Complying with Section 194C of the Income Tax Act: A Guide

Section 194C of the Income Tax Act is a very important provision with respect to employers and their responsibilities towards the Government while remunerating their employees. Relates to tax deductions on work contracts, known as TDS, which stands for Tax Deducted at Source. This form of tax was introduced through Section 194C of the Income Tax Act to collect tax as the main source of income.

What does Section 194C of Income Tax Act say?

The opening lines of Section 194C of the Income Tax Act define the parties to which this Section is applicable. It states that:

“Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person…”

From these opening lines, the following inferences can be made:

• Section 194C of the Income Tax Act is applicable for any person paying a sum to another person for performing a certain task.
• Under Section 194C of Income Tax Act, this task must be in pursuance of a contract between the person paying the sum and the person performing the task.

The following lines discuss the specifics of the aforementioned person’s responsibility under Section 194C of the Income Tax Act:

“[The person] shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier…”

These lines of Section 194C of the Income Tax Act lead to the following conclusions:

• The person responsible will be vested with the responsibility when the sum is credited to the person performing the task, or when they are actually paid.
• Under Section 194C of the Income Tax Act, this payment can be in cash, by issuing a cheque, or through any other means.
• The responsibility under Section 194C of Income Tax Act will be vested as soon as either event occurs, which means that the event which happens sooner creates the responsibility.

The next few lines of Section 194C of Income Tax Act elaborate on the amount that is to be paid:

“[They shall] deduct an amount equal to –

1. One percent where the payment is being made or credit is being given to an individual or a Hindu Undivided Family;
2. Two percent where the payment is being made or credit is being given to a person other than an individual or a Hindu Undivided Family, of such sum as income-tax on income comprised therein.”

Thus, the amount that the person is responsible for would be:

• 1% if the payment is being made to an individual or a Hindu Undivided Family.
• 2% if the payment is made to anyone else.

There are several other clauses in Section 194C of Income Tax Act, most of which define different terms that have been used in the aforementioned clause. For instance, “work” has been defined to include advertising, marketing, and manufacturing. Section 194C of Income Tax Act also enlists exceptions to these definitions.

How does Section 194C of the Income Tax Act affect me?

Section 194C of Income Tax Act affects people differently on the basis of whether they are an employer or an employee.

• If you are an employee, Section 194C of Income Tax Act imposes a certain percentage of TDS on the amount that you would have been paid otherwise.
• For instance, if you were going to be paid Rs. 20,000 for your services, and you are acting as an individual, the TDS rate would be 1%, which is Rs. 2,000. Therefore, Rs. 2,000 would be deducted from the total of Rs. 20,000, and you would receive Rs. 18,000 for your service.
• If you are an employer, Section 194C of the Income Tax Act outlines the amount that you have to pay to the Government as tax whenever you pay someone for their services.
• In the above example, the employer would have paid the Rs. 2,000 that was deducted to the Government as TDS.
• As an employer, it is important to note that a delay in deducting TDS will result in interest of 1% per month until the tax is deducted.
• The tax must be a credit to the Government by the 7th day of the following month.

Section 194C of Income Tax Act is not the only provision relating to TDS. The Income Tax Act contains more than two dozen provisions relating to TDS on different payments.

Other provisions relating to TDS

The Income Tax Act contains many other provisions for TDS apart from Section 194C of Income Tax Act. These are:

• Section 192, which deals with salary income. There is no TDS rate specified in the Act itself.
• Section 194A is regarding interest income from sources other than that on securities. The TDS rate given in this Section is 10%.
• Section 194D governs the TDS rate for the insurance commission. The TDS rate for this provision is 5% for Hindu Undivided Families and individuals, and 10% for others.
• Section 194D deals with the commission on the sale of lottery tickets. Here, the TDS rate is 10%.
• Section 194H, which deals with commission or brokerage. For these, the TDS rate is 5%.
  

Exceptions under Section 194C of Income Tax Act

TDS is exempted under Section 194C of Income Tax Act in the following cases:

• TDS is exempted if the amount credited to the person performing the task in a single contract doesn’t surpass Rs. 30,000.
• If the gross amount credited during the financial year doesn’t surpass Rs. 1,00,000, TDS is exempted.
• The amount credited to the contractor by an individual or Hindu Undivided Family for carrying out work for personal use is exempted from TDS.
  

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Conclusion

Section 194C of Income Tax Act is a very important provision for employers and employees alike, as it directly affects the financial status of both of these parties. In case of any doubts or issues relating to TDS, arrange an attorney consultation with a tax lawyer to resolve these.