| 📅 Updated as on: 7 May 2026 | Income Tax provisions are subject to amendment — verify at incometax.gov.in before acting |
From 1st April 2026, the Income Tax Act, 1961 stands repealed. The Income Tax Act, 2025 is now the governing law for all transactions. For accounts teams, tax professionals and business owners, one of the most immediate compliance changes is in TDS on contractor payments — previously governed by Section 194C, now restructured under Section 393(1) of the new Act.
This blog provides a complete legal comparison: the old provision, the new equivalent, what changed, what stayed the same, and what action your business needs to take immediately.
Part 1 — The Old Law: Section 194C, Income Tax Act 1961
What Section 194C Said
Section 194C of the Income Tax Act, 1961 required any specified person making a payment to a resident contractor or sub-contractor for carrying out any work — including the supply of labour — to deduct tax at source at the time of credit or payment, whichever was earlier.
| 📌 SECTION 194C — INCOME TAX ACT, 1961 (Key Provisions) Who must deduct: Any specified person — Central/State Government, local authority, company, co-operative society, firm, trust, university, or individual/HUF liable to tax audit in the preceding year. Nature of payment: Any sum paid for carrying out any ‘work’ under a contract. Definition of ‘work’ includes: Advertising Broadcasting Carriage of goods or passengers by any mode of transport Catering Manufacturing or supply to customer specification Supply of labour (sub-contractors) TDS Rate: 1% — if payee is Individual or HUF2% — if payee is any other person (company, firm, etc.) Threshold: No deduction if single payment ≤ ₹30,000No deduction if aggregate during the year ≤ ₹1,00,000 PAN not furnished: TDS @ 20% (Section 206AA) Transporter exemption: No TDS if transporter owns ≤ 10 goods carriages and furnishes PAN + declaration. |
What Was Unclear Under the Old Act
The old Act did not explicitly mention ‘manpower supply services’ in the definition of ‘work’. This created sustained litigation across India — businesses regularly disputed whether deploying contract workers constituted a works contract (TDS @ 1-2%) or a professional service (TDS @ 10% under 194J). Courts and tax authorities gave conflicting decisions for years.
Part 2 — The New Law: Section 393(1), Income Tax Act 2025
What Section 393(1) Says
All TDS provisions of the Income Tax Act, 1961 — previously spread across individual sections 192 to 194T — are now consolidated under three parent sections of the Income Tax Act, 2025:
- Section 392 — TDS on salary payments
- Section 393 — TDS on all non-salary payments to residents and non-residents
- Section 394 — Tax Collected at Source (TCS)
Within Section 393(1), contractor payments are covered under Table Sl. No. 6(i), specifically sub-entries D(a) and D(b), distinguishing between Individual/HUF contractors and all other contractors.
| 📌 SECTION 393(1) — INCOME TAX ACT, 2025 (Contractor Payments) Reference: Section 393(1) [Table: Sl. No. 6(i).D(a) & 6(i).D(b)] Payment Codes (New Challan System — effective 1 Apr 2026): Code 1023 — Contractor being Individual or HUF → Rate: 1% Code 1024 — Contractor other than Individual or HUF → Rate: 2% Who must deduct: Same specified persons as under old Act. Individual/HUF: only if liable to tax audit under Section 63 (equivalent of old Section 44AB). Definition of ‘work’ NOW EXPLICITLY includes: Advertising, Broadcasting, Carriage of goods/passengers, Catering Manufacturing/supply per customer specification Supply of labour Manpower supply services ← NEW EXPLICIT INCLUSION — Section 402(47) Threshold: Single payment ≤ ₹30,000 → No TDS (unchanged) | Aggregate ≤ ₹1,00,000 → No TDS (unchanged) PAN not furnished: TDS @ 20% (continues under new Act) Transporter exemption: Continues under same conditions — ≤ 10 goods carriages + PAN + declaration. Note: ‘Assessment Year’ and ‘Previous Year’ are replaced by ‘Tax Year’ in the new Act. |
