You hire a contractor to rebuild your house. The bill comes to ₹60 lakh over the year. You are not a business, you have no TAN, and you have never deducted TDS in your life. Do you still have to deduct tax from the contractor’s payment? Since 1 September 2019, the answer is yes — under Section 194M.
Quick answer: Section 194M requires an individual or HUF to deduct 2% TDS when payments to one resident contractor, professional or commission agent cross ₹50 lakh in a financial year. No TAN is needed — you use your PAN and file Form 26QD within 30 days of the month-end of deduction.
This guide explains Section 194M in plain words: who has to deduct, the ₹50 lakh limit, the 2% rate, the worked numbers, the Form 26QD and Form 16D steps, what happens if you miss it, and how the rule changes under the Income-tax Act, 2025.
What is Section 194M?
Section 194M sits in Chapter XVII-B of the Income-tax Act, 1961, next to the other TDS sections. It was inserted by the Finance Act, 2019 and applies from 1 September 2019.
Before this section, there was a gap in the TDS system. TDS on contractor payments under Section 194C and TDS on professional fees under Section 194J applied only to businesses and to individuals or HUFs whose accounts were audited. A salaried person paying ₹60 lakh to a builder for a home renovation, or an HUF paying ₹55 lakh to an architect, deducted nothing. Section 194M closes that gap.
The section applies to any individual or HUF who is not required to deduct TDS under Sections 194C, 194H or 194J. In practice, that means an individual or HUF whose accounts are not liable to tax audit under Section 44AB. If your business turnover crosses ₹1 crore, or your professional receipts cross ₹50 lakh, you are under audit and you deduct under 194C, 194H or 194J instead — Section 194M does not apply to you.
The section covers payments to a resident only. Payments to a non-resident contractor or professional fall under Section 195 instead.
Section 194M TDS rate and threshold
The numbers are simple. There are only five to remember.
| Item | Rule for FY 2025-26 |
|---|---|
| TDS rate (PAN given) | 2% of the covered payment |
| TDS rate (PAN not given, or inoperative PAN) | 20% under Section 206AA |
| Threshold | No TDS if the total covered payments to one payee are ₹50 lakh or less in the financial year |
| When to deduct | At the earlier of credit to the payee’s account or actual payment |
| TAN required | No — PAN is enough |
The threshold is worked out payee by payee, on the total of all covered payments for the year. Contract work plus professional fees plus commission paid to the same person are added together. Payments to different people are counted separately.
Two points about the threshold catch people out:
- Once the limit is crossed, TDS applies to the full amount, not only the part above ₹50 lakh. If you pay one contractor ₹60 lakh in a year, the TDS is 2% of ₹60 lakh, which is ₹1,20,000. It is not 2% of ₹10 lakh.
- The ₹50 lakh is not a basic exemption. It is only a trigger. Below it, nothing is deducted. Above it, the whole payment is in the TDS net.
The rate was 5% when the section began in 2019. The Finance Act, 2024 cut it to 2% from 1 October 2024. For FY 2025-26, the rate is 2%. Some older articles on the internet still show 5% — they are out of date, and following them means deducting more than the law asks for.
The 2% rate is flat. No surcharge and no health and education cess are added at the time of deduction. Cess is worked out later, in the payee’s own tax calculation when the return is filed.
What payments does Section 194M cover?
The section names three kinds of payment. If you pay a resident any of these, the amount counts toward the ₹50 lakh limit and toward the TDS:
- Contract work — payments for carrying out work under a contract, including supply of labour. A home renovation, a house construction contract, or a large repair job all count.
- Professional services — fees paid to a professional, such as an architect, a lawyer, a chartered accountant or a consultant, for work done for you.
- Commission or brokerage — payments to an agent or broker, such as a property broker’s commission on a deal.
What does Section 194M not cover?
Just as important is what stays outside the section:
- Insurance commission. Commission paid on insurance is covered by Section 194D, not 194M. Our guide to Section 194D TDS on insurance commission explains that rule.
- Payments to non-residents. Section 194M applies only to resident payees. A payment to a non-resident architect or contractor is dealt with under Section 195.
- Payments below ₹50 lakh in the year. If the total to one person stays at or below ₹50 lakh, no TDS is due at all.
- Payments by a person already deducting under 194C, 194H or 194J. If you are liable to tax audit and already deduct under those sections, 194M does not apply to the same payments.
- Rent, salary and interest. Rent is covered by Sections 194-I and 194-IB, salary by Section 192, and interest by Section 194A. Section 194M does not touch them.
Who has to deduct TDS under Section 194M?
The deductor is any individual or HUF that is not required to deduct TDS under Sections 194C, 194H or 194J. That covers:
- A salaried person paying a builder for a home renovation.
- An HUF paying an architect for a family property.
