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TDS by Individuals and HUFs on Payments to Contractors

Tax Insights Team
  • Updated

 

 

FY 2025-26: Sections 194C and 194M, Income-tax Act, 1961
Tax year 2026-27: Section 393, Income-tax Act, 2025

An individual or Hindu Undivided Family (HUF) may have to deduct TDS when paying a resident contractor. The applicable provision depends mainly on whether the payer is covered by the regular business TDS rules or is making a large payment outside those rules.

Section 194C vs Section 194M

Point Section 194C Section 194M
Who deducts? An individual or HUF whose business turnover exceeded ₹1 crore or professional receipts exceeded ₹50 lakh in the preceding financial year. An individual or HUF not required to deduct under sections 194C, 194H or 194J.
Payments covered Payment to a resident contractor or subcontractor for carrying out work, including supply of labour. Payment to a resident for contractual work, commission, brokerage or professional services, including qualifying personal payments.
Threshold A single payment exceeding ₹30,000 or aggregate payments exceeding ₹1,00,000 in the financial year. Aggregate covered payments exceeding ₹50 lakh in the financial year.
TDS rate 1% where the contractor is an individual or HUF; 2% for other resident contractors. 2% for FY 2025-26.
Compliance TAN, regular deposit and quarterly TDS statement generally required. TAN not required; payment and statement through Form 26QD for transactions governed by the 1961 Act.
Resident payee condition: Sections 194C and 194M apply to payments to residents. Payments to non-residents must be examined under section 195 and the applicable tax treaty.

When Is TDS Deducted?

TDS is generally deducted at the earlier of credit to the contractor’s account or actual payment. Once the applicable annual threshold is crossed, the deduction is not restricted only to the amount above the threshold.

Section 194M Procedure for FY 2025-26

  1. Collect the payer’s and payee’s PAN and verify the residential status.
  2. Calculate aggregate covered payments during the financial year.
  3. Deduct TDS at 2% when the ₹50 lakh threshold is crossed.
  4. File Form 26QD and deposit the tax within 30 days from the end of the month in which deduction is made.
  5. Issue Form 16D to the payee within the prescribed period.
PAN not available: A higher TDS rate may apply under the PAN-related provisions. Do not use an incorrect or unverified PAN merely to complete the transaction.

Transactions from 1 April 2026

For a credit or payment occurring on or after 1 April 2026, the TDS provisions of the Income-tax Act, 2025 apply. Contractor payments by specified business payers and large payments by other individuals or HUFs are covered in the relevant rows of section 393. Form 141 replaces the earlier challan-cum-statements, including Form 26QD, for applicable transactions under the new Act.

Common Mistakes

  • Applying section 194M when the payer is already covered by section 194C.
  • Ignoring payments made for personal construction or renovation that exceed ₹50 lakh.
  • Deducting TDS only on the amount above the threshold.
  • Using section 194C for payment to a non-resident contractor.
  • Missing Form 26QD/Form 141 or the TDS certificate deadline.
Practical check: Review all payments to the same contractor during the year, including advances, reimbursements forming part of the contract and amounts credited but not yet paid.

 

 

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