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In India, TDS on a contractor payment is required when the payer is a specified person (under the old law) or the corresponding designated person under the 2025 Act, the payment is for covered work under a contract, and the statutory threshold is met. The deduction is made at the earlier of crediting the contractor’s account or making payment, even if the credit goes to a suspense account. For events up to 31 March 2026, use section 194C of the Income-tax Act, 1961. For a credit or payment on or after 1 April 2026, use section 393(1), table serial 6(i), of the Income-tax Act, 2025. This explanation reflects the law and official guidance available on 13 October 2026; check the current Income Tax Department rules or an Indian tax professional for a transaction with unusual facts.
The short answer
Section 194C does not apply only to companies. Government bodies, local authorities, statutory corporations, companies, co-operative societies, specified housing or planning authorities, registered societies, trusts, universities, foreign entities and associations, and firms can be required to deduct. An individual, Hindu undivided family (HUF), association of persons (AOP) or body of individuals (BOI) is also within the specified-person definition when its preceding-year business turnover exceeded ₹1 crore or its professional receipts exceeded ₹50 lakh.
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For a covered work contract with a resident contractor, the standard rate is 1% when the contractor is an individual or HUF and 2% for any other contractor. No deduction is required on an individual payment of ₹30,000 or less, but the exemption cannot be used to avoid withholding once the aggregate paid or credited to that contractor in the financial year exceeds ₹1,00,000. These payment thresholds are separate from the payer-turnover tests that determine whether an individual or HUF is a specified person.
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One free scan finds every outdated or missing driver and matches the right update for your exact hardware.Free scan · exact hardware matchThe governing statute depends on the date of the earlier credit or payment. A transaction whose earlier event occurred on or before 31 March 2026 remains under the 1961 Act. If the earlier event occurred on or after 1 April 2026, the 2025 Act applies. The Income Tax Department’s Tax Payments FAQ states: “TDS obligations shall continue to be governed by the Act applicable to the financial year in which the sum is paid or credited.”
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A decision table for the correct rule
| Question | What to determine | Why it matters |
|---|---|---|
| When was the earlier event? | Credit or payment on or before 31 March 2026, or on or after 1 April 2026 | It selects the 1961 Act or the 2025 Act |
| Who is the payer? | Specified/designated person under the main contractor rule, or an Individual/HUF using the separate rule | The payer category can change the applicable provision and reporting form |
| What is being paid for? | Work under a contract, professional or technical services, or commission/brokerage | Different provisions and table items can apply |
| Who is the contractor? | Resident individual/HUF or another resident entity | The ordinary work-contract rate is 1% or 2% |
| Has a threshold been crossed? | ₹30,000 for one sum and ₹1,00,000 for the financial-year aggregate under the ordinary work-contract rule | It determines whether withholding is triggered |
| Does an exception apply? | Exclusive personal use, or a qualifying goods-carriage declaration with PAN | A valid exception can remove the ordinary obligation, but only if all conditions are met |
Who is a “specified person” under section 194C?
For events governed by the Income-tax Act, 1961, section 194C applies when a resident contractor carries out work under a contract with a specified person. The category is deliberately broad.
Institutional and business payers
- The Central Government, a State Government, or a local authority.
- A statutory corporation.
- A company, including a company incorporated outside India where the statutory definition covers it.
- A co-operative society.
- An authority constituted in India by or under law and involved in housing, planning or developing cities, towns or villages, or in carrying out or planning such activities.
- A registered society established under a Central, State or Provincial Act, or a society registered under the Societies Registration Act, 1860, or a corresponding law.
- A trust.
- A university or other educational institution established or recognised under the relevant law.
- A foreign government or foreign enterprise, or an association or body established outside India.
- A firm.
Individuals, HUFs, AOPs and BOIs
An individual, HUF, AOP or BOI that does not already fall into one of those institutional categories becomes a specified person when, in the immediately preceding financial year, business turnover exceeded ₹1 crore or professional receipts exceeded ₹50 lakh. The test concerns the payer’s status, not the contractor’s invoice and not the amount of the current payment.
Consequently, “only companies deduct TDS” is wrong, but “every individual must deduct TDS” is also wrong. A small individual paying a contractor for a business below the statutory turnover test is not brought into section 194C merely because the invoice uses the word contractor.
When exactly must the deduction be made?
The statutory trigger is the earlier of:
- crediting the sum to the contractor’s account; or
- paying the sum by any mode.
