TDS on Interest, Commission and Contractor Payments 2026-27 (Income Tax Act 2025)
Under the Income Tax Act 2025, tax on payments to a resident for commission, contract work, professional or technical fees and interest is deducted under section 393(1), in Table Sl. Nos. 1, 5 and 6. Contractors attract 1% or 2%, commission 2%, professional fees 10% and technical fees 2% for specified payers, while interest is deducted at the "rates in force". Each row has its own threshold and its own payer test.
This guide covers who must deduct, at what rate, on what amount, and how and when the tax is deposited and reported. Every figure is from the Act as amended by the Finance Act, 2026 and the Income-tax Rules, 2026, with the section or rule shown beside it. It applies to payments in tax year 2026-27. This is information, not tax advice.
Which row of the section 393(1) Table applies to my payment?
Start with the nature of the payment and then check who is paying. The diagram shows the main routes.
The terms used in the diagram are defined in section 402: "designated person" in 402(11), "specified person" in 402(37), and "commission or brokerage" in 402(7).
What are the TDS rates and thresholds for each payment?
| Payment (section 393(1) Table) | Payer | Rate | Threshold |
|---|---|---|---|
| Insurance commission (soliciting or procuring insurance business), Sl. No. 1(i) | Any person | Rates in force | Rs 20,000 |
| Other commission or brokerage, Sl. No. 1(ii) | Specified person | 2% | Rs 20,000 |
| Contract work, including supply of labour, Sl. No. 6(i) | Designated person | 1% if the contractor is an individual or HUF; 2% for any other contractor | Rs 30,000 for any one sum, or Rs 1,00,000 for the total of such sums |
| Contract work, professional fees, commission or brokerage, Sl. No. 6(ii) | Individual or HUF not covered by Sl. Nos. 6(i), 6(iii) or 1(ii) | 2% | Rs 50 lakh |
| Professional services, technical services, director's remuneration, royalty, Sl. No. 6(iii) | Specified person | 2% for technical services (not professional), film royalty and call-centre payees; 10% for the rest | Rs 50,000; nil for director's remuneration or fees |
| Interest on securities, Sl. No. 5(i) | Any person | Rates in force | Rs 10,000 |
| Other interest, Sl. No. 5(ii) | Banking company, co-operative bank, or post office (notified scheme) | Rates in force | Rs 1,00,000 for a senior citizen; Rs 50,000 for anyone else |
| Other interest, Sl. No. 5(iii) | Specified person other than a Sl. No. 5(ii) payer | Rates in force | Rs 10,000 |
"Rates in force" means the rate fixed for the year by the Finance Act. The Table does not print a percentage for interest, so check the current rate before you deduct. For 6(iii), the 2% rate applies only to the three cases the Table lists: fees for technical services that are not professional services, royalty on sale, distribution or exhibition of cinematographic films, and a payee engaged only in operating a call centre.
Who is a "designated person" for contractor payments?
Section 402(11) lists them. It covers the Central and State Governments, local authorities, companies, firms, co-operative societies, trusts, registered societies, universities and statutory housing or development authorities. An individual, HUF, association of persons or body of individuals is also a designated person if its sales, gross receipts or turnover in the immediately preceding tax year exceeded Rs 1 crore for business or Rs 50 lakh for profession.
A "specified person" (section 402(37)) is any person other than an individual or HUF, plus an individual or HUF who crossed the same Rs 1 crore or Rs 50 lakh limits in the preceding tax year.
What counts as "work" in a contract?
Section 402(47) says "work" includes advertising, broadcasting and telecasting, carriage of goods or passengers by any mode other than railways, catering, and manufacturing or supplying a product to a customer's specification using material bought from that customer or its associate. A contract includes a sub-contract (section 402(10)).
Where the contract is for manufacturing or supply to a customer's specification, the Note to Sl. No. 6 says tax is deducted on the invoice value excluding material, if the material value is shown separately in the invoice. If the material is not shown separately, tax is deducted on the whole invoice value.
