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Key Takeaways
- From 1 April 2026, contractor TDS falls under Section 393(1), Table Sl. No. 6(i) of the Income-tax Act, 2025. Section 194C of the 1961 Act covers only sums credited or paid up to 31 March 2026.
- Rates are unchanged: 1% if the contractor is an individual or HUF, 2% for everyone else.
- TDS starts when one bill crosses Rs 30,000 or the year's total to that contractor crosses Rs 1,00,000, and then it is due on the entire amount.
- The "TDS on labour only" rule is narrower than most people think. It applies only to job work using material bought from the customer, not to a normal civil sub-contract.
- No PAN means 20%. Deposit by the 7th of the next month (30 April for March). File Form 140 quarterly and issue Form 131 certificates.
A construction company pays more kinds of vendors than almost any other business: civil sub-contractors, labour and manpower agencies, transporters, equipment hirers, security and housekeeping, architects and structural consultants. Most of the TDS defaults in the sector come from three places: the yearly total for a sub-contractor quietly crossing Rs 1 lakh, a proprietor or firm tagged with the wrong status in the vendor master, and confusion about whether TDS can be cut down to the labour portion of a bill.
This guide sets out the contractor TDS position for construction companies for tax year 2026-27, read from the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. For the general rules on contractor TDS across all industries, see our Section 194C / 393 contractor TDS guide.
The Provision: Section 393(1), Table Sl. No. 6(i)
| Point | Position |
|---|---|
| Provision from 1 April 2026 | Section 393(1), Table Sl. No. 6(i), Income-tax Act, 2025 |
| Old provision | Section 194C, Income-tax Act, 1961 (sums credited or paid up to 31 March 2026) |
| What is covered | "Any sum for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a designated person" |
| "Contract" | Includes a sub-contract (Section 402(10)) |
| When to deduct | At credit to the contractor's account or at payment, whichever is earlier (Section 393(1)(c)) |
| Payee | Resident contractor. Payments to non-residents fall under Section 393(2) instead |
For a full map of the old and new section numbers, see our Section 393 new TDS numbers explainer.
Who Must Deduct: the "Designated Person"
Only a designated person deducts under Sl. No. 6(i). Section 402(11) lists them. The ones that matter in construction are:
- Any company (so every private or public limited construction company, whatever its turnover)
- Any firm, including an LLP
- Central and State Governments, local authorities, statutory corporations, housing and development authorities
- Co-operative societies, trusts and registered societies
- An individual, HUF, AOP or BOI whose sales, gross receipts or turnover in the preceding tax year exceeded Rs 1 crore (business) or Rs 50 lakh (profession)
So a proprietor builder whose turnover crossed Rs 1 crore in FY 2025-26 deducts contractor TDS from 1 April 2026 just like a company does.
The Rates: 1% or 2%
The rate depends only on the legal status of the contractor, not on the size of the job or the type of work.
| Contractor | TDS rate | Source |
|---|---|---|
| Individual (including a sole proprietor trading under a business name) | 1% | s.393(1) Table Sl. 6(i), Col. D(a) |
| Hindu undivided family | 1% | s.393(1) Table Sl. 6(i), Col. D(a) |
| Company, firm, LLP, AOP, co-operative, trust or any other person | 2% | s.393(1) Table Sl. 6(i), Col. D(b) |
| Any contractor without a valid PAN | 20% | s.397(2)(b)(i) |
Where the 1% Rate Goes Wrong
A sub-contractor may run a proprietorship with a trade name, a GSTIN and a letterhead, so the vendor master tags it as a business and the system deducts 2%. Legally it is an individual, and the rate is 1%. The fourth character of the PAN tells you the status: P is an individual, H an HUF, C a company, F a firm or LLP.
Over-deduction is not a default, because the contractor gets credit for the full amount in their return. The dangerous mistake is the reverse: a firm or company tagged as an individual and deducted at 1%. That is short deduction, and the shortfall plus interest lands on you.
Lower or Nil Deduction Certificate
If a sub-contractor produces a certificate from the Assessing Officer under Section 395(1), deduct at the rate and up to the amount stated in it, and only for the period it covers.