Part 3 — Complete Comparison Table
| Parameter | Old Act — Section 194C | New Act — Section 393(1) | Changed? |
| Section Reference | Section 194C | Section 393(1) [Table Sl. No. 6(i)] | Yes |
| Payment Codes in Challans | 194C quoted directly | Code 1023 (Indv/HUF) & Code 1024 (Others) | Yes |
| TDS Certificate Form | Form 16A | Form 131 | Yes |
| Quarterly TDS Return | Form 26Q | Form 140 | Yes |
| Effective Date | Until 31 Mar 2026 | From 1 Apr 2026 (Tax Year 2026-27) | Yes |
| TDS Rate — Individual/HUF | 1% | 1% — Code 1023 | No |
| TDS Rate — Others | 2% | 2% — Code 1024 | No |
| Threshold — Single Payment | ₹30,000 | ₹30,000 | No |
| Threshold — Aggregate | ₹1,00,000 | ₹1,00,000 | No |
| Manpower Supply as ‘Work’ | Not explicit — litigated | Explicitly included — Section 402(47) | Yes |
| Transporter Exemption | Yes — ≤10 carriages + PAN | Continues — same conditions | No |
| CBDT Circulars | Advisory in nature | Legally binding — Section 400(2) | Yes |
| Year Terminology | Assessment Year / Previous Year | Tax Year only | Yes |
Part 4 — What Changed: Detailed Analysis
Change 1: Payment Codes Replace Section Number — Immediate Action Required
The most impactful operational change is the replacement of ‘194C’ with two separate numeric codes — 1023 (Individual/HUF payee) and 1024 (all other payees) — in all TDS challans and returns from 1st April 2026. Any TDS return or challan filed for payments made on or after 1st April 2026 that quotes ‘194C’ will trigger system-level validation errors at the TRACES portal. Every ERP system, accounting software and TDS return preparation tool must be updated before the first quarterly return of Tax Year 2026-27.
| ✅ Action: Update your TDS software immediately. Use Code 1023 for Individual/HUF contractors and Code 1024 for all other contractors. Stop using ‘194C’ in any filing for payments from 1 Apr 2026. |
Change 2: Manpower Supply Explicitly Included — Resolves Long-Standing Litigation
Section 402(47) of the new Act now explicitly defines manpower supply services as ‘work’ for the purposes of Section 393. This resolves years of litigation where businesses disputed whether deploying contract workers attracted TDS @ 2% (works contract) or @ 10% (professional service).
The answer from 1st April 2026 is unambiguous: manpower supply is a works contract. TDS @ 1% (Code 1023 — Individual/HUF payee) or 2% (Code 1024 — all others). If your business was not deducting TDS on manpower invoices, the position must be corrected immediately.
| ✅ Action: Review all manpower supply contracts. Deduct TDS on all such invoices from 1 Apr 2026. Assess past period exposure if TDS was not deducted earlier. |
Change 3: TDS Certificate — Form 16A Replaced by Form 131
Every TDS certificate issued for contractor payments made on or after 1st April 2026 must use Form 131 instead of Form 16A. Issuing Form 16A for such payments is non-compliant under the new Income Tax Rules, 2026. Vendors relying on Form 16A for TDS credit claims may face mismatches on the e-filing portal.
| ✅ Action: Issue Form 131 to all contractors for payments from 1 Apr 2026. Update your TDS certificate generation process. |
Change 4: CBDT Circulars Now Legally Binding
Under Section 400(2) of the new Act, CBDT guidelines — including circulars on perquisites and contract payments — now carry mandatory compliance weight for both tax authorities and deductors. The earlier practice of dismissing CBDT circulars as merely advisory is no longer a defensible position.
| ✅ Action: Track all CBDT circulars on contractor TDS. They are now binding — not optional guidance. |
Part 5 — Complete Action Checklist
- Update all TDS software/ERP: use Code 1023 (Individual/HUF) and Code 1024 (Others) — stop using ‘194C’ for all payments from 1 Apr 2026.
- Begin deducting TDS on all manpower supply invoices @ 1% or 2% — legally settled under Section 402(47).
- Issue Form 131 (not Form 16A) as TDS certificate for all contractor payments from 1 Apr 2026.
