TDS on Contractor Payments: Section 194C
Once payments to one payee cross ₹30,000 in a financial year, 1% or 2% comes off before the money moves. Here's the whole rule, with a calculator.
The rate right now · TY 2026-27
| Rates | 1% Payment to individual / HUF contractor 2% Payment to any other contractor (firm, company) |
|---|---|
| Annual threshold | ₹30,000 per payee, per financial year₹30,000 per single contract; ₹1,00,000 aggregate per year. |
| Effective from | 1 April 2025 |
| Who deducts | Any specified person paying a resident contractor for carrying out work, including supply of labour. |
| Who's covered | Contractors and sub-contractors: construction, transport, catering, advertising, job-work. |
| Under the Act 2025 | Contractor-payment TDS now lives in the Section 393 table of the 2025 Act with its own numeric payment code. Rate and threshold unchanged. |
Rates per Section 194C, Income-tax Act 1961, as amended by the Finance Act, 2025 · verified 1 July 2026
Work out the TDS on a payment
TDS to deduct at 1%
₹1,200
The split
| Payment for the year | ₹1,20,000 |
| TDS @ 1% | − ₹1,200 |
| Net receipt | ₹1,18,800 |
Once the year's total crosses the threshold, TDS applies to the whole amount, not just the part above it. Without the payee's PAN, deduction jumps to 20% under the higher-of rule. ₹30,000 per single contract; ₹1,00,000 aggregate per year. Runs in your browser; nothing is stored.
Rate history
| Period | Rate | Threshold | Set by |
|---|---|---|---|
| From 1 Apr 2025Current | 1%Payment to individual / HUF contractor | ₹30,000 | Finance Act, 2025† |
| From 1 Apr 2025Current | 2%Payment to any other contractor (firm, company) | ₹30,000 | Finance Act, 2025† |
Effective-dated from Finance Acts as notified in the Gazette of India · sources below
How Section 194C TDS works
TDS flips the collection point. Instead of the person earning the money paying tax months later, the payer holds back 1% or 2% at the moment of payment and deposits it with the government against the payee's PAN. The payee sees that credit in their Form 26AS and settles only the balance when they file. Here's how that plays out under Section 194C:
- Who deducts. Any specified person paying a resident contractor for carrying out work, including supply of labour.
- Who's on the receiving end. Contractors and sub-contractors: construction, transport, catering, advertising, job-work.
- When it triggers. At credit or payment, whichever comes first. Once the year's running total for a payee crosses ₹30,000, tax comes off the whole amount, not just the part above the line.
- Deposit by the 7th. Tax deducted in a month must reach the government by the 7th of the next month, through challan ITNS-281. March deductions get until 30 April.
- Report and certify. Non-salary deductions go into the quarterly Form 26Q return, and the payee gets a Form 16A certificate to match against their Form 26AS and AIS.
The section runs both ways. If you're the one being paid, this is why your money arrives 1% or 2% light. The deduction isn't extra tax, it's an advance against your final bill. Check your Form 26AS each quarter and claim the credit in your return; it's your money, already sitting with the government.
Where Section 194C trips people up
- Transporters owning ≤10 goods carriages who furnish a declaration with PAN: no TDS.
- Pure supply of materials on a purchase basis is not 'work', so no 194C TDS.
- No PAN → 20% under the higher-of rule.
Sources
- Finance Act, 2025†Official text (CBDT) · archived copy
† pending CA verification against the Finance Act 2025 text.
Section 194C: questions people actually ask
What is the 194C TDS rate?
1% when the payee is an individual or HUF, 2% for any other contractor (firms, companies). Triggered above ₹30,000 per contract or ₹1,00,000 aggregate in a year.
Where did Section 194C go in the Income-tax Act 2025?
Into the consolidated TDS table under Section 393, identified by a numeric payment code. The 1%/2% rates carry over unchanged.