In this guide
What changes for contractor payments from 1 April 2026?
For payments credited or made on or after 1 April 2026, contractor TDS is governed by section 393 of the Income-tax Act, 2025. The Income-tax Act, 1961, including section 194C, continues to govern a payment or credit made on or before 31 March 2026.
The Income-tax Act, 2025 calls the period from 1 April 2026 to 31 March 2027 Tax Year 2026-27. The section number has changed, but the main contractor rates and thresholds are retained. The payer needs to identify which section 393 table entry applies.
Section 393(1) covers specified payments to resident contractors. If the contractor is non-resident, the withholding rules must be reviewed separately under section 393(2); do not automatically apply the resident rates below.
Section 393 contractor TDS rates and thresholds
There are two common routes for resident contractor payments. The applicable route depends on the payer’s status.
| Payer and payment type | TDS rate | Threshold |
|---|---|---|
| A designated person paying a contractor for work under section 393(1), Table Serial No. 6(i) | 1% if the contractor is an individual or HUF; 2% for other contractors | ₹30,000 for a single sum, or ₹1,00,000 for the aggregate of sums during the tax year |
| An individual or HUF payer not required to deduct under the other relevant table entries, paying for a contract, professional services, commission or brokerage under section 393(1), Table Serial No. 6(ii) | 2% | Aggregate payments exceeding ₹50 lakh during the tax year |
For the first route, the threshold has two parts. A single sum exceeding ₹30,000 can trigger TDS. Even if no single sum exceeds ₹30,000, TDS can be triggered when the aggregate exceeds ₹1,00,000 during the tax year. Once the threshold is crossed, TDS is generally calculated on the entire amount covered by the provision, not only the amount above the threshold.
For example, a company pays the same contractor ₹25,000, ₹30,000 and ₹50,000 during the tax year. No single sum exceeds ₹30,000, but the aggregate exceeds ₹1,00,000. The payer should review the threshold and deduct TDS at the applicable rate.
Under the second route, certain individual or HUF payers must check whether their aggregate payments for the listed services exceed ₹50 lakh during the tax year. Once the threshold is crossed, TDS is generally calculated on the amount covered by the provision, not only the excess. This rule has a different threshold and a single rate of 2%; do not confuse it with the 1%/2% rates under Table Serial No. 6(i).
Who is a “designated person”?
For contractor payments under Table Serial No. 6(i), “designated person” is defined in section 402. It includes, among others:
- The Central Government or a State Government;
- A local authority;
- A company, co-operative society or firm;
- Certain corporations, authorities, registered societies, trusts and universities; and
- Certain individuals, HUFs, associations of persons and bodies of individuals that meet the preceding-tax-year turnover test.
An individual or HUF not otherwise listed may fall within the definition if their business turnover or gross receipts exceeded ₹1 crore, or their professional receipts exceeded ₹50 lakh, in the immediately preceding tax year. These tests determine the payer’s status under the definition. They are separate from the ₹30,000 and ₹1,00,000 payment thresholds.
Do not choose the rate based only on the contractor’s legal structure. First establish whether the payer is a designated person and which section 393 entry applies. Then check whether the contractor is an individual or HUF, or another type of person.
What payments count as contract work?
The rule covers sums for carrying out work under a contract, including labour supplied to carry out work. A subcontract is included. “Work” also covers activities such as advertising, broadcasting and telecasting, carriage of goods or passengers by modes other than railways, catering, and specified manufacturing using material purchased from the customer or its associate.
The Finance Act, 2026 amended the definition of “work” to include the supply of manpower to a person where the workers operate under that person’s supervision, control or direction. This change took effect on 1 April 2026. Assess a manpower agreement based on the actual working arrangement, not just the service label in the contract or invoice.
For specified manufacturing or supply work using material purchased from the customer or its associate, section 393 sets out how to calculate the TDS base. If the material value is stated separately in the invoice, TDS is calculated on the invoice value excluding that material. If it is not stated separately, TDS is calculated on the whole invoice value.
Professional fees and technical services have separate provisions under Table Serial No. 6(iii), including different rates in some cases. Classify a payment by its actual nature; calling a professional service a “contract” in an invoice does not by itself make the contractor-payment rate apply. TaxClear’s Section 194J guide explains the separate provisions for specified professional and technical fees under the earlier Act.
When should TDS be deducted?
For payments covered by section 393(1), TDS is generally due at the earlier of:
- Crediting the sum to the payee’s account; or
- Paying it in cash, by cheque or draft, or by another mode.
TDS can therefore be due when an amount is credited to the contractor’s account, even if payment is made later. Advance payments can also trigger deduction. Track payments and credits during the tax year so a threshold crossed later is not missed.
For a contract spanning March and April 2026, use the earlier credit or payment date to determine which Act applies. If that event occurred on or before 31 March 2026, the 1961 Act applies. If it occurred on or after 1 April 2026, apply the relevant provision of the 2025 Act.
