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For a contractor sum first credited or paid on or after 1 April 2026, use the Income Tax Act, 2025: the Income Tax Department identifies the applicable contractor-payment entry as section 393(1), Table Sl. No. 6(i). If the first credit or payment occurred by 31 March 2026, the Income Tax Act, 1961 applies instead. The Department says TDS rates and monetary thresholds were retained, but the official material available here does not state the contractor row’s exact figures; check the operative table and applicable Finance Act before calculating or quoting a rate or limit.
Which Act applies to contractor TDS in FY 2026–27?
The deciding date is the earlier of the sum being credited to the contractor and being paid. The date of the contract, invoice, or later cash transfer does not replace that earlier event for choosing the governing Act.
| First credit or payment | Governing Act | Reference for contractor TDS |
|---|---|---|
| On or before 31 March 2026 | Income Tax Act, 1961 | Section 194C |
| On or after 1 April 2026 | Income Tax Act, 2025 | Section 393(1), Table Sl. No. 6(i) |
For example, if a sum is credited on 31 March 2026 and paid in April, the credit is the earlier event, so the 1961 Act governs that sum. If the sum is first credited or paid on 5 April 2026, the 2025 Act applies. The Department’s transition guidance says the Q1 Tax Year 2026–27 filing for a post-transition contractor payment should quote section 393(1), Table Sl. No. 6(i), not section 194C.
What are the contractor TDS rates and limits?
The Income Tax Department says the TDS rates and monetary thresholds were retained under the 2025 Act. However, the official material available for this guide identifies the relevant contractor entry but does not reproduce its numeric rate or threshold. Do not treat “retained” as the rate or as confirmation that an old figure applies to every case. Before deducting, check the operative section 393(1) table and current Finance Act amendments for the specific payment and parties.
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In particular, confirm the contractor’s legal form, the kind of payment, the applicable threshold basis, PAN status, and whether a valid lower- or nil-deduction certificate applies. The appropriate rate and threshold can depend on those facts, so a single unqualified percentage or limit could misstate the amount due.
How to classify a contractor payment
The contractor-payment category covers carrying out work under a contract, including supply of labour. Classify the actual work and the payer-payee relationship against the statutory table rather than relying only on an invoice label. A professional service is not automatically a contractor payment; where an invoice combines distinct work or services, assess the components and the governing provisions carefully.
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How to handle a contract that spans March and April 2026
Apply the earlier-event rule to each sum, not just to the contract as a whole. A monthly arrangement may therefore have some sums governed by the 1961 Act and later sums governed by the 2025 Act. The Department says a contract does not need to be amended solely because the new Act commenced.
| Example | Earlier event | Act and reference | Practical treatment |
|---|---|---|---|
| March credit; April payment | Credit on 31 March 2026 | 1961 Act; section 194C | Apply the old Act to that sum. Do not deduct again on the April payment if TDS was already deducted when credited. |
| First credit or payment on 5 April 2026 | 5 April 2026 | 2025 Act; section 393(1), Table Sl. No. 6(i) | Use the new reference in the applicable return or filing record. |
| Monthly service contract with March and April credits | Each month’s credit or payment, whichever comes first | March event: 1961 Act. April event: 2025 Act. | Track each sum by its own event date; the contract’s original signing date does not decide the treatment for every instalment. |
How to calculate and report the deduction
- Classify the payment. Determine whether it is work under a contract, including supply of labour, and identify the payer, payee, and payment category needed to select the correct statutory entry.
- Record the triggering date. Compare the credit date with the payment date and use whichever happened first to select the 1961 or 2025 Act framework.
- Verify the figures for the specific case. Check the operative table and Finance Act for the rate and threshold, and confirm the payee’s legal form, PAN, and any valid lower- or nil-deduction certificate before working out TDS.
- Calculate on the applicable base. Once the statutory rate and taxable amount are established, the basic structure is: eligible taxable amount × applicable rate = TDS; amount payable after deduction = eligible amount minus TDS. The actual base and timing depend on the statute and contract/payment facts. The Department’s Form 141 instructions say the tax is calculated from the taxable amount multiplied by the entered rate and rounded to the nearest rupee.
- Use the correct post-transition reference. For sums first credited or paid on or after 1 April 2026, map the contractor entry to section 393(1), Table Sl. No. 6(i), and use the corresponding current portal or return code. For earlier triggering events, use the 1961 Act framework.
- Deposit and furnish the applicable statement. For covered section 393(1) contract payments, Rules 218(3) and 219(5) identify Form 141 as a challan-cum-statement. The rules require deposit and statement within 30 days after the end of the month of deduction. Confirm that the payment is within the categories covered by this route.
- Reconcile the filing record. Check the tax year, amount, deduction and payment dates, section/table reference, and deductee PAN against the underlying records and portal entry.
Certificates, filing errors and interest
A valid lower- or nil-deduction certificate should be checked against its terms and the relevant payment. The Department says a certificate under section 197 of the 1961 Act may remain valid after 1 April 2026 if it was issued for projected Tax Year 2026–27 receivables; confirm that the certificate covers the specific receipts before relying on it.
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Using an old section number for a transaction after 1 April 2026 may cause a processing error and require a correction statement. Check the section/table reference before filing rather than relying on a prior-year template.
The Department states these interest consequences: failure to deduct attracts interest at 1% per month or part of a month from the date tax was deductible until it is deducted; failure to deposit tax after deduction attracts 1.5% per month or part of a month from the deduction date until payment.
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