The Two Thresholds and the "Entire Amount" Rule
| Test | Limit (Col. D of Sl. 6(i)) |
|---|---|
| Any single sum | More than Rs 30,000 |
| Aggregate of sums to the same contractor in the tax year | More than Rs 1,00,000 |
Section 393(1)(a) says tax is deducted "on the entire amount of such income or sum, where the amount or aggregate of amounts exceeds the threshold limit". The threshold is a trigger, not an exemption slab.
| Scenario | TDS? |
|---|---|
| One bill of Rs 28,000 to a company sub-contractor, nothing else in the year | No |
| One bill of Rs 50,000 to a company sub-contractor | Yes: 2% of Rs 50,000 = Rs 1,000 |
| Eleven bills of Rs 9,000 to one individual (total Rs 99,000) | No |
| Twelfth bill of Rs 9,000 takes the total to Rs 1,08,000 | Yes: 1% of Rs 1,08,000 = Rs 1,080, deducted when the twelfth bill is credited or paid |
With 30 or 40 sub-contractors across several sites, the only reliable control is a vendor-wise, year-to-date register checked before every payment run.
Labour vs Material: What the Act Actually Says
This is where many construction TDS write-ups go wrong.
The Act has one Note under Table Sl. No. 6 of Section 393(1). It says that where a sum is paid for work specified in Section 402(47)(e), TDS is deducted:
- on the invoice value excluding the value of material, if the material value is specified separately in the invoice; or
- on the whole invoice value, if it is not.
Section 402(47)(e) is "manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer" or its associate. In other words, the labour-only rule is for job work on the customer's own material.
| Arrangement | How TDS works |
|---|---|
| You issue your own steel to a fabricator, who invoices material (bought from you) and labour separately | Work under s.402(47)(e). TDS on the invoice value excluding the separately stated material |
| Same job, but the invoice does not show the material value separately | TDS on the whole invoice value |
| Fabricator buys its own steel and supplies fabricated sections to your design | Not "work": s.402(47) excludes manufacturing with material bought from someone other than the customer. Treat it as a purchase of goods (see our purchase of goods TDS guide) |
| Civil sub-contractor builds a block with its own cement, steel and labour under a works contract | Work under Sl. 6(i). The Note does not apply, so TDS is on the sum credited or paid for the work, even if the bill splits material and labour |
| Labour-only contract (you supply all material) | Work. TDS on the full labour bill |
Action point: do not reduce the TDS base on an ordinary civil works bill just because the sub-contractor has itemised material. If you do, you have short-deducted. The split only helps where the material came from you.
GST on the same works contract is a separate question; see our GST on works contracts guide.
What Counts as "Work" on a Construction Site
Section 402(47) says "work" includes:
| Clause | What it covers | Construction examples |
|---|---|---|
| (a) | Advertising | Site hoardings, project ads through an agency |
| (b) | Broadcasting and telecasting | Rarely relevant |
| (c) | Carriage of goods or passengers by any mode other than railways | Trucks carrying sand, cement, steel; staff buses |
| (d) | Catering | Site canteen contracts |
| (e) | Manufacturing or supply to specification using material bought from the customer | Fabrication on your steel, precast on your cement |
| (f) | Supply of manpower to work under your supervision, control or direction (inserted by Finance Act, 2026, from 1 April 2026) | Labour agencies, site helpers, security guards working under your site in-charge |
Because the definition only "includes" these items, ordinary civil, electrical, plumbing, painting, repair and renovation contracts are also contracts for carrying out work.
What Is Not Contractor TDS
- Pure purchase of goods: cement, steel, sand, ready-mix concrete bought from a dealer or manufacturer. Check the purchase-of-goods TDS rules instead.
- Professional or technical fees: architects, structural consultants, project management consultants. These fall under Sl. No. 6(iii), below.