- A retired person paying a professional for a large personal project.
- A freelancer whose receipts are below the audit limit, paying a sub-contractor.
It does not cover companies, firms, LLPs or trusts — those deduct under 194C, 194H or 194J. It does not cover an individual or HUF whose accounts are audited under Section 44AB. And it does not cover a person who is already deducting under the regular sections for the same kind of payment.
Worked examples
Example 1 — below the limit, no TDS. You pay an architect ₹30 lakh and a contractor ₹15 lakh in FY 2025-26. The limit is tested per payee, so neither payment crosses ₹50 lakh. No TDS is deducted from either payment.
Example 2 — above the limit. You pay one contractor ₹30 lakh in June and ₹32 lakh in December for a house rebuild — ₹62 lakh in total. TDS is 2% of the full ₹62 lakh, which is ₹1,24,000. The contractor receives ₹60,76,000 and reports ₹62 lakh as income. The ₹1,24,000 sits in Form 26AS as a tax credit.
Example 3 — crossing the limit mid-year. You pay an interior designer ₹45 lakh in June and ₹15 lakh in February — ₹60 lakh in total. No TDS is deducted on the June payment, because the total had not crossed ₹50 lakh yet. At the February payment, the total crosses the limit, so TDS of 2% on the full ₹60 lakh — ₹1,20,000 — is deducted from the February payment. The designer receives ₹13,80,000 in February.
Example 4 — no PAN. You pay a contractor ₹60 lakh, but the contractor has not given a PAN, or the PAN is inoperative. TDS is 20% under Section 206AA — ₹12,00,000 instead of ₹1,20,000. Always collect the payee’s PAN before the first payment crosses the limit.
Example 5 — commission. You sell a property through a broker and pay ₹55 lakh as brokerage in one year. The broker is a resident, and you are an individual not under audit. TDS is 2% of ₹55 lakh, which is ₹1,10,000. You pay the broker ₹53,90,000.
What you must do: compliance steps
Section 194M keeps the compliance deliberately light, because the deductor is usually not a business. There is no TAN, no quarterly return, and no registration. The steps are:
- Collect the payee’s PAN. You need your own PAN and the payee’s PAN. Without the payee’s PAN, the rate jumps to 20%.
- Deduct 2% at the time of credit or payment, whichever comes first. If you credit the amount to the contractor’s account in your books on 15 February, deduct on that date, even if the cash is paid in March.
- Deposit the TDS and file Form 26QD within 30 days from the end of the month in which the deduction was made. Form 26QD is a challan-cum-statement — the payment and the statement are filed together on the e-filing portal, using your PAN. For TDS deducted in February, the due date is 31 March. For TDS deducted in March, the due date is 30 April.
- Issue the TDS certificate to the payee. Download Form 16D from the TRACES portal and give it to the payee within 15 days of filing Form 26QD. The payee needs it to claim the credit in the return.
That is the whole workflow. Compare it with the quarterly Form 26Q cycle that businesses follow for 194C and 194J — Section 194M replaces all of it with one form per deduction.
What happens if you do not deduct TDS?
Skipping the deduction is costly:
- Interest is charged on the TDS that should have been deducted — 1% a month from the date the tax was deductible until it is actually deducted, and 1.5% a month from the date of deduction until it is deposited.
- Late filing fee of ₹200 a day applies if Form 26QD is filed late, under Section 234E, capped at the TDS amount for the statement.
- 30% of the payment is disallowed as a business expense under Section 40(a)(ia), if the payment was claimed as a business expense. This does not apply to a purely personal payment, such as a home renovation, because there is no business expense to disallow — but the interest and late fee still apply.
- The payee’s credit is delayed. Until you file Form 26QD, the TDS does not appear in the payee’s Form 26AS or AIS, and the payee cannot claim the credit. Our guide to a missed TDS return deadline explains the fee and interest in detail.
Section 194M vs 194C, 194J and 194H
The four sections look alike, but they apply to different people. This table settles which one covers your payment:
| Section 194C | Section 194J | Section 194H | Section 194M | |
|---|---|---|---|---|
| Who deducts | Business, or individual/HUF under audit | Business, or individual/HUF under audit | Business, or individual/HUF under audit | Individual/HUF not under audit |
| Covers | Contract work | Professional and technical fees, royalty | Commission and brokerage | Contract, professional fees, commission — all three |
| Rate | 1% (individual/HUF) or 2% (others) | 2% or 10% | 2% | 2% |
| Threshold | ₹30,000 single payment or ₹1,00,000 a year | ₹50,000 a year per category | ₹20,000 a year (from 1 Apr 2025) | ₹50 lakh a year per payee |
| TAN needed | Yes | Yes | Yes | No |
| Form | Form 26Q quarterly | Form 26Q quarterly | Form 26Q quarterly | Form 26QD, within 30 days |
The practical test is simple. If you are a business or you are under tax audit, you deduct under 194C, 194H or 194J. If you are an ordinary individual or HUF making a large personal payment, you deduct under 194M.