Exceptions and other checks
Section 393 contains exclusions and special rules, so check them before applying the general table. For example:
- A specified exemption applies to certain payments to contractors for plying, hiring or leasing goods carriages. The contractor must own no more than ten goods carriages during the tax year, provide the required declaration with PAN, and the payer must report the prescribed particulars.
- Section 393(4) excludes payments under Table Serial No. 6(i) made by an individual or HUF exclusively for personal purposes of that individual or a member of the HUF. Do not assume this exception automatically applies to the separate ₹50 lakh rule in Table Serial No. 6(ii).
- Section 393(1) covers payments to residents. Payments to non-resident contractors require separate analysis.
- Check the payee’s PAN and any valid lower- or nil-deduction certificate or declaration before withholding. Different rules may apply when required taxpayer details are missing.
If the nature of the work, payer category, payee status or payment threshold is unclear, record the basis for your classification before processing the invoice.
Depositing and reporting TDS
For regular deductors reporting non-salary payments to residents, the Income Tax Department identifies Form 140 as the quarterly TDS statement for Tax Year 2026-27. Its due dates are:
| Quarter | Period | Form 140 due date |
|---|---|---|
| Q1 | April–June | 31 July |
| Q2 | July–September | 31 October |
| Q3 | October–December | 31 January |
| Q4 | January–March | 31 May of the following year |
TDS deducted by regular deductors is generally deposited by the 7th of the following month, with separate timelines for March deductions and specified cases. Government deductors may have different payment procedures. Confirm the applicable rule and challan process.
Certain individual or HUF payers using the separate ₹50 lakh route report through Form 141, a challan-cum-statement that consolidates certain PAN-based TDS transactions, including payments under Table Serial No. 6(ii). It is generally due within 30 days after the end of the month in which tax is deducted. Check the current portal instructions and schedule before filing.
Keep the contract, invoices, payee’s PAN and status, payment ledger, threshold calculation, challans and submitted TDS statements. Reconcile the TDS with the contractor’s tax-credit records. TDS is not a substitute for reporting taxable income; the contractor generally claims the eligible credit in their income tax return. TaxClear’s online ITR filing guide explains the return process.
Examples
Company paying an individual contractor
In May 2026, a company pays a resident individual contractor ₹80,000 for work. The single sum exceeds ₹30,000, so the threshold under Table Serial No. 6(i) is crossed. The rate is 1%, and TDS is generally ₹800, subject to any applicable exception or valid lower-deduction certificate.
Company paying a partnership firm
A designated company credits ₹2,00,000 to a resident partnership firm for contract work. If Table Serial No. 6(i) applies, the rate is 2%, and TDS is generally ₹4,000, subject to the applicable conditions.
Individual payer using the ₹50 lakh route
An individual who is not required to deduct under the other applicable entries pays a resident contractor and other covered service providers an aggregate of ₹52 lakh during Tax Year 2026-27. The ₹50 lakh threshold under Table Serial No. 6(ii) is exceeded. TDS at 2% is generally considered under that entry. Verify the payer’s status and the payments included in the calculation.
Common mistakes to avoid
- Using section 194C for a payment or credit made on or after 1 April 2026;
- Applying the 1% rate to every contractor, regardless of payer and payee type;
- Treating the ₹30,000 and ₹1,00,000 tests as a single threshold;
- Deducting only on the excess when the applicable rule requires deduction on the amount covered by the provision;
- Missing TDS because the amount was credited before payment;
- Assuming all manpower services are outside the definition of “work” under the 2026 Act;
- Applying the personal-purpose exclusion to the separate ₹50 lakh payment rule without checking its scope; and
- Filing a regular quarterly statement where the payer is required to use the Form 141 challan-cum-statement process.
Frequently asked questions
What is the TDS rate on contractor payments in Tax Year 2026-27?
Under section 393(1), Table Serial No. 6(i), it is generally 1% if the contractor is an individual or HUF and 2% for other contractors. A separate 2% rule applies to specified contract payments by certain individual or HUF payers under Table Serial No. 6(ii).
Is TDS deducted only on the amount above ₹30,000 or ₹1 lakh?
Generally, no. Under Table Serial No. 6(i), once the applicable threshold is crossed, TDS is generally calculated on the amount covered by the provision, not only the excess.
Does the ₹50 lakh threshold apply to every payer?
No. It applies to the separate rule for an individual or HUF payer who is not required to deduct under the other specified section 393 entries. Check the payer’s status first.
Are payments for manpower supply covered?
From 1 April 2026, the definition of “work” includes the supply of manpower where workers operate under the recipient’s supervision, control or direction.
Which form is used to report contractor TDS?
Regular deductors generally report resident non-salary TDS in quarterly Form 140. Certain individual or HUF payers using the ₹50 lakh rule report through Form 141. Confirm which provision applies before filing.
