TDS on Contractor and Professional Payments - 194C vs 194J rates, limits and new Section 393

TDS on Contractor and Professional Payments: 194C vs 194J Rates, Limits and New Section 393 (2026)

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Quick answer

194C – TDS on contractor payments

Who does it cover?

  • Any specified person who pays a contractor for work, labour, or services.
  • The payer must be a company, firm, co‑operative society, trust, local authority or an individual/HUF that was liable to tax audit in the previous year.
  • A contractor can be an individual, HUF, partnership, company, LLP, etc.

Rates

Contractor type TDS rate
Individual / HUF 1 %
Company, firm, LLP, other entity 2 %

Note: No surcharge or cess is added to the TDS. GST shown separately on the invoice is not part of the TDS base.

Thresholds

  • TDS is required when either of the following happens:
  • A single payment to the contractor exceeds ₹30,000.

  • Total payments to the same contractor in the financial year exceed ₹1,00,000.

  • Once a trigger is hit, TDS must be deducted on that payment and on every later payment to the same contractor in the same FY.

Worked example – single large payment

A company hires an individual contractor for office renovation. The invoice is ₹1,50,000 (GST ₹27,000 is shown separately).

  • The payment is above the single‑payment limit of ₹30,000.
  • Contractor is an individual → rate = 1 %.

TDS = 1 % of ₹1,50,000 = ₹1,500

The contractor receives ₹1,48,500 plus the ₹27,000 GST, which the company pays separately.

Worked example – aggregate payments

A firm makes five separate payments of ₹25,000 each to the same contractor.

Payment No. Amount Cumulative total
1 ₹25,000 ₹25,000
2 ₹25,000 ₹50,000
3 ₹25,000 ₹75,000
4 ₹25,000 ₹1,00,000
5 ₹25,000 ₹1,25,000
  • After the fourth payment the cumulative total is exactly ₹1,00,000 – still no TDS.
  • The fifth payment pushes the total past ₹1,00,000, so TDS must be deducted on that fifth payment only.

If the contractor is a firm, the TDS rate is 2 % → ₹25,000 × 2 % = ₹500 TDS on the fifth payment.

Sub‑contractors

The same 1 %/2 % rates apply to payments made to sub‑contractors.

Goods transporters

A goods transporter who owns up to 10 carriages and files a PAN declaration is exempt from 194C TDS.

194J – TDS on professional & technical fees

What does it cover?

  • Professional services (legal, accounting, consultancy, etc.)
  • Technical services (IT support, engineering design, call‑centre services)
  • Royalty (except film royalty)
  • Royalty for sale/distribution/exhibition of cinematographic films (film royalty)
  • Non‑compete fees
  • Director remuneration

Rates

Category Rate
Professional services, royalty (non‑film), non‑compete fees 10 %
Technical services, call‑centre payments, royalty for cinematographic films 2 %
Director remuneration 10 % (no threshold)

Thresholds

  • A ₹50,000 limit per category per payee in a FY.
  • The limit applies separately to each of the following categories:
  • Professional fees
  • Technical fees
  • Royalty (non‑film)

  • Non‑compete fees

  • When the annual total in a category exceeds ₹50,000, TDS must be deducted on the whole amount (not just on the excess).

Worked example – professional fees

A business hires a chartered accountant (CA) firm and pays ₹80,000 for tax advisory.

  • Category = professional services.
  • Threshold = ₹50,000 → exceeded.
  • Rate = 10 % → ₹80,000 × 10 % = ₹8,000 TDS.

The CA firm receives ₹72,000.

Worked example – technical services

An IT company outsources server maintenance to a support firm for ₹2,00,000.

  • Category = technical services.
  • Threshold = ₹50,000 → exceeded.
  • Rate = 2 % → ₹2,00,000 × 2 % = ₹4,000 TDS.

Director remuneration

Director’s non-salary remuneration — sitting fees, commission and similar payments — attracts 10 % TDS without any threshold. A director’s salary is not covered by 194J; it falls under Section 192 (now Section 392), the salary-TDS section.

194C vs 194J – Quick comparison

Feature Section 194C Section 194J
Payments covered Contractor work, labour, services Professional services, technical services, royalty, non‑compete, director fees
Rate 1 % for individual/HUF contractors; 2 % for companies, firms, LLPs and others Depends on the type of payment, not the payee: 10 % professional services, royalty (non‑film), non‑compete fees and director remuneration; 2 % technical services, call‑centre payments and film royalty
Threshold Single payment > ₹30,000 or total > ₹1,00,000 per FY ₹50,000 per category per payee per FY (no limit for director fees)
Who must deduct Companies, firms, trusts, local authorities, audit‑liable individuals/HUFs Same as 194C
GST Excluded from TDS base Excluded from TDS base
Exemptions Goods transporters (≤10 carriages, PAN declaration filed) No general exemption; director fees simply have no threshold. Personal payments by individuals/HUFs who are not liable to audit are outside 194J
Penalty for non‑deduction Interest, possible disallowance of 30 % of expense Same as 194C

What changed under the new Income‑Tax Act 2025 (effective 1 Apr 2026)

Old provision New provision (Section 393) Payment code New form(s)
Section 194C Section 393(1) – Table Sl. 6(i) 1023 = individual/HUF, 1024 = others Form 140 (quarterly TDS return)
Section 194J Section 393(1) – Table Sl. 6(iii) 1026 = 2 % (technical services, film royalty, call‑centre)
1027 = 10 % (professional services, non‑compete)
1028 = 10 % (director remuneration)		 Form 131 (TDS certificate)
Form 26Q → Form 140 – –
Form 16A → Form 131 – –
Form 13 (lower/nil TDS) → Form 128 – –
No‑PAN TDS (Section 206AA) → Section 397(2) Rate unchanged at 20 % –

What stayed the same?