- File Form 140 (not Form 26Q) as the quarterly TDS return from Tax Year 2026-27.
- Update vendor onboarding checklists with new section references and form numbers.
- Review past manpower supply contracts and assess TDS exposure for prior periods.
- Confirm your tax audit team knows Form 3CD is replaced by Form 26 under the new Act.
Summary
| ✅ Section 194C → Section 393(1) [Table Sl. No. 6(i).D(a) & D(b)] — effective 1 Apr 2026 ✅ Payment Codes: 1023 (Individual/HUF) and 1024 (Others) — replace ‘194C’ in all challans ✅ Rates: Unchanged — 1% (Individual/HUF) | 2% (Others) ✅ Thresholds: Unchanged — ₹30,000 single | ₹1,00,000 aggregate ✅ Manpower supply now explicitly ‘work’ under Section 402(47) — litigation settled ✅ TDS Certificate: Form 131 replaces Form 16A ✅ Quarterly Return: Form 140 replaces Form 26Q ✅ CBDT Circulars: Legally binding under Section 400(2) |
Key Takeaways
- Section 194C is replaced by Section 393(1) [Table Sl. No. 6(i)] with effect from 1st April 2026.
- TDS rates are unchanged — 1% for Individual/HUF (Code 1023) and 2% for all other payees (Code 1024).
- Threshold limits are unchanged — ₹30,000 per payment and ₹1,00,000 aggregate per year.
- Manpower supply services are now explicitly defined as ‘work’ under Section 402(47) — ending years of litigation.
- TDS certificates must now use Form 131 (not Form 16A) for contractor payments.
- Quarterly TDS returns must now use Form 140 (not Form 26Q).
- CBDT circulars are now legally binding on all deductors under Section 400(2).
- Transporter exemption continues under same conditions — ≤10 goods carriages + PAN + declaration.
Frequently Asked Questions
| Q: My software still shows Section 194C for TDS on contractors. What do I do? Update your TDS/ERP software to use Code 1023 (Individual/HUF) or Code 1024 (Others) under Section 393(1) for payments from 1 April 2026. Continuing to use ‘194C’ in challans or TDS returns after implementation of the new framework may lead to validation issues or non-acceptance in updated TRACES utilities. Contact your software vendor and tax team immediately to ensure timely compliance. Q: We have not been deducting TDS on manpower supply invoices. Is this now a default? Yes. Section 402(47) of the new Act explicitly includes manpower supply services in the definition of ‘work’. From 1st April 2026, TDS @ 1% (Code 1023 — Individual/HUF) or 2% (Code 1024 — Others) is mandatory on manpower invoices. Review past periods for any exposure. Q: Do we issue Form 16A or Form 131 to our contractors for Tax Year 2026-27? Form 131. Form 16A is the certificate format under the old Act. Under the Income Tax Act 2025 and the new Income Tax Rules 2026, non-salary TDS certificates must be issued using Form 131 for any payment made on or after 1st April 2026. Q: A transporter with 10 goods carriages claims TDS exemption. Does this continue? Yes. The transporter exemption continues under the new Act under the same conditions — not more than 10 goods carriages, PAN furnished, written declaration given. Update your vendor declaration format to reference the new section. |
| ⚠ DISCLAIMER This article is published for general informational and educational purposes only and does not constitute legal, tax, or professional advice. The provisions of the Income Tax Act, 2025 and the Income Tax Act, 1961 are subject to amendment through Finance Acts, CBDT Circulars, Notifications, Rules, and judicial decisions at any time. Section references, payment codes, form numbers, rates, and thresholds mentioned in this article reflect the law as understood on the date of publication (7 May 2026) and may not reflect subsequent amendments or clarifications. Fimaco Private Limited has taken reasonable care in compiling this content; however, no representation is made as to the completeness, accuracy, or ongoing validity of the information herein. Readers are strongly advised to verify all provisions from the official Income Tax portal (incometax.gov.in) and consult a qualified Chartered Accountant before making any compliance or business decisions. For professional support, contact us at info@fimaco.in or visit fimaco.in. |