Introduction

Businesses regularly make payments to contractors, consultants, freelancers, and professionals. These payments attract Tax Deduction at Source (TDS) under two important sections of the Income Tax Act — Section 194C and Section 194J.

While both sections deal with TDS on payments for services, they apply to different types of services, and the rates, thresholds, and rules vary significantly.

This guide provides complete clarity on the differences, applicability, rates, and compliance requirements under Sections 194C and 194J.

What Is Section 194C? (TDS on Contractor Payments)

Section 194C applies to payments made to contractors and sub-contractors for carrying out work contracts.

✔ Examples of Payments Covered:

• Labour contracts

• Transport contracts (when vehicle owner does not provide PAN, TDS applies)

• Housekeeping services

• Advertising agencies (execution part)

• Packaging, loading/unloading

• Manufacturing on job-work basis

• Catering services

✔ TDS Rates under 194C:

✔ Threshold Limits:

• No TDS if a single payment ≤ ₹30,000

• No TDS if total annual payments ≤ ₹1,00,000

What Is Section 194J? (TDS on Professional Fees & Technical Services)

Section 194J applies to payments for professional or technical services.

✔ Examples of Payments Covered:

• Legal, medical, architectural, engineering services

• Chartered Accountant or Company Secretary fees

• IT consulting & technical services

• Professional consultancy

• Advertising (creative or advisory component)

• Royalty payments

• Director sitting fees

✔ TDS Rates under 194J:

✔ Threshold Limits

• No TDS if total payment ≤ ₹30,000 per financial year per payee

How to Determine Whether a Payment Falls Under 194C or 194J

✔ Apply 194C when:

• Service is labour-intensive.

• The contract involves execution of work.

• No specialised professional skill is required

✔ Apply 194J when:

• The service requires professional or technical expertise

• The provider is a consultant, professional, or subject expert.

• Advisory or intellectual services are involved

Consequences of Non-Compliance

Failure to deduct or deposit TDS leads to:

• Interest @ 1% – 1.5% per month

• Penalty equal to the amount of TDS

• Disallowance of 30% of the expense under Section 40(a)(ia)

• Notices under Section 201

Proper classification between 194C and 194J is crucial to avoid scrutiny.

Practical Examples

Example 1 – Digital Marketing Agency

• Creative design → 194J

• Posting, scheduling, and execution → 194C

Example 2 – Interior Designer

• Design consultancy → 194J

• Labour work and installation → 194C

Example 3 – Software Company

• Developer on contract (skill-based) → 194J

• Data entry/back-office work → 194C

Conclusion

While both Section 194C and Section 194J govern TDS on service payments, understanding the difference is essential for correct compliance, avoiding penalties, and ensuring proper classification of expenses.

Businesses should analyse the nature of the service and the level of expertise involved before determining which section applies.

Bisways Consulting Group helps businesses with TDS classification, deduction, deposit, return filing (Form 26Q), and complete income-tax compliance.