  • The rates (1 %, 2 %, 10 %, 2 %) are unchanged.
  • The thresholds (₹30,000/₹1,00,000 for 194C, ₹50,000 per category for 194J) remain the same.
  • The no‑surcharge/cess rule for TDS continues.

What this means for freelancers (receiving side)

  • When a client deducts TDS under 194J, the freelancer gets the net amount after TDS.
  • The freelancer must declare the gross receipt (the amount before TDS) in the Income Tax Return (ITR).
  • The TDS amount appears in Form 26AS/AIS. It can be claimed as a tax credit against the final tax liability.
  • If the freelancer uses presumptive taxation under the old 44ADA (now Section 58 — see our 44ADA guide for freelancers), TDS is still deducted by the client. The freelancer can claim the credit the same way.

Practical steps for freelancers

  1. Keep the TDS certificate (Form 131) issued by the client.
  2. Verify the same amount in Form 26AS at the end of the financial year.
  3. Report the gross amount in the ITR.
  4. Claim the TDS as pre‑paid tax.

What this means for small businesses (paying side)

  • Identify the nature of payment: contractor work (194C) or professional/technical service (194J).
  • Check the payee’s status (individual/HUF vs company/LLP). Use the correct rate.
  • Observe the thresholds. Once crossed, start deducting TDS on every subsequent payment.
  • Do not deduct TDS on the GST amount shown on the invoice.
  • Deposit the TDS by the 7th of the next month (30 April for March deductions).
  • File Form 140 (quarterly) and issue Form 131 to the payee.
  • Keep records of payments, challans, returns and certificates for each financial year.

Quick checklist for each payment

  • [ ] Is the payment for contractor work? → use 194C.
  • [ ] Is the payment for professional/technical service, royalty, director fees? → use 194J.
  • [ ] Is the payee an individual/HUF or an entity? → pick the correct rate.
  • [ ] Has the applicable threshold been exceeded? → if yes, deduct TDS now.
  • [ ] Is GST part of the invoice? → exclude it from the TDS base.
  • [ ] Deposit TDS by the 7th of next month.
  • [ ] File the quarterly return and issue the certificate.

Common mistakes to avoid

Mistake Correct approach
Using 194C for a CA’s fees (professional service) Use 194J (professional fees = 10 %).
Applying the old ₹30,000 limit for 194J Use the ₹50,000 per‑category limit (effective from FY 2025‑26).
Deducting TDS on the GST amount shown in the invoice GST is excluded; calculate TDS on the invoice amount before GST.
Forgetting the per‑category rule in 194J (e.g., mixing professional and technical fees) Treat each category separately; each has its own ₹50,000 threshold.
Not issuing the new Form 131 after 1 Apr 2026 Issue Form 131 (replaces Form 16A) for each payee.
Ignoring the Section 194M rule when total contract payments exceed ₹50 Lakh If you are an individual/HUF who does not deduct under 194C/194J and you pay more than ₹50 lakh in a year for contract work, professional fees or commission, deduct 2 % TDS under 194M.
Delaying TDS deposit beyond the 7th Deposit on time to avoid interest and possible 30 % disallowance of the expense.

FAQ

1. What is the difference between Section 194C and Section 194J?
194C deals with payments to contractors for work or services. 194J deals with professional fees, technical services, royalty, non‑compete fees and director remuneration.

2. What is the TDS limit under Section 194J?
TDS is required when the total amount in a specific category (professional, technical, royalty, or non‑compete) paid to a payee exceeds ₹50,000 in a financial year.

3. What is the TDS rate under Section 194C for an individual contractor?
The rate is 1 % of the payment amount (excluding GST).

4. Is TDS applicable on the GST amount in the invoice?
No. GST is shown separately on the invoice and is not part of the TDS base.

5. How do I report 194J TDS income in my ITR?
Report the gross amount (before TDS) as income. Claim the TDS amount shown in Form 26AS as tax credit. Our step-by-step ITR filing guide shows where this credit appears on the portal.

6. What happens if TDS is not deducted under 194C or 194J?
Interest applies: 1 % per month for not deducting TDS, and 1.5 % per month for deducting but depositing late. Additionally, up to 30 % of the expense can be disallowed while calculating taxable profit.

7. Do I need to deduct TDS if I am a freelancer paying another freelancer?
Only if you fall under the categories that must deduct (e.g., you are a company, firm, or an audit‑liable individual/HUF). A freelancer paying another freelancer for personal work generally does not have to deduct TDS, but 194M may apply if total payments exceed ₹50 Lakh in a year.

Related guides

Official sources

Reviewed by Asuthod Rathod, CA. Last updated: 17 October 2026.

Disclaimer

This article provides general information on TDS provisions. It does not replace professional tax advice. Tax laws may change, and individual circumstances vary. Please consult a qualified tax advisor for advice tailored to your situation.

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