- Hire of plant or machinery without any work element: this is rent under Sl. No. 2(ii) (2% for machinery, plant or equipment, threshold Rs 50,000 for a month or part of a month). See our TDS on rent guide. Where the hirer supplies an operator and does the job (for example, an excavator "with operator" to dig a foundation), read the contract: if you are paying for work done rather than for use of the machine, Sl. 6(i) is the better fit.
Contractor TDS vs Professional Fees TDS
| Contractor: Sl. 6(i) | Professional or technical: Sl. 6(iii) | |
|---|---|---|
| Payer | Designated person | Specified person (s.402(37): anyone other than an individual or HUF, or an individual or HUF above Rs 1 crore business / Rs 50 lakh profession turnover in the preceding year) |
| Rate | 1% individual or HUF, 2% others | 2% for fees for technical services; 10% for professional services |
| Threshold | Rs 30,000 single, Rs 1,00,000 aggregate | Rs 50,000 in the tax year |
| Construction vendors | Civil, electrical, plumbing sub-contractors, labour supply, transport, catering, security | Architects, structural design consultants, legal and accounting fees |
The gap is real money. Rs 10,00,000 paid to an architect's firm as professional fees attracts Rs 1,00,000 (10%). The same Rs 10,00,000 to a company sub-contractor for construction work attracts Rs 20,000 (2%). Classify at the purchase-order stage, by what you are paying for, not by the vendor's letterhead. Our 194C vs 194J vs 194Q vs 194H selector helps with borderline bills.
The Small Transporter Exemption
Construction companies pay transporters constantly. Carriage of goods is "work", so TDS normally applies. Section 393(4), Table Sl. No. 8(a) removes TDS where all of these are met:
| Condition | Requirement |
|---|---|
| Business | The contractor is in the business of plying, hiring or leasing goods carriages |
| Fleet size | Owns ten or fewer goods carriages at any time during the tax year |
| Declaration | Gives you a declaration to that effect along with PAN |
| Your reporting | You furnish the particulars to the prescribed income-tax authority in the prescribed form and time |
Take a fresh declaration each tax year and keep it on file. If the transporter owns more than ten goods carriages, or does not give the declaration and PAN, deduct normally. Details are in our transporter TDS exemption guide.
Individuals Building Their Own House: Sl. No. 6(ii)
This row matters when a client asks you about TDS on what they pay you.
| Sl. 6(i) | Sl. 6(ii) | |
|---|---|---|
| Payer | Designated person (companies, firms, large individuals) | Individual or HUF not required to deduct under Sl. 6(i), 6(iii) or 1(ii) |
| Rate | 1% or 2% | 2% |
| Threshold | Rs 30,000 / Rs 1,00,000 | Rs 50 lakh in the tax year (the row covers contract work, professional fees and commission) |
| Statement | Form 140 quarterly | Form 141 challan-cum-statement |
Separately, Section 393(4), Table Sl. No. 8(b) says no TDS is needed under Sl. 6(i) where an individual or HUF pays exclusively for personal purposes. So a salaried homeowner paying your company Rs 40 lakh to build their house deducts nothing; if the payments exceed Rs 50 lakh in the year, they deduct 2% under Sl. 6(ii).
Due Dates, Statements and Certificates
| Step | Requirement | Source |
|---|---|---|
| Deduct | At credit or payment, whichever is earlier | s.393(1)(c) |
| Deposit | By the 7th of the following month; March deductions by 30 April | Rule 218(2), IT Rules 2026 |
| Quarterly statement | Form 140 (old 26Q) | Rule 219(1) |
| Statement due dates | Q1: 31 July, Q2: 31 October, Q3: 31 January, Q4: 31 May | Rule 219(4) |
| Certificate | Form 131 (old 16A), within 15 days of the statement due date | Rule 215 |
For tax year 2026-27, the October to December 2026 quarter statement is due by 31 January 2027.
