Compliance
Since 1 April 2026, TDS on contractors and professionals is section 393 of the Income-tax Act, 2025. The rates (1%, 2%, 10%), the thresholds, and what failing to deduct costs.
Check your DPDP readiness — free More on the blogManaging contractor and freelancer payments is an everyday task for Indian startups and SMBs. It is also one of the most frequent sources of income tax demand notices during annual assessment. Since 1 April 2026 the rules are in the Income-tax Act, 2025, which replaced the Income-tax Act, 1961. Sections 194C and 194J are gone as numbers: TDS on contractors and on professional and technical fees are now rows of the table in section 393(1). The rates and thresholds carried over. Anything paid up to 31 March 2026 is still dealt with under the old sections.
The contractor row covers "work" — including advertising, catering, carriage of goods and passengers, broadcasting, and manufacturing or supplying a product to the customer's specification:
The most contentious audit question is whether a payment is for a work contract (1% or 2%) or for professional or technical services (10%, or 2% for technical services). Under the 1961 Act this was the 194C-versus-194J question, and it has not gone away: Deducting 1% as a contractor payment when the assessing officer treats the service as professional leaves your business liable for the 9% shortfall, plus interest on it at 1% a month for the tax not deducted.
If you fail to deduct TDS, or fail to deposit deducted tax by the due date for filing your return, section 35 of the Income-tax Act, 2025 disallows 30% of that expense from your taxable profit until the tax is paid. On ₹10,00,000 in contractor invoices, ₹3,00,000 is added straight back to taxable income. Protect your business by maintaining clear written contracts that define the scope and tax classification upfront. Use our freelance service agreement template for individual contributors and our master services agreement template for institutional vendors.
Section 393 of the Income-tax Act, 2025, which replaced the Income-tax Act, 1961 on 1 April 2026. TDS on contractors and on professional or technical fees are now rows of the table in section 393(1). Payments made up to 31 March 2026 are still dealt with under 194C and 194J.
1% when the contractor is an individual or Hindu Undivided Family (HUF), and 2% for anyone else — a company, partnership firm or LLP. These carried over unchanged from section 194C. If the contractor has not given a valid PAN, tax is deducted at 20% under section 397(2), formerly 206AA.
TDS applies if a single payment exceeds ₹30,000, or if total payments to that contractor exceed ₹1,00,000 in the tax year — the same limits section 194C had.
A contract for work — manufacturing, transport, catering, advertising, maintenance — is deducted at 1% or 2%. Professional fees (legal, medical, engineering, accountancy, consultancy) are deducted at 10%, and fees for technical services and call centres at 2%, once payments to one person exceed ₹50,000 in the year. Under the 1961 Act these were sections 194C and 194J.
Under section 35 of the Income-tax Act, 2025 (formerly 40(a)(ia)), 30% of the expense is disallowed for the year, raising taxable income until the tax is paid. Interest also runs under section 398(3)(a) (formerly 201(1A)): 1% a month for failing to deduct, and 1.5% a month for failing to deposit tax already deducted.
Published 12 September 2026, updated 10 October 2026. Founder & CEO at VidhiSar. I have watched four companies pay for the same mistake, and it was never the mistake anyone expected. VidhiSar is software, not a law firm: every answer names the section it relies on so you can check it, and anything turning on your specific facts is worth putting to a professional. More about who builds this
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