Section 194C: Payment to contractor/sub-contractor

Section 194C requires TDS on payments to contractors and sub-contractors. Here is how it works:

Threshold: TDS applies if a single payment exceeds Rs 30,000 OR aggregate payments in a financial year exceed Rs 1,00,000.

Rates:
- 1% if the payee is an individual or HUF
- 2% for companies, firms, LLPs, and other entities

From April 1, 2026, the new Income Tax Act 2025 is in effect. Section 194C is now referenced as Section 393 in the new code - same rules apply, just a different section number in TDS returns filed from FY 2026-27.

If your contractor submits Form 15G/15H, TDS is not required even above the threshold.

For the full rates table and Section 393 mapping, see the [contractor TDS guide](taxgarden.in/blog/tds-on-contractor-payments-section-194c-393-guide-india).

If such remuneration paid to partners exceeds the limit prescribed under Section 40(b), the excess amount is not allowed as a deduction while computing the firm’s taxable income. The disallowed portion will be added back to the firm’s income, thus increasing its tax liability.

Payment of remuneration beyond the prescribed limit does not make the payment invalid under partnership law. It only affects the tax deductibility of the expenditure. The remuneration must also be authorised by the partnership deed and be paid to working partners to qualify for deduction.

Therefore, for FY 2023-24 and FY 2024-25, calculate the allowable remuneration as per the applicable Section 40(b) limits and add back any excess remuneration in the firm’s income-tax computation.