Interest, Fees and Penalties
| Default | Consequence | Section (2025 Act) |
|---|---|---|
| TDS not deducted | Assessee in default for the tax | s.398(1) |
| Late deduction | Interest 1% per month or part from when deductible to when deducted | s.398(3)(a)(i) |
| Late deposit after deduction | Interest 1.5% per month or part from deduction to deposit | s.398(3)(a)(ii) |
| Late Form 140 | Fee Rs 200 per day, capped at the TDS amount | s.427 |
| Late or incorrect Form 140 | Penalty Rs 10,000 to Rs 1,00,000; no penalty for delay if tax, fee and interest are paid and the statement is filed within one month of the due date | s.461 |
| Failure to deduct or pay | Penalty up to an amount equal to the tax not deducted or paid | s.448 |
| Expense side | 30% of the sum disallowed if TDS is not deducted, or not paid by the return due date; allowed in the year the tax is paid | s.35(b)(i) |
Interest under Section 398(3) must be paid before the statement is filed. If the contractor has already filed a return including the income and paid the tax, and you get an accountant's certificate in the prescribed form, you are not treated as an assessee in default under Section 398(2), though interest for the delay still applies until that return date.
A Short-Deduction Example
A construction company pays a partnership firm sub-contractor Rs 8,00,000 in the year and deducts at 1% because the firm was tagged as an individual.
- Correct TDS at 2%: Rs 16,000
- Deducted at 1%: Rs 8,000
- Short deduction: Rs 8,000, plus interest at 1% a month from each date the tax was deductible until it is actually deducted
Flip the facts (a proprietor deducted at 2%) and you have over-deducted Rs 8,000. That is not a default; the proprietor claims the credit in their return.
Worked Example: One Month's Payment Run
A private limited construction company pays four vendors in November 2026.
| Vendor | Status (PAN 4th letter) | Bill | Year-to-date before this bill | TDS this month |
|---|---|---|---|---|
| A: civil sub-contractor, builds with own material | Individual (P) | Rs 1,15,000 (Rs 70,000 material + Rs 45,000 labour shown separately) | Nil | 1% of Rs 1,15,000 = Rs 1,150. The material split does not apply, as the material is not yours |
| B: electrical works | Company (C) | Rs 60,000 | Rs 20,000 | 2% of Rs 60,000 = Rs 1,200 (single bill above Rs 30,000) |
| C: plumbing works | Firm (F) | Rs 25,000 | Rs 70,000 | Nil. Bill below Rs 30,000; year total Rs 95,000, still under Rs 1,00,000 |
| D: transporter with 6 trucks, declaration and PAN on file | Individual (P) | Rs 80,000 | Rs 2,10,000 | Nil under s.393(4) Table Sl. 8(a) |
In December, Vendor C bills Rs 20,000 more. The year total becomes Rs 1,15,000, which exceeds Rs 1,00,000, so TDS is due on the entire Rs 1,15,000: 2% = Rs 2,300, deducted from the December payment. Without a year-to-date register, that catch-up is exactly what gets missed.
Total deposited by 7 December 2026 for November: Rs 1,150 + Rs 1,200 = Rs 2,350.
Compliance Checklist for Construction Companies
- Remap ERP and challan templates from 194C to Section 393(1) Table Sl. No. 6(i) for sums credited or paid from 1 April 2026
- Tag every contractor by status from the PAN 4th letter; apply 20% where there is no valid PAN
- Run a year-to-date total per contractor before every payment run
- Use the material-excluded base only for job work on material bought from you
- Classify architects and consultants under Sl. 6(iii), machine hire without work under Sl. 2(ii)
- Collect a fresh transporter declaration with PAN each tax year
- Deposit by the 7th (30 April for March)
- File Form 140 by 31 July, 31 October, 31 January and 31 May
- Issue Form 131 within 15 days of each statement due date
- Reconcile TRACES short-deduction and short-payment defaults every quarter
Where Tax Garden Helps
Construction TDS is a volume problem, not a knowledge problem. Thirty sub-contractors across four sites, a mix of proprietors, firms, companies and transporters, and bills that arrive in fragments make spreadsheets unreliable.
Our TDS return filing service covers:
- Vendor status checks from PAN and correct rate tagging
- A year-to-date register that flags the Rs 1,00,000 crossover before you release the payment
- Review of material-split bills and transporter declarations
- Challans by the 7th, Form 140 statements and Form 131 certificates
- TRACES default resolution and correction statements
Contractors on the other side of the bill can read our income tax guide for contractors and sub-contractors on claiming the TDS credit.
