TDS on Contractors under Section 194C for FY 2025-26: Limit, Rate, Due Dates and the Mistakes That Trigger Notices

If your business pays anyone to do something — a contractor who builds, a transporter who moves goods, an agency that runs your advertising, a caterer, a labour supplier, a job-worker who manufactures to your specification — Section 194C is the provision that decides whether you deduct tax before paying them. It is the most frequently applied TDS section in Indian business and, in our experience of reconciling clients’ books, the one most frequently applied wrongly: on the wrong base, at the wrong rate, or not at all until the threshold has quietly been crossed.

This is the FY 2025-26 position, in the order you actually need it.

---

The limit for FY 2025-26

TDS under 194C is required when either of two thresholds is crossed:

Test	Threshold	Consequence
Single payment or credit	More than ₹30,000	Deduct on that payment
Aggregate paid or credited to the same contractor in the financial year	More than ₹1,00,000	Deduct on the entire aggregate — including earlier payments that were individually below ₹30,000

The thresholds were left unchanged by the Finance Act 2025, which raised limits under several other sections. The aggregate test is the one that catches people: a contractor paid ₹28,000 a month is below the single-payment limit every month, and above the annual limit in the fourth month — at which point TDS is due on the full ₹1,12,000, not just on the payment that tipped it over.

---

The rate

Payee	Rate
Individual or Hindu Undivided Family	1%
Any other person — partnership firm, LLP, company, AOP	2%
Payee has not furnished PAN (Section 206AA)	20%

The base is the invoice value excluding GST, provided the GST component is shown separately on the invoice. Where the contractor issues a composite bill with GST built into a single figure, deduction is on the full amount. The higher rate for non-filers under Section 206AB was removed with effect from 1 April 2025, so for FY 2025-26 the only rate uplift that applies is the 20% for a missing PAN.

---

What counts as “work”

Section 194C applies to payments for carrying out any work, including supply of labour, under a contract. The Act’s definition includes:

• Advertising
• Broadcasting and telecasting, including production of programmes
• Carriage of goods or passengers by any mode other than railways
• Catering
• Manufacturing or supplying a product to the customer’s specification, using material purchased from that customer — job-work, in practice

A contract to manufacture using material bought from someone other than the customer is a sale of goods, not work, and falls under Section 194Q (or nothing) rather than 194C. Payments for professional or technical services — an architect, a consultant, a software developer — are not work either; they fall under Section 194J at 2% or 10%. Getting this line wrong in either direction produces a mismatch the department’s systems now read directly from the deductor’s return against the deductee’s.

---

Who has to deduct

Every company, firm, LLP, trust, and cooperative society paying a resident contractor must deduct. Individuals and HUFs must deduct only if their business turnover exceeded ₹1 crore, or professional receipts exceeded ₹50 lakh, in the preceding financial year — that is, if they were liable to a tax audit last year. Payments by an individual or HUF for purely personal purposes are outside 194C altogether, whatever the amount.

An individual or HUF who is not required to deduct under 194C, but who pays a single contractor more than ₹50 lakh in a year for work, falls under Section 194M instead — at 2%, deposited with a challan-cum-statement rather than a quarterly return.

---

The transporter exemption

A contractor in the business of plying, hiring, or leasing goods carriages who owns ten or fewer goods carriages at any time during the year, and who gives you a written declaration to that effect along with their PAN, is exempt from TDS under 194C(6). You must still report the payment in your quarterly return under the “no deduction” code. A declaration not obtained, or a transporter who owns more than ten vehicles, means full deduction at 1% or 2%.

---

When to deduct, when to deposit, what to file

Step	Timing
Deduct	At credit of the invoice to the contractor’s account or at payment, whichever is earlier — including credit to a suspense account
Deposit	By the 7th of the following month; deductions for March by 30 April
Quarterly return, Form 26Q	31 July, 31 October, 31 January, and 31 May for the fourth quarter
Certificate, Form 16A	Within 15 days of the return due date

Deduction on credit, not on payment, is the rule most businesses miss. If you book the contractor’s invoice on 28 March and pay it on 15 April, the TDS was due on the March credit and deposits by 30 April — not with April’s deductions by 7 May.

---

Three worked examples

Example 1 — Below both limits. A courier firm is paid ₹25,000 in June and ₹18,000 in November. No single payment exceeds ₹30,000 and the annual total is ₹43,000. No TDS.

