TDS on Contractors w.e.f 01.4.2026 as per New Income Tax Rules 2026
Under the new Income-tax Act, 2025, which comes into effect on April 1, 2026, the provisions for Tax Deducted at Source (TDS) on payments to contractors have been restructured and simplified. The old Section 194C has been replaced by Section 393(1) [Table: Sl. No. 6(i)], and the old Section 194M has been replaced by Section 393(1) [Table: Sl. No. 6(ii)]. [ Refer Section 393 Income Tax Act 2025 Tax to be deducted at source.]
While the fundamental policy, rates, and thresholds remain the same as under the old Act, the framework is now presented in a consolidated tabular format. Here are the complete provisions:
1. General TDS on Contractors (Replaces old Section 194C)
When a “designated person” makes a payment to a resident contractor for carrying out any “work” (including the supply of labor for carrying out work) in pursuance of a contract, TDS must be deducted at the following rates:
- Applicable Rates:
- 1% if the payee/contractor is an Individual or a Hindu Undivided Family (HUF).
- 2% if the payee/contractor is any other person (e.g., a company, firm, LLP).
- Threshold Limits:
- TDS is not required if the sum credited/paid for a single contract does not exceed ₹30,000.
- TDS is not required if the aggregate of such sums during the tax year does not exceed ₹1,00,000.
2. TDS by Individuals/HUFs not covered above (Replaces old Section 194M)
If an Individual or HUF is not required to deduct tax under the general contractor provision above (typically because they are not subject to tax audit), they are still liable to deduct TDS if their contract payments are substantial.
- Applicable Rate: 2%.
- Threshold Limit: TDS is only required if the aggregate contract payments to a resident contractor exceed ₹50,00,000 in a tax year.
- Compliance: These deductors do not need a TAN. They will report and deposit this TDS using Schedule C of the new Challan-cum-Statement Form No. 141 within 30 days from the end of the month in which the deduction is made.
3. Definition of “Work”
The term “work” is specifically defined to include:
- Advertising.
- Broadcasting and telecasting, including production of programs.
- Carriage of goods or passengers by any mode of transport other than railways.
- Catering.
- Manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from that customer (or their associate).
- Exclusion: It does not include manufacturing/supplying products where the material is purchased from a third party.
- Manufacturing or supplying a product according to a customer’s requirement or specification if the materials are purchased from a third party (i.e., a person other than the customer or the customer’s associate.
- Any sum that falls under the separate TDS provisions for fees for professional or technical services under Section 393(1) [Table: Sl. No. 6(iii)]
4. Treatment of Material Costs on Invoices
If a contractor manufactures a product according to customer specifications using the customer’s materials, the TDS calculation depends on the invoice:
- If the value of the material is specified separately on the invoice, TDS is deducted only on the invoice value excluding the material value.
- If the value of the material is not specified separately, TDS is deducted on the whole of the invoice value.
5. Exemptions (When TDS is NOT required)
No TDS is required to be deducted under the contractor provisions in the following scenarios:
- Transporters/Goods Carriages: If the payment is made to a contractor during the course of the business of plying, hiring, or leasing goods carriages, and that contractor owns 10 or fewer goods carriages at any time during the year. The contractor must furnish a declaration to this effect along with their PAN.
- Personal Use: If the payment is credited or paid by an Individual or HUF exclusively for their personal purposes.
6. Transition Rules (March-April 2026)
The governing Act for a transaction that spans the transition date depends on the “earlier of the event of credit or payment”.
- If the payment or credit occurs on or before March 31, 2026, the TDS obligations fall under Section 194C of the old Act.
- If the payment or credit occurs on or after April 1, 2026, the deductor must deduct tax under the new Act and quote Section 393(1) [Table: Sl. No. 6(i)] in their TDS returns (quoting the old section will result in system-level validation errors).
7. How to deduct tds on contractor with example
Under the Income-tax Act, 2025, deducting Tax Deducted at Source (TDS) on payments to resident contractors depends on the type of payer, the type of contractor, and the payment thresholds.
1. General TDS on Contractors (Section 393(1) [Table: Sl. No. 6(i)]) When a “designated person” (such as a company, firm, local authority, or audited individual) makes a payment to a resident contractor for carrying out any “work”, they must deduct TDS.
