Do I deduct TDS on a contractor's invoice including or excluding GST?

Excluding GST, as long as the GST is shown separately on the invoice. CBDT Circular 23/2017 says TDS on such a payment is worked out on the value without the GST. If the invoice shows one lump sum with no separate GST line, TDS is on the whole amount.

I am an individual. Do I have to deduct TDS when I hire a contractor?

Only if the payment is for your business or profession and you were above the tax audit limit in the previous year (business turnover over ₹1 crore, or professional receipts over ₹50 lakh). If you hire a contractor for purely personal work, such as renovating your own home, there is no TDS at all.

Is TDS needed on a transporter's freight bill?

Not if the transporter owns 10 or fewer goods carriages in the year and gives you their PAN along with a declaration. If they do not give a PAN, TDS applies, and the no-PAN rate of 20% is the one to use.

What if my contractor has no PAN?

TDS is deducted at 20% instead of 1% or 2%. This is the flat no-PAN rate under Section 206AA. Ask for the PAN before the first payment.

What happens if I miss the TDS on a contractor payment?

You owe interest, at 1% a month from the date the tax should have been deducted if you did not deduct it, and 1.5% a month if you deducted it but did not deposit it. You can also lose 30% of that expense as a business deduction, and a penalty of the same amount as the tax can follow.

Does 194C cover supply of manpower or labour?

Yes. Work includes supplying labour for carrying out a work, so a manpower or staffing agency bill falls under the contractor rate: 1% for an individual or HUF, 2% for a company, firm or any other payee.

Which payment code do I use for contractor TDS from April 2026?

1023 for a contractor who is an individual or HUF (1%), and 1024 for any other contractor (2%). Both sit in Section 393(1), Table 1, Sl. 6(i) of the Income-tax Act, 2025.

TDS on Contractor Payments (194C): Limit, Rate, Exemptions

Contractor TDS is the deduction people get wrong most often, because the rule has two limits, two rates and two exemptions that never appear on the invoice. Most small businesses know the headline ("deduct 1% or 2% on contractor payments") and nothing else. Then a vendor sends three ₹28,000 bills in a quarter, or an invoice with GST on it, or a freight bill, and nobody is sure what to do.

This post is the whole rule on one page: when TDS starts, what rate, what the invoice amount is, who does not have to deduct, and what it costs if you miss it. It is written for the Income-tax Act, 2025, which has covered this since 1 April 2026 as Section 393(1). The old name, Section 194C, is still what everyone says, so this post uses both.

Rates and limits here are the same as under the old Section 194C. What changed is the section number and the payment code. Confirm against your TDS return utility before filing.

The short answer

Question	Answer
Who is the payment to	A resident contractor or sub-contractor doing any "work", including supply of labour
Rate if the contractor is an individual or HUF	1%
Rate for a company, firm, LLP or anyone else	2%
Rate if there is no PAN	20%
When does TDS start	A single payment above ₹30,000, or ₹1,00,000 in total to that contractor in the financial year
Is GST included	No, if GST is shown separately on the invoice
Payment code (FY 2026-27)	1023 (individual/HUF), 1024 (others)

The two limits: ₹30,000 and ₹1,00,000

TDS applies if either of these is crossed:

A single payment or credit to the contractor is more than ₹30,000. This one is judged on its own, however little you have paid them before.
The total paid or credited to that contractor in the financial year is more than ₹1,00,000.

No TDS is needed only while you are below both. That is the part that catches people. Three invoices of ₹28,000 are each under the single limit, but together they are ₹84,000, and a fourth makes it ₹1,12,000. From that point you are over the yearly limit.

Once the yearly total crosses ₹1,00,000, TDS is due on the whole year's total to that contractor, including the small invoices you did not deduct on earlier. You take the catch-up amount out of the payment that crosses the limit. Keep a running total for each contractor, because your accounting software will not warn you when it passes ₹1 lakh.

The limits are tested separately for each contractor, and they start again every financial year.

Our TDS Calculator works out the amount for a single payment. The section pages for individual/HUF contractors and company/firm contractors have the worked examples for each rate.

1% or 2%: it depends on who you are paying

The rate follows the contractor's status, not yours:

1% if the contractor is an individual or HUF: a freelance electrician, a sole-proprietor caterer, a carpenter.
2% for everyone else: a company, a partnership firm, an LLP, a society or a trust.

Check the contractor's PAN card or their PAN's fourth letter. P is an individual, H is a HUF, C is a company, F is a firm and L is a local authority. A proprietorship has the proprietor's own PAN, so it is taxed at 1%.