Example 2 — The aggregate test. A housekeeping contractor (a partnership firm) is paid ₹28,000 every month. April through July are each below ₹30,000. At the July payment, the aggregate reaches ₹1,12,000 and crosses ₹1 lakh. TDS at 2% is due on ₹1,12,000 — ₹2,240 — deducted from the July payment, and at 2% on each subsequent month. Had you begun deducting from the first month in anticipation, no harm; had you not, the shortfall attracts interest from the July due date.

Example 3 — Single payment. A sole-proprietor electrician invoices ₹45,000 plus 18% GST, shown separately. TDS at 1% on ₹45,000 — ₹450 — regardless of the annual total. If the invoice had shown a single figure of ₹53,100 with GST built in, deduction would be on ₹53,100.

---

What a miss costs

Default	Consequence
Failure to deduct	Interest at 1% per month from the date the tax was deductible to the date it is deducted (Section 201(1A))
Deducted but not deposited	Interest at 1.5% per month from the date of deduction to the date of deposit
Late filing of Form 26Q	Late fee of ₹200 per day under Section 234E, capped at the TDS amount
Non-filing beyond a year, or incorrect details	Penalty of ₹10,000 to ₹1,00,000 under Section 271H
Expense disallowance	30% of the payment is disallowed in your own income computation under Section 40(a)(ia) — a ₹10 lakh contractor payment on which TDS was missed adds ₹3 lakh to your taxable income

The last row is the expensive one. The TDS you failed to deduct on a ₹10 lakh contract was ₹10,000 or ₹20,000. The disallowance is ₹3,00,000 of your own profit. Interest and late fees are the department’s way of nudging; 40(a)(ia) is how it collects.

---

How this reaches you as a notice

The contractor’s return and yours are matched. A contractor who declares ₹1.2 lakh of receipts from you against a Form 26AS that shows no deduction by you is a flag on both sides. From FY 2025-26 the department also cross-reads the TDS section you used against the nature of the payee’s income — a professional-fee payment coded under 194C, or a contractor payment coded under 194J, is precisely the kind of inconsistency that surfaces in a scrutiny questionnaire. Our income-tax notice reply service sees the deductee’s side of this every month.

---

Frequently asked questions

What is the TDS limit under Section 194C for FY 2025-26?

₹30,000 for a single payment or credit, or ₹1,00,000 in aggregate to the same contractor during the financial year. Crossing either triggers deduction; crossing the annual limit triggers deduction on the entire aggregate. Both thresholds are unchanged from the previous year.

What is the TDS rate on contractors?

1% where the contractor is an individual or HUF, 2% for any other payee — firms, LLPs, companies. 20% if the contractor has not furnished a PAN. The higher rate for non-filers under Section 206AB no longer applies from 1 April 2025.

Is TDS under 194C deducted on the GST component?

No, provided GST is shown separately on the invoice. Deduct on the taxable value. Where the invoice states a single inclusive figure, deduct on that full figure.

I am an individual with a small business. Do I have to deduct TDS on contractor payments?

Only if your business turnover exceeded ₹1 crore, or professional receipts exceeded ₹50 lakh, in the previous financial year. Below that, 194C does not apply to you — but if you pay a single contractor more than ₹50 lakh in a year, Section 194M applies at 2%.

Do I deduct TDS when paying a transporter?

Not if the transporter is in the business of plying goods carriages, owns ten or fewer vehicles, and gives you a written declaration with their PAN. You must still report the payment in Form 26Q. Without the declaration, or with more than ten vehicles, deduct at the normal rate.

What happens if I forgot to deduct TDS on a contractor for the whole year?

Interest at 1% per month on the amount not deducted, a late-fee and penalty exposure on the returns, and — most significantly — 30% of the payment disallowed as an expense in your own return under Section 40(a)(ia). Deducting and depositing before you file your return, and obtaining the contractor’s confirmation that they have paid tax on the income, can mitigate the disallowance.

---

Related reading

• TDS Rate Chart FY 2025-26 (AY 2026-27)
• Outsourced Accounting & Bookkeeping — TDS computed and deposited before the 7th, every month
• Automated Compliance — TDS, GST and ROC on a monitored calendar
• Compliance Calendar FY 2025-26: Monthly Due Dates
• Income Tax Notice Reply & Representation