Sources: Income-tax Act, 2025 as amended by the Finance Act, 2026 (incometaxindia.gov.in): sections 35(b)(i), 393(1) Table Sl. Nos. 2, 6 and Note, 393(4) Table Sl. No. 8, 395(1), 397(2), 398, 402(10), (11), (37), (47), 427, 448 and 461. Income-tax Rules, 2026 (incometaxindia.gov.in): Rules 215, 218 and 219. Check incometax.gov.in and TRACES before deducting, as rules may be amended. This article is general information, not professional advice for your specific contracts.
Frequently Asked Questions
What is the TDS rate for contractor payments by a construction company in FY 2026-27?
1% where the contractor is an individual or HUF, and 2% where the contractor is any other person, such as a company, firm or LLP. For payments credited or made on or after 1 April 2026, the provision is Section 393(1), Table Sl. No. 6(i) of the Income-tax Act, 2025, which replaces Section 194C of the 1961 Act.
Is Section 194C still applicable in 2026?
Only for sums credited or paid up to 31 March 2026, which fall under the Income-tax Act, 1961. For sums credited or paid from 1 April 2026, contractor TDS is deducted under Section 393(1), Table Sl. No. 6(i) of the Income-tax Act, 2025. The rates and thresholds did not change.
What is the TDS threshold for contractor payments?
TDS applies where a single sum paid or credited to a contractor exceeds Rs 30,000, or where the aggregate of such sums to the same contractor in the tax year exceeds Rs 1,00,000. Once either limit is crossed, Section 393(1)(a) requires TDS on the entire amount, not only the excess.
Can a construction company deduct TDS only on the labour portion if material is shown separately?
Not for an ordinary civil works contract. The Note to Table Sl. No. 6 of Section 393(1) allows TDS on the invoice value excluding material only for work under Section 402(47)(e), that is, manufacturing or supplying a product to the customer's specification using material bought from that customer or its associate. For a contract where the sub-contractor builds with its own material, the Act gives no such carve-out, so TDS applies on the sum credited or paid for the work.
What is the TDS rate if the contractor does not give a PAN?
20%. Section 397(2)(b)(i) of the Income-tax Act, 2025 requires deduction at the higher of the normal rate, the rates in force, or 20%, where the payee does not furnish a valid PAN.
Is TDS deductible on payments to transporters who carry cement and steel to the site?
Carriage of goods is 'work' under Section 402(47)(c), so TDS normally applies. No TDS is needed if the transporter is in the business of plying, hiring or leasing goods carriages, owns ten or fewer goods carriages at any time in the tax year, and gives you a declaration with PAN, and you report the particulars as prescribed (Section 393(4), Table Sl. No. 8).
Is a labour or manpower supply contract covered by contractor TDS?
Yes. Table Sl. No. 6(i) itself covers 'supply of labour for carrying out any work'. From 1 April 2026, the Finance Act, 2026 also added Section 402(47)(f), which includes supply of manpower to work under the payer's supervision, control or direction within the meaning of 'work'.
What is the due date for depositing contractor TDS?
By the 7th of the following month. Tax deducted in March can be deposited by 30 April (Rule 218(2), Income-tax Rules, 2026).
Which return and certificate replace Form 26Q and Form 16A?
The quarterly statement for TDS on payments to residents is Form 140 (old 26Q), due 31 July, 31 October, 31 January and 31 May (Rule 219). The certificate to the contractor is Form 131 (old 16A), issued within 15 days of the statement due date (Rule 215).
What happens if a construction company does not deduct TDS on a contractor bill?
It becomes an assessee in default under Section 398(1), pays interest at 1% a month until deduction and 1.5% a month from deduction to deposit (Section 398(3)), may face a penalty equal to the tax not deducted (Section 448), and 30% of the payment can be disallowed in its own return under Section 35(b)(i) until the tax is paid.
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