Is TDS on the amount with GST or without?

Without GST, if the GST is shown separately on the invoice. CBDT Circular 23/2017 says TDS is worked out on the value before GST.

A worked example. A company contractor bills ₹1,00,000 plus 18% GST:

Invoice total: ₹1,18,000.
TDS at 2% is on ₹1,00,000, which is ₹2,000.
You pay the contractor ₹1,16,000 and the GST is paid in full on the supply.

If the invoice shows one lump sum with the GST not separated, TDS is on the whole amount. That is a good reason to insist your vendors show the GST on a separate line.

The same logic applies when you supply materials. If the contract is for work on material you give the contractor, and the material cost is shown separately on the invoice, TDS is on the invoice value without the material. When the invoice does not split it, TDS is on all of it.

Who does not have to deduct TDS

Two exemptions are written into the section itself.

1. Individuals and HUFs paying for personal work

An individual or HUF who hires a contractor for personal purposes has no TDS to deduct, at any amount. Having the kitchen at home renovated is the usual example.

Beyond that, an individual or HUF running a business or profession only has to deduct if they were liable to a tax audit in the previous year. In practice that means business turnover above ₹1 crore or professional receipts above ₹50 lakh. A small shop owner below those figures does not deduct TDS on contractor payments, even for business work. Companies, firms and LLPs always do, regardless of size.

2. Transporters with 10 or fewer goods carriages

If you pay a goods transporter who owns 10 or fewer goods carriages during the year, you do not deduct TDS if they give you:

their PAN, and
a declaration that they own 10 or fewer goods carriages.

Collect both for each financial year and keep them on file. If the transporter gives no PAN, the exemption does not apply and TDS is due at 20%.

Freight bills from a large logistics company, which is not an owner of 10 or fewer vehicles, are an ordinary contractor payment at 2%.

No PAN means 20%

If a contractor does not give you a valid PAN, the rate goes up to 20%, which is the flat no-PAN rate under Section 206AA. This is far above the usual 1% or 2%, so ask every new contractor for a PAN before you pay the first bill. Taking it at the time of the first payment is easier than chasing a vendor three months later for a corrected certificate.

What counts as "work"

Work is wide. It covers construction, repairs, catering, transport of goods and passengers, advertising, broadcasting and supply of labour, which includes manpower and staffing agencies. Two limits on it are worth knowing:

A plain purchase of goods from a supplier is not work, even if they deliver it. That can fall under TDS on purchase of goods if your turnover is high enough, and is not covered here.
A professional or technical service, such as a lawyer, a consultant or an architect, has its own section with its own rates. It is not under 194C.

If a contract mixes both, the invoice should say which part is which. That is usually where a dispute starts.

From April 2026: Section 393(1) and payment codes

The Income-tax Act, 2025 replaced Section 194C with Section 393(1), Table 1, Sl. 6(i). The rates and limits are unchanged. What you see on the challan and return is a payment code:

1023 for an individual or HUF contractor (1%).
1024 for any other contractor (2%).

Our Section 393(1) payment code guide lists the codes for the other old sections, and what happened to the TDS certificates.

What a missed deduction costs

Skipping contractor TDS is expensive, and the cost lands on you, not the contractor:

Interest of 1% a month if you did not deduct, from the date the tax should have been deducted to the date it is deducted. If you deducted but did not deposit, it is 1.5% a month and part of a month counts as a full month.
A disallowance of 30% of the contractor expense in your accounts, so you pay income tax on that part of the expense as if it were profit.
A penalty that can be as much as the tax not deducted or not deposited.

On a ₹5,00,000 contract paid to a company at 2%, the TDS is ₹10,000. Missing it for a year costs about ₹1,200 in interest, plus a disallowance on ₹1,50,000 of expense. That is worth a calendar reminder.

A checklist for each contractor payment

Get the PAN and the status (individual, firm or company) before the first bill.
Check the invoice for a separate GST line, and a separate material line if you supplied materials.
Update the contractor's running total for the financial year.
Is it an exempt case? Personal work, a deductor below the audit limit, or a transporter with PAN and declaration.
If not, deduct 1% or 2%, on the value without GST, and file under 1023 or 1024.
Deposit the TDS by the due date and file the TDS return, then issue the certificate to the contractor.

Sources

This post is correct as of 1 October 2026. It explains the rules and is not tax advice. For a specific contract, check with your CA, since the answer can turn on the contract's wording.