If you're building invoicing software, payroll automation, or a payment platform for Indian businesses, TDS section selection is one of the trickiest parts to get right. Wrong section = wrong rate = tax department notice for your client.
Here's the decision tree our CA team uses:
STEP 1: Is the payment for goods or services?
Goods only: Section 194Q applies if the buyer's turnover > Rs 10 crore. Rate: 0.1% on purchases above Rs 50 lakh/year per vendor. If buyer's turnover is lower, no TDS required under this section.
Services: Continue to Step 2.
STEP 2: Is it a contract for work/labour OR a professional/technical service?
Contract for work (manufacturing, construction, catering, transport, housekeeping): Section 194C. Rate: 1% for individuals/HUF, 2% for companies/firms. Threshold: Rs 30,000 per contract or Rs 1 lakh aggregate per year.
Professional services (legal, medical, engineering, accounting) OR technical services (IT consulting, software development, maintenance): Section 194J. Rate: 10% (2% for technical services since Budget 2020). Threshold: Rs 30,000 per year per vendor.
STEP 3: Is it a commission/brokerage payment?
Section 194H. Rate: 5%. Threshold: Rs 15,000/year.
The overlap zone (and how courts have ruled):
The 194C vs 194J distinction is litigated constantly. Key principles:
If the output is a specific result (a designed building, a software feature), 194J applies.
If the output is labour/effort (construction workers, drivers), 194C applies.
An IT outsourcing contract where the vendor provides developers? Courts have gone both ways. Conservative approach: 194J.
Section 393 codes (FY 2026-27):
Budget 2025 introduced new section codes. When filing TDS returns, use the correct 393 sub-code for each nature of payment. Refer to TRACES for updated codes, old section codes still work for historical corrections.
Implementation note for payroll/invoicing systems:
Store vendor category at onboarding. Map: contractor → 194C, professional → 194J, goods_vendor → 194Q, commission_agent → 194H. Auto-select based on vendor type, override manually for edge cases.
Full TDS section reference (with threshold chart): https://taxgarden.in/blog/which-tds-section-applies-to-your-payment-194c-vs-194j-vs-194q-vs-194h
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