exemption requires the transporter to furnish their PAN. If they do not, TDS at 20% under Section 206AA applies. Collect PAN and a declaration about the number of goods carriages before making the first payment.
-
Missing the "credit" trigger. TDS is due at the earlier of payment or credit. If your accountant books the contractor's bill in March but payment goes out in April, TDS is due in March (when the credit entry was made).
Practical Checklist for SME Owners
- Confirm whether your FY 2025-26 turnover exceeds Rs 1 crore (business) or Rs 50 lakh (profession). If yes, you must deduct TDS on contractor payments in FY 2026-27.
- Maintain a contractor-wise payment register to track aggregates against the Rs 1,00,000 annual threshold.
- Collect PAN from every contractor before the first payment. For transporters, also collect a declaration on the number of goods carriages.
- Update your TDS software to use Section 393 payment codes for Q1 FY 2026-27 filings.
- Deposit TDS by the 7th of the following month. Set a recurring calendar reminder.
- File Form 26Q quarterly and issue Form 16A within the prescribed timelines.
- Reconcile Form 26AS / AIS of your contractors periodically to confirm deposits are reflecting.
Tax Garden Handles Your TDS Compliance
Tax Garden's TDS compliance plans track every contractor payment, apply the correct TDS rate and threshold, deposit TDS before the monthly deadline, and file Form 26Q on time every quarter. No disallowances, no interest, no penalty notices.
For related topics, see our guides on TDS rate chart for FY 2026-27, TDS return filing with Form 24Q and 26Q, TDS/TCS changes for FY 2026-27, new TDS payment codes under the Income Tax Act 2025, TDS on property purchase (Section 194-IA), and the Section 393 mapping under the new Act.
Frequently Asked Questions
Is TDS applicable on payments to contractors who are not residents of India?
No. Section 194C applies only to payments made to resident contractors. Payments to non-resident contractors are covered under Section 195 (now also part of the Section 393 framework under the new Act), with TDS rates determined by the applicable Double Taxation Avoidance Agreement (DTAA) or the rates specified in the Act, whichever is lower.
Should I deduct TDS on reimbursement of expenses paid to a contractor?
If the reimbursement is part of the same contract and forms part of the total contract value, TDS applies on the full amount including reimbursements. If the expenses are reimbursed separately and are not part of the contract value (backed by actual expense bills), TDS may not apply on the reimbursed portion. This distinction has been litigated, so maintain clear documentation and separate invoicing for reimbursements.
What if TDS is deducted under the wrong section (194C instead of 194J or vice versa)?
Multiple tribunal and high court decisions have held that if TDS has been deducted and deposited, a wrong section reference alone does not trigger the 30% disallowance under Section 40(a)(ia). The disallowance provision targets non-deduction, not wrong-section deduction. However, using the wrong payment code under the new Section 393 framework may lead to processing errors. Correct the code in the next revised return.
Is TDS required on advance payments to contractors?
Yes. TDS is triggered at the earlier of payment or credit. An advance payment to a contractor triggers TDS deduction at the time of the advance, even if the work has not started. The threshold limits (Rs 30,000 single, Rs 1,00,000 aggregate) apply as usual.
My contractor is registered under the GST composition scheme. Does TDS still apply?
Yes. The contractor's GST registration status has no bearing on income tax TDS obligations. Section 194C TDS must be deducted based on income tax rules regardless of whether the contractor is under regular GST, composition, or is unregistered for GST purposes.
Can a contractor request lower TDS deduction?
Yes. A contractor can apply to the Assessing Officer for a lower TDS certificate under Section 197 (corresponding provision under the new Act). Once the certificate is issued, the deductor must apply the rate specified in the certificate instead of the standard 1% or 2%. The contractor must furnish the certificate to the deductor before the payment.
Is TDS applicable on payments to Indian Railways for freight?
No. Payments to Indian Railways are specifically excluded from the scope of Section 194C. The definition of work includes carriage of goods or passengers by any mode of transport other than railways. This exclusion applies only to Indian Railways, not to private railway operators or metro services.
Sources
This guide is verified against Section 194C of the Income Tax Act, 1961 (TDS on contractor payments), Section 393 of the Income Tax Act, 2025 (consolidated non-salary TDS table effective April 1, 2026), Section 40(a)(ia) (30% disallowance for non-deduction), Section 206AA (TDS at 20% for no PAN), Section 201(1A) (interest on late deduction/deposit), and Section 271C (penalty for failure to deduct). Threshold limits of Rs 30,000 (single payment) and Rs 1,00,000 (aggregate) confirmed from CBDT circulars and ClearTax, Tax2win, TaxGuru, and BajajFinserv reference materials as of May 2026. Transport exemption provisions verified against Section 194C(6) and Explanation (iv) to Section 194C. Section 393 consolidation and payment code structure confirmed from ClearTax and TaxGuru coverage of the Income Tax Act 2025. All rates and thresholds should be verified against incometax.gov.in before applying to specific deductions.