Section 194C expressly treats a credit to a suspense account as a credit to the contractor. A payer cannot postpone withholding simply by placing an approved invoice in a suspense, provision or “contractor payable” account instead of the contractor’s named ledger.
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For example, if a qualifying invoice is credited on 25 March and paid on 10 April, the credit on 25 March is the earlier event. The deduction belongs to the March event and the 1961 Act governs it. If no credit is made until 5 April and the payment is also made on 5 April, the 2025 Act governs the transaction.
“At the time of credit of such sum to the account of the contractor or at the time of payment thereof … whichever is earlier.”
This timing rule answers the practical question “bill booked or bill paid?”: use whichever happened first, not whichever date is more convenient for the payer.
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What counts as “work” under the old section 194C rule?
The provision covers sums paid to a resident contractor for carrying out work, including the supply of labour, under a contract with a specified person. A contract includes a subcontract, so a principal contractor may have a section 194C obligation on payments to a resident subcontractor even when the principal’s customer is the party that awarded the main contract.
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Examples of statutory work categories include:
- Advertising.
- Broadcasting or telecasting, including production of programmes for broadcasting or telecasting.
- Carriage of goods or passengers by any mode other than rail.
- Catering.
- Manufacturing or supplying a product to a customer’s specification when materials are purchased from that customer or its associate, subject to the statutory exclusions.
Not every purchase of goods is work. A normal sale in which the seller supplies its own goods is not automatically converted into a work contract because the buyer calls the seller a contractor. Examine the written arrangement, who supplies materials, the nature of the deliverable and whether the payment is actually for a service or labour arrangement.
Rates and thresholds for ordinary work-contract payments
| Contractor’s status | Rate under section 194C and section 393(1), table serial 6(i) | Individual-sum threshold | Financial-year aggregate threshold |
|---|---|---|---|
| Individual or HUF | 1% | No deduction where that individual sum does not exceed ₹30,000 | Withholding is required when the aggregate exceeds ₹1,00,000 |
| Any other contractor | 2% | No deduction where that individual sum does not exceed ₹30,000 | Withholding is required when the aggregate exceeds ₹1,00,000 |
The ₹30,000 and ₹1,00,000 figures apply to the ordinary covered work-contract rule. They do not determine whether an individual or HUF payer is a specified person; that separate classification uses ₹1 crore of business turnover or ₹50 lakh of professional receipts in the preceding year.
What changed on 1 April 2026?
Events through 31 March 2026
If the earlier credit or payment occurred on or before 31 March 2026, cite and apply section 194C of the Income-tax Act, 1961. The old section contains the specified-person definition, the earlier-of-credit-or-payment rule, the suspense-account treatment, rates and thresholds, and the relevant exceptions.
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Events from 1 April 2026
For a sum credited or paid on or after 1 April 2026, the Income-tax Act, 2025 applies. The main work-contract rule is section 393(1), table serial 6(i). It retains the 1% rate for an individual or HUF contractor, the 2% rate for another contractor, and the ₹30,000 per-sum and ₹1,00,000 aggregate thresholds.
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The Income Tax Department has said that substantive rates and thresholds were retained, but statutory references and reporting routes changed. Using section 194C as the citation for a post-1 April 2026 event can cause return-processing validation errors. A March credit followed by an April payment does not create a second deduction under the new Act for the same sum; the earlier March event determines the governing law.
The separate Individual/HUF route: table serial 6(ii)
Section 393 also contains a separate route at table serial 6(ii). An Individual or HUF payer that is not already required to deduct under the specified provisions may have a 2% obligation for covered work contracts, professional fees, or commission or brokerage when the relevant threshold reaches ₹50 lakh. This is not the same rule as table serial 6(i). Confirm both the payer’s status and the character of the payment before using it.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Exceptions that require careful checking
Payment for an individual or HUF’s exclusively personal purposes
An individual or HUF is not liable to deduct under section 194C when the payment is exclusively for personal purposes. The word “exclusively” matters. A mixed personal and business arrangement should not be treated as exempt without examining the facts and the applicable provision.
Goods-carriage contractors with ten or fewer vehicles
A contractor in the business of plying, hiring or leasing goods carriages may qualify for an exception for the relevant sums when the contractor owns ten or fewer goods carriages at any time during the previous year and furnishes the required declaration together with the contractor’s PAN. Obtain and retain the declaration and PAN before treating the payment as outside withholding; do not rely on an oral statement or an invoice note alone.