- Applicable Rates: 1% if the contractor is an Individual or a Hindu Undivided Family (HUF), and 2% if the contractor is any other person (e.g., a company or firm).
- Threshold Limits: TDS is required only if the payment for a single contract exceeds ₹30,000, or if the aggregate of such payments during the tax year exceeds ₹1,00,000.
Example 1: M/s ABC Ltd. awards a housekeeping contract to Mr. Sharma (an individual). The contract is for a single payment of ₹45,000. Since this exceeds the ₹30,000 single-contract threshold, ABC Ltd. must deduct 1% TDS because Mr. Sharma is an individual.
- TDS amount = 1% of ₹45,000 = ₹450.
- Net payment to Mr. Sharma = ₹44,550.
2. TDS by Individuals/HUFs not covered by the general rule (Section 393(1) [Table: Sl. No. 6(ii)]) If an Individual or HUF is not required to deduct tax under the general provision above, they must still deduct TDS if they make substantial payments to a contractor for work.
- Applicable Rate: 2% regardless of the contractor’s status.
- Threshold Limit: TDS is deducted only if the aggregate payments to the contractor exceed ₹50,00,000 in a tax year.
- Compliance: Such individuals do not need a TAN; they report and pay this TDS using Schedule C of Form No. 141.
Example 2: Mr. Gupta (an individual not subject to tax audit) pays ₹55,00,000 to XYZ Constructions Pvt Ltd to build a commercial shop. Since the payment exceeds ₹50 Lakhs, he must deduct 2% TDS.
- TDS amount = 2% of ₹55,00,000 = ₹1,10,000.
- Net payment = ₹53,90,000. Mr. Gupta will deposit the ₹1,10,000 using his PAN via Form 141.
3. Important Rules for Invoices Involving Material Costs If the contractor manufactures or supplies a product according to your specifications using materials purchased from you (or your associate), the TDS deduction depends on how the invoice is prepared:
- If the value of the material is specified separately in the invoice, TDS is deducted only on the invoice value excluding the material value.
- If the material value is not specified separately, TDS is deducted on the whole invoice value.
Example 3: A contractor bills a company ₹1,00,000 for a manufacturing job. The invoice clearly breaks down ₹60,000 for labor/work and ₹40,000 for customer-supplied materials. The company will deduct TDS (at 1% or 2% depending on the contractor’s status) only on the ₹60,000 portion.
Exemptions (When TDS is NOT required):
- Personal Use: No TDS is required if the payment is made by an Individual or HUF exclusively for their personal purposes.
- Transporters: No TDS is required for payments to a contractor in the business of plying, hiring, or leasing goods carriages, provided the contractor owns ten or fewer goods carriages at any time during the year and furnishes a declaration along with their PAN.
8. Application of TDS on supply of manpower
Section 393(1) [Table: Sl. No. 6(i)] provides for the tax deduction at source (TDS) in the case of payments made to contractors for carrying out any work. It provides for rate of deduction of 1% when payment is made to individual or HUF and 2% in other cases.
2. Section 393(1) [Table: Sl. No. 6(iii)] provides for the tax deduction at source in the case of fees paid for professional or technical services. It provides for rate of deduction of 2% n case of fees for technical services or royalty for sale, distribution or exhibition of cinematographic films or to the business engaged in operation of call centre and 10% in other cases.
3. Section 393(1)[Table: Sl. No. 6(ii)] provides for the tax deduction at source by individual and HUF in the case of payments made to contractors for carrying out any work (not covered under section 393(1)[Table: Sl. No. 6(i)], by way of commission or brokerage or by way of professional services (not covered under section 393(1) [Table: Sl. No. 6(iii)]). It provides for rate of deduction of 2% for such payments.
4. There is ambiguity with regard to applicable rate of TDS for supply of manpower that whether provisions under section 393(1) [Table: Sl. No. 6(i)/(ii)] or [Table: Sl. No. 6(iii)] shall be applied.
5. In order to provide clarity with regard to the deduction of tax at source in case of supply of manpower, it is proposed to include it under the ambit of “work” in section 402(47) so that the provisions of Section 393(1)[Table: Sl. No. 6(i)] or 393(1)[Table: Sl. No. 6(i)], as the case may be, applies.
(Memorandum of Budget 2026-27)
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New Section 393 of Income Tax Act 2025 to Replace Section 194C of Income Tax Act 1961 for TDS on Conractor