Section 194M under the new Income-tax Act, 2025
From 1 April 2026, the Income-tax Act, 2025 replaces the 1961 Act for transactions in Tax Year 2026-27. Section 194M moves into the consolidated TDS section: Section 393(1), Table Sl. No. 6(ii). The rate stays 2% and the threshold stays ₹50 lakh — only the section number and the forms change. Form 26QD becomes Form 141 (Schedule C), and the certificate Form 16D becomes Form 131.
For payments made up to 31 March 2026, keep using the old reference, Section 194M of the 1961 Act, in challans and returns. For payments on or after 1 April 2026, use Section 393(1) Sl. No. 6(ii). The complete old-vs-new section numbers table lists every TDS mapping in one place.
Frequently asked questions
What is Section 194M of the Income Tax Act?
Section 194M is a TDS provision, inserted by the Finance Act, 2019 and effective from 1 September 2019. It requires an individual or HUF to deduct TDS on payments to a resident contractor, professional or commission agent, when the total paid to that person crosses ₹50 lakh in a financial year. It applies only to people who are not already required to deduct TDS under Sections 194C, 194H or 194J — in practice, individuals and HUFs whose accounts are not audited.
What is the TDS rate under Section 194M?
The rate is 2% from 1 October 2024, after the Finance Act, 2024 cut it from 5%. The 2% rate applies for FY 2025-26. If the payee does not give a PAN, the rate is 20% under Section 206AA. No surcharge or cess is added to the TDS. Some older articles still show 5% — that rate ended on 30 September 2024.
What is the threshold limit under Section 194M?
No TDS is deducted if the total covered payments to one payee are ₹50 lakh or less in a financial year. The limit is per payee, per year, and it adds up contract work, professional fees and commission paid to the same person. Once the total crosses ₹50 lakh, TDS is cut at 2% on the full amount, not only on the part above the limit.
Who is required to deduct TDS under Section 194M?
Any individual or HUF that is not required to deduct TDS under Sections 194C, 194H or 194J. That means a person whose accounts are not liable to tax audit under Section 44AB. Companies, firms and LLPs never deduct under 194M — they use 194C, 194H or 194J.
Is TAN required for Section 194M?
No. You do not need a Tax Deduction Account Number to deduct under Section 194M. Your PAN is enough. You file Form 26QD using your PAN, and the payee gets Form 16D as the certificate. This is the main difference from the regular TDS sections, which all need a TAN.
What is Form 26QD and when do I file it?
Form 26QD is a challan-cum-statement — you pay the TDS and report it in the same form, on the e-filing portal. It must be filed within 30 days from the end of the month in which the TDS was deducted. For TDS deducted in February, the due date is 31 March. After filing, download Form 16D from the TRACES portal and give it to the payee within 15 days.
What happens if the payee does not give a PAN?
TDS is deducted at 20% instead of 2%, under Section 206AA. On a ₹60 lakh payment, that is ₹12,00,000 instead of ₹1,20,000. Always collect the payee’s PAN before the first payment, and check that it is operative and linked with Aadhaar.
Does Section 194M apply to non-residents?
No. Section 194M applies only to payments to residents of India. A payment to a non-resident contractor or professional is covered by Section 195, with the rate set by the Double Taxation Avoidance Agreement.
How is Section 194M different from Section 194C?
Section 194C applies to businesses and to individuals or HUFs under tax audit, and it has a low threshold — ₹30,000 for a single payment or ₹1,00,000 in a year. Section 194M applies to individuals and HUFs who are not under audit, and its threshold is much higher — ₹50 lakh a year per payee. The rate under 194M is a flat 2%, and no TAN is needed, while 194C needs a TAN and a quarterly Form 26Q.
What is the new section number for 194M under the Income Tax Act, 2025?
From 1 April 2026, Section 194M becomes Section 393(1), Table Sl. No. 6(ii) of the Income-tax Act, 2025. The 2% rate and the ₹50 lakh threshold stay the same. Form 26QD is replaced by Form 141 (Schedule C), and the Form 16D certificate becomes Form 131.
Official sources
- Income Tax Department, e-filing portal — https://www.incometax.gov.in
- Income Tax Department, TDS provisions and rates — https://www.incometaxindia.gov.in
- TRACES (TDS Centralized Processing Cell), TDS statements and certificates — https://www.tdscpc.gov.in
Reviewed by Asuthod Rathod, CA · Last updated: 10 November 2026
Disclaimer: This article explains tax rules in simple words for general information. Tax law changes often, and your own case may have details that change the result. Check the official portals above or speak to a qualified tax professional before acting on it.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.