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Do not confuse contractor work with other services
A recipient may be described commercially as a contractor while the legal payment is for professional services, technical services, commission or brokerage, or a payment to a non-resident. The 1% and 2% figures in the ordinary work-contract table are not universal rates. The correct rate can depend on the transaction provision, the payee’s residence, PAN availability and a valid lower- or nil-deduction certificate.
Classify the underlying service first. A consultancy agreement, engineering advice, legal work, software development or commission arrangement may follow a different table item or provision even if the supplier sends a “contractor fee” invoice.
Practical workflow for a payer
- Identify the earlier event. Record the date on which the amount was credited, including a suspense-account credit, and the date on which it was paid. Use the earlier date.
- Select the governing Act. Use section 194C for an earlier event on or before 31 March 2026. Use section 393(1), table serial 6(i), for an earlier event on or after 1 April 2026.
- Classify the payer. Check whether the payer is an institutional specified/designated person. If it is an individual, HUF, AOP or BOI, test the preceding-year ₹1 crore business-turnover or ₹50 lakh professional-receipts condition where relevant.
- Classify the contract and service. Establish that the arrangement is covered work, including any subcontract, rather than a sale of goods or a professional, technical or commission payment governed elsewhere.
- Confirm the contractor. Verify that the payee is resident for the ordinary rule and determine whether the contractor is an individual/HUF or another entity.
- Apply the thresholds. Track each sum and the financial-year aggregate. Do not split invoices or payments to stay below a threshold when the statutory aggregate has crossed ₹1,00,000.
- Check exceptions and certificates. Review personal-purpose status, the goods-carriage declaration and PAN, and any valid lower- or nil-deduction certificate.
- Deduct and document. Withhold at the applicable rate at the earlier event, record the calculation, and preserve the contract, invoice, ledger entry, PAN and supporting declarations.
- Deposit and report. Use the deposit deadline and statement route that match the Act, payer category and provision.
Deposit deadlines and reporting routes
For a non-government deductor under the 1961 Act, the general deadline for depositing tax is the seventh day of the month following the month of deduction. Tax deducted in March is generally due by 30 April. The portal lists exceptions, including section 194M challan-cum-statement cases, where payment is due within 30 days from month-end. The 2026 Rules retain the same timelines under the new Act, subject to the specific route that applies.
Form 141 is not a universal contractor-TDS return. Its Schedule C is the Individual/HUF route for contractor or professional payments covered by section 393(1), table serial 6(ii). The Form 141 FAQ states that Schedules A, C and D are restricted to Individual/HUF deductors; other payer categories use the applicable TAN-based forms or statements.
The FAQ gives a 30-day payment deadline and a one-month filing deadline for transactions reportable through Form 141. Those deadlines should not be extended to every contractor payment. First identify whether the transaction belongs in Form 141 and Schedule C or in a TAN-based statement.
Common mistakes and how to avoid them
- Using the wrong law after the transition: cite section 393 and the correct table serial for an event from 1 April 2026 onward.
- Calling every payer a company: firms and specified institutional bodies, and some high-turnover individuals or HUFs, can also be covered.
- Confusing turnover with the payment threshold: ₹1 crore and ₹50 lakh classify certain payers; ₹30,000 and ₹1,00,000 govern ordinary work-contract withholding.
- Waiting for payment after booking the invoice: the earlier credit controls, including a suspense-account credit.
- Applying 1% or 2% to every “contractor fee”: professional, technical, commission, non-resident and other payments may use different provisions and rates.
- Assuming a goods purchase is a work contract: review the manufacturing, customer-material and statutory-exclusion rules.
- Using Form 141 for every contractor: Schedule C is limited to the specified Individual/HUF route; other payers generally use applicable TAN-based reporting.
- Accepting an exception without evidence: retain the personal-purpose analysis or the qualifying goods-carriage declaration and PAN.
Records to keep for an audit trail
- The executed contract and any subcontract.
- Invoices, work orders and evidence of the work performed.
- Ledger entries showing the credit date, including any suspense-account entry.
- Payment records and the date of each payment.
- The contractor’s legal status, residence and PAN.
- Financial-year totals used to monitor the ₹30,000 and ₹1,00,000 thresholds.
- Any lower- or nil-deduction certificate.
- Personal-purpose declarations or goods-carriage declarations, where an exception is claimed.
- Challan receipts and the filed statement or return for the applicable reporting route.
The governing question is not simply whether an invoice says “contractor.” Determine who paid, what work or service was supplied, when the earlier credit or payment occurred, which Act and table item applies, and whether a documented exception changes the result. For an uncertain classification, consult current Income Tax Department material or a qualified Indian tax professional before filing.
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