How To Deduct TDS On Contractor With Example: What is TDS? The full form of TDS is tax deducted source. Under the TDS system a person while paying in exchange for services such as brokerage, the commission is required to deduct a certain amount from the total amount. That amount is further deposited to the Government. This amount can further be claimed while filing Income Tax Return.
For example, XYZ Pvt Ltd has to make a payment of Rs. 1,00,000 to Mr. A as a professional fee under 10% TDS.
TDS deducted = 10% of 1,00,000 = 10,000
Net payment to Mr. A = Gross amount-TDS = Rs. 1,00,000- Rs, 10,000 = Rs. 90,000
TDS that ABC Pvt Ltd needs to pay the Government = Rs. 10,000
TDS Amount Deduction Under Section 194C
If you are making a payment to the contractor and the amount does not exceed Rs. 30,000, then no amount is deducted for TDS. But if the sum total of the payment to be made or already made during the same financial year exceeds Rs. 70,000 then TDS is deducted. It is explained below with the help of few examples:
|Case||TDS to be deducted or not|
|Contract of Rs. 25000 in a year||NO|
|Two contracts of Rs. 25,000 in a year||NO|
|Contract of Rs. 69,999||YES|
|Contract of Rs. 69,999||NO|
|Contract of Rs. 69,999 in a year||YES|
|Two contracts of Rs. 30,000 in a year||NO|
|Two contracts of Rs. 70,000 in two years||YES|
|Two contracts of Rs.35,000 in a year||YES|
Exceptions on Deduction on TDS
- If the person does not fall under the category of paying taxes under section 44AB.
- If the payment is used for personal use.
- If payment is made for hiring resources, plying or leasing good carriage.
- If payments are made to airlines or travel agencies for the purchase of air tickets.
Calculation of TDS Amount
Service provided by an individual contractor ‘Mr. A’ to a partnership firm ‘XYZ’ and the following payment is being made to the contractor during the year:-
- First payment – Rs 40,000
- Second payment – Rs 20,000
- Third payment – 60,000
First payment – Rs 40,000
TDS is to be deducted @ 1% as the sum exceeds the limit of Rs 30,000 in a single payment. Therefore, the net payment to be made to A will be Rs 39,600 after deducting TDS of Rs 400 (32,000 * 1%).
Second payment – Rs 20,000
No TDS is deducted since the total single payment amounts less than the limit that is Rs. 30,000. Total payment made during the year will amount to Rs 60,,000 (40,000 + 20,000) which is also less than the threshold limit of RS 75,000.
Third payment – 60,000
Here, TDS is supposed to be deducted since it crosses the threshold of Rs. 30,000. Therefore an amount of 1% shall be deducted from the amount as TDS. Total TDS required to be deducted is Rs 800 (20,000 * 1% + 60,000 * 1%) at the time of making payment of Rs 60,000. Net payment to be made to Mr. A will be Rs 52,000.
In the above example if contractor A is a Partnership Firm in place of an individual.
First payment – Rs 31,000
It crosses the threshold of Rs. 30,000 so therefore 3% TDS is deducted. After deduction of TDS of Rs. 930, the total amount payable becomes Rs. 30,070.
Second payment – Rs 20,000
No TDS is deducted since the amount is less than Rs. 30,000 and also the total amount throughout the year is less than Rs. 75,000 (31,000+20,000=51,000).
Third payment – 61,000
2% TDS is deducted since total amount (20,000+61,000 = 81,000)
Total TDS to be deducted is Rs 16,20 (20,000 * 2% + 61,000 * 2%) at the time of making payment of Rs 61,000. Net payment to be made to A will be Rs 59,380.
Conclusion on How To Deduct TDS On Contractor With Example
TDS forms a very important and integral part of Income-tax law In India. You must always abide by the rules and regulations of the nation. You should never hide your income statements or lie about them. Pay your taxes regularly and do not forget to claim them at the end of each financial year. If you want to avoid serious complications, do get in touch with a well-known CA around your locality who will assist you and guide you on matters regarding taxes and accounting.