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Section 194C of income tax act – TDS rate on Contractor

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February 11, 2022

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14 mins read

Section 194C of income tax act – TDS rate on Contractor

Section 194C of Income Tax Act Provision

  • TDS shall be deducted under section 194C of Income tax act in case of payment by any person (i.e. Resident or Non-Resident) to a resident (i.e. contractor) for carrying out any work, in pursuance of contract between the contractor and contractee.
Who can be Payor? Resident/Non Resident
Who can be Payee? Resident
What is the Rate of Tax deduction 1% or 2%
What is the timing of deduction of TDS Date of credit or Date of payment whichever is earlier
What is the exemption limit Not exceeding Rs.30,000 individual transaction / Rs.100,000 on aggregate basis (Enroll for our TDS Course)
Whether Issue of Form 16A is compulsory? Compulsory
What is the due date for issue of Form 16A With in 15 days of filing of TDS return
AO’s Certificate under section 197 Can be obtained
Applicability of Section 206AA Yes
Applicability of Section 285BB (Annual Information system) Applicable
Aopplicability on person not covered under section 44AB Not applicable
Which TDS Return is applicable under Section 194C 26Q
Applicability on payments made in the nature of personal use Not applicable
Applicability in case of Courier charges Applicable (Enroll for our TDS Course)
Applicability in case of Advertising model Not applicable
Applicability on Oral Contracts Applicable
Applicability on piece rated contract Applicable
Applicability on courier services Applicable (Enroll for our TDS Course)
Applicability on warehousing contracts Applicable
Applicability on cold storage charges Applicable
Applicability on AMC Charges Applicable
Applicability on Bank Charges Not applicable
Applicability on payments made to Advertising agency Applicable
Applicability on sponsorship Applicable
Applicability on clearing and forwarding agents Applicable
Applicability on contract for purchase of materials Not applicable
Applicability in case of hoarding Applicable
Applicability of ancillary services provided by Hotel Not applicable
Applicability on landing and parking charges paid by Airlines Applicable

Timing of Deduction of Tax u/s 194-C

  • TDS shall be deducted at the time of
    • Credit of such sum to the account of payee; or
    • Payment in cash or by way of issue of cheque/ draft/ any other mode
      Whichever is earlier
  • Where such sum is credited to any account by whatever name called, in the books of the account of the person liable to pay such sum, shall be deemed to be credit of such sum to the account of the payee.

Rates of TDS under section 194C of Income Tax Act

  • TDS shall be deducted @ following rates u/s 194C depending on whether the payee is an Individual/ HUF or other than Individual/ HUF :
    • Credit/ Payment is made to an Individual/ HUF – 1%
    • Credit/Payment is made to a person other than an Individual/ HUF – 2%

TDS on contractor limit and exemption from tax deduction under section 194C of Income tax Act ?

  • Where the amount credited/ paid does not exceed Rs. 30,000 in single transaction, in other words TDS on contractor limit is Rs. 30,000.

Further, no TDS shall be deducted, where the amount or aggregate of amounts credited/ paid during the FY does not exceed Rs. 1,00,000.

  • Where consideration paid by an individual or HUF is on account of personal purpose.
  • Payment made to Non-Resident contractor shall not attract TDS under section 194C of Income tax act. However, it shall be governed by provisions of Section 195 of income tax act.

On which value, TDS shall be deducted ?

  • TDS shall be deducted on invoice value excluding the value of material (if such value is mentioned separately in the invoice).

TDS shall be deducted on whole of the invoice value (if value of material is not mentioned separately in the invoice).

Higher rate of TDS under section 194C of Income Tax Act

  • TDS @ 20% shall be deducted where no PAN has been furnished by contractor.

No Surcharge and HEC on TDS

  • No Surcharge and HEC shall be added to the above mentioned rates.

Multiple Choice Questions  – TDS rate on Contractors – Section 194C of Income Tax Act

1. Section 194C provides for deduction of tax at source on the payments made to ____________ contractors/ sub-contractors.

a. Resident
b. Non-resident
c. Both resident and non-resident
d. None of the above

Answer

Answer: a. Resident


 

2. Who would be liable to deduct tax at source on payments made to resident contractor u/s 194C ?

a. Individual
b. HUF
c. Individual or HUF liable to tax audit in immediately preceding FY
d. None of the above

Answer

Answer: c. Individual or HUF liable to tax audit in immediately preceding FY


 

3. Chanchal Pvt. Ltd. has to make payment of Rs. 40,000 per month to Mr. Munna for operation and maintenance of factory premises. At what rate, TDS would be deducted under section 194C of Income tax act?

a. 1%
b. 2%
c. 10%
d. Nil

Answer

Answer: a. 1%


 

4. Neetu Pvt. Ltd. has to make payment of Rs. 70,000 per month to Geeta India Ltd. for operation and maintenance of factory premises. At what rate, TDS would be deducted under section 194C of Income tax act?

a. 1%
b. 2%
c. 10%
d. Nil

Answer

Answer: b. 2%


 

5. Contract ________ sub-contract for the purpose of deduction of TDS under section 194C of Income tax act.

a. Includes
b. Excludes

Answer

Answer: a. Includes


 

MCQs  – How to deduct TDS rate on Contractor with Example

6. Hemant Limited, manufactured certain toy cars for Abhishek Private Limited, for which the necessary material was provided by Abhishek Private Limited. The service charges for such work were Rs. 1,00,000, which was included in the gross amount of material supplied, worth Rs. 6,00,000. In such a case, the TDS deducted would be _________

a. 1,000
b. 7,000
c. 2,000
d. 14,000

Answer

Answer: d. 14,000


 

7. Hoshiyar Limited, manufactured certain toy cars for Bipasha Private Limited, for which the necessary material was provided by Bipasha Private Limited. The service charges for such work were Rs. 50,000, which was separately mentioned alongwith the gross amount of material supplied, worth Rs. 4,50,000. In such a case, the TDS deducted would be ___________

a. 1,000
b. 10,000
c. 500
d. 5,000

Answer

Answer: a. 1,000


 

TDS Sections

 

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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