TDS on Payments to Contractors
Payments to resident contractors for carrying out work, including supply of labour, are subject to tax deduction at source when the statutory conditions are met. From 1 April 2026, the applicable contractor TDS provision is consolidated in Section 393 of the Income-tax Act, 2025. Legacy Section 194C of the Income-tax Act, 1961 remains relevant for earlier payment or credit events.
Section 393(1), Table Serial No. 6(i): contractor payments
For a payment or credit arising on or after 1 April 2026, a payer covered by the provision must deduct tax from a sum paid or credited to a resident contractor for carrying out work in pursuance of a contract. The concept includes supply of labour for carrying out work.
TDS rates for contractor payments
| Resident contractor | TDS rate |
|---|---|
| Individual or Hindu undivided family | 1 percent |
| Person other than an individual or Hindu undivided family | 2 percent |
The Income Tax Department's transition guidance states that the contractor TDS rates and monetary thresholds remain the same under the new Act, while the section reference changes to the relevant table item of Section 393.
When is TDS deducted?
The triggering event is the earlier of credit to the contractor or payment. A credit to a suspense account or another account may be treated as credit to the payee where the statutory deeming rule applies.
Meaning of work for contractor TDS
The legacy Section 194C definition, carried into the reorganised TDS framework subject to the current statutory wording, covers important categories of contractual work including:
- advertising;
- broadcasting and telecasting, including production of programmes;
- carriage of goods or passengers by a mode of transport other than railways;
- catering; and
- manufacturing or supplying a product according to a customer's requirement or specification using material purchased from that customer or its specified associate, subject to the statutory conditions.
Manufacture or supply using material purchased from an independent person, rather than the customer or specified associate, was excluded from the corresponding legacy definition.
Current transition rule: 31 March 2026 and 1 April 2026
| Earlier event of credit or payment | Applicable law | Section reference |
|---|---|---|
| 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 Serial No. 6(i), for ordinary resident contractor payments |
For example, a March 2026 contractor invoice credited on 31 March 2026 remains governed by Section 194C even if payment is made in April 2026. An April 2026 contractor payment or credit for which the first TDS event occurs after 1 April 2026 is governed by Section 393.
Legacy Section 194C of the Income-tax Act, 1961
Section 194C required a specified person responsible for paying a resident contractor for carrying out work, including supply of labour, under a contract to deduct tax at 1 percent where payment was to an individual or Hindu undivided family and at 2 percent where payment was to another person.
Legacy threshold
The uploaded provision records that no deduction was required where a single sum did not exceed Rs. 30,000, unless the aggregate sums credited or paid or likely to be credited or paid during the financial year exceeded Rs. 1,00,000. The threshold applicable to a particular period should always be checked against amendments then in force.
Personal-purpose payments by individuals and HUFs
Under legacy Section 194C, an individual or Hindu undivided family was not liable to deduct tax where the contractor payment was exclusively for the personal purposes of the individual or a member of the HUF.
Goods carriage contractors
The legacy provision contained a specific no-deduction rule for a contractor engaged in plying, hiring or leasing goods carriages who owned ten or fewer goods carriages at any time during the previous year and furnished the prescribed declaration together with PAN. The payer also had a reporting obligation for such payments.
Material separately shown in invoice
For specified manufacturing or supply work using material purchased from the customer or its associate, legacy Section 194C provided for deduction on the invoice value excluding material where the material value was separately stated. If it was not separately stated, deduction applied to the whole invoice value.
Who was a specified person under legacy Section 194C?
The definition included the Central and State Governments, local authorities, statutory corporations, companies, co-operative societies, specified housing or development authorities, registered societies, trusts, universities, foreign governments and enterprises, firms, and certain individuals, HUFs, associations of persons and bodies of individuals satisfying the prescribed turnover conditions.
Special TDS for specified individual or HUF payments
The current Act also contains a separate Section 393(1) table item for certain payments by an individual or HUF to contractors or professionals where the ordinary contractor provision does not apply. The Income Tax Department identifies this as Table Serial No. 6(ii). For Tax Year 2026-27, the unified Form 141 includes Schedule C for these PAN-based contractor or professional payments.
Form 141 from Tax Year 2026-27
Under the Income-tax Act, 2025, Form 141 consolidates specified PAN-based challan-cum-statements. Schedule C is used for payments by an individual or HUF to contractors or professionals under Section 393(1), Table Serial No. 6(ii). It replaces the corresponding earlier PAN-based reporting workflow for such payments.
Contractor TDS compliance checklist
1. Identify the first event: establish the earlier date of credit or payment.
2. Apply the correct Act: use Section 194C up to 31 March 2026 and the relevant Section 393 table item from 1 April 2026.
3. Identify the contractor: confirm residence and whether the contractor is an individual/HUF or another person.
4. Check threshold and exclusions: review the applicable tax-year threshold, personal-purpose rule, goods-carriage rule and other statutory exceptions.
5. Quote the current provision: for post-1 April 2026 transactions, use the relevant Section 393 table item in TDS reporting rather than old Section 194C.
Related Income Tax provisions
Interest other than interest on securities: Section 194A
Lottery and horse-race winnings: Sections 194B and 194BB
Insurance commission and life-insurance payments: Sections 194D and 194DA
Commission, brokerage and immovable property TDS: Sections 194H and 194IA
Rates, thresholds and forms should be checked for the tax year in which the TDS obligation arises.