TDS Section 194C explained: what contractors deduct and when

Section 194C of the Income Tax Act is the provision under which payments to contractors and subcontractors are subject to tax deduction at source (TDS). If you're paying or being paid for construction, transport, advertising, catering, or any other "work" contract in India, 194C applies.

This post is a working note, not a tax opinion — your CA signs off the final return.

Who deducts

The deductor is the payer. If a developer pays a contractor, the developer deducts. If a contractor pays a subcontractor, the contractor deducts. The deducted tax is deposited with the government and a TDS certificate issued.

The rates

• 1% if the payee is an individual or HUF.
• 2% if the payee is any other person (including companies, LLPs, partnerships, AOPs, BOIs).

The rate is on the pre-GST amount, not the gross.

The thresholds

TDS under 194C is not deducted below certain thresholds:

• Single invoice: ≤ ₹30,000 → no TDS.
• Aggregate in financial year: ≤ ₹1,00,000 → no TDS.

Once either threshold is crossed, TDS applies on the whole amount, including the earlier invoices — so track aggregates, not just individual bills.

A worked example

Contractor (private limited company) raises an RA bill of ₹5,00,000 + 18% GST = ₹5,90,000.

• Pre-GST: ₹5,00,000.
• TDS @ 2% on ₹5,00,000 = ₹10,000.
• Amount paid to contractor: ₹5,90,000 − ₹10,000 = ₹5,80,000.
• ₹10,000 goes to the government against the contractor's PAN.

The contractor claims ₹10,000 as a credit against their income tax liability. The TDS certificate (Form 16A) is the evidence.

Where Blueprint fits

Blueprint's GST billing module captures:

• Payee type (individual vs company) — sets the default rate.
• Aggregate TDS to date against each payee — alerts when thresholds cross.
• Net payable on each invoice with TDS line shown inline.

You can override the computed rate on any invoice if you have a lower-deduction certificate under Section 197.

The common mistakes

1. Deducting TDS on the GST-inclusive amount. The rule is pre-GST; many teams get this wrong and overpay TDS.
2. Missing the aggregate threshold. You paid ₹25,000 in April, ₹30,000 in May, ₹60,000 in June. That June invoice now makes the aggregate cross ₹1 lakh — so TDS is due on the entire ₹1,15,000, retroactively for the year.
3. Forgetting to file Form 26Q. Deducted tax must be deposited by the 7th of the following month, and the quarterly return filed by specified dates. Miss these and penalties compound.

Further reading

• CGST vs SGST vs IGST for contractors
• GST-compliant RA bills