How is TDS on contractor payments calculated? Four worked examples
Example 1: small payments add up (tax year 2026-27). Whitefield Builders Pvt Ltd (a company, so a designated person) pays Meena, an individual civil contractor, for four small jobs. The company deducts 1% because Meena is an individual. Section 393(1)(a) deducts tax on the entire amount once the aggregate crosses Rs 1,00,000.
| Job | Bill | Running total | Tax action |
|---|---|---|---|
| 1 | Rs 25,000 | Rs 25,000 | No tax. Below Rs 30,000 and below Rs 1,00,000 |
| 2 | Rs 28,000 | Rs 53,000 | No tax |
| 3 | Rs 30,000 | Rs 83,000 | No tax. Rs 30,000 does not exceed the limit |
| 4 | Rs 22,000 | Rs 1,05,000 | Aggregate exceeds Rs 1,00,000. Tax = 1% x Rs 1,05,000 = Rs 1,050 |
The Rs 1,050 is taken from the fourth payment, so Meena receives Rs 22,000 - Rs 1,050 = Rs 20,950. Had the contractor been a firm or company, the rate would be 2%: 2% x Rs 1,05,000 = Rs 2,100.
Example 2: commission (tax year 2026-27). Sharma Traders LLP (not an individual or HUF, so a specified person) pays Rs 36,000 in commission to a sales agent during the year. The Rs 20,000 threshold is crossed, so tax is 2% x Rs 36,000 = Rs 720. If the total were Rs 18,000, no tax would be deducted under Sl. No. 1(ii).
Example 3: professional and technical fees (tax year 2026-27). A company pays a law firm Rs 80,000 in professional fees and a software consultant Rs 1,20,000 for technical services (not professional services).
| Payee | Rate (Sl. No. 6(iii)) | Calculation | Tax |
|---|---|---|---|
| Law firm, professional fees Rs 80,000 | 10% | 10% x Rs 80,000 | Rs 8,000 |
| Consultant, technical fees Rs 1,20,000 | 2% | 2% x Rs 1,20,000 | Rs 2,400 |
Both are above the Rs 50,000 threshold.
Example 4: an individual crossing Rs 50 lakh (tax year 2026-27). Ravi runs a trading business. His turnover in the preceding tax year was Rs 80 lakh, below Rs 1 crore, so he is not a designated person or a specified person. In the current year he pays a contractor Rs 60 lakh in total for his shop fit-out. Sl. No. 6(ii) applies with its Rs 50 lakh threshold. Because Rs 60 lakh exceeds the threshold, tax is 2% on the entire amount: 2% x Rs 60,00,000 = Rs 1,20,000. If the total were Rs 45 lakh, nothing would be deducted.
How does TDS on interest work for a bank deposit?
Scenario A. Kiran, who is not a senior citizen, earns Rs 62,000 interest from a bank in the year. That is above the Rs 50,000 limit in Sl. No. 5(ii), so the bank deducts tax at the rate in force on the interest. Kiran's mother, a senior citizen with Rs 62,000 of interest at the same bank, is below her Rs 1,00,000 limit and the bank deducts nothing.
Scenario B. A bank that has not adopted core banking solutions pays interest on time deposits. Note 1 to Sl. No. 5 says the threshold is then measured branch by branch. The payee's total across branches does not trigger deduction by itself.
Two Table features save payees from over-deduction. Note 2 lets the payer adjust any excess or shortfall from earlier deductions in the same tax year in a later deduction. Under section 393(6) and rule 211, a resident individual whose estimated tax for the year is nil can give a written declaration in Form 121, which covers interest under Sl. No. 5(i), (ii) and (iii). The payer must report these declarations in the quarterly statement even if no tax was deducted in that quarter. The declaration route is not available to anyone other than a resident aged 60 or more if the aggregate of such incomes is, or is likely to be, above the maximum amount not chargeable to tax (note to section 393(6)).
When is TDS not deducted at all?
- Goods carriage contractors. A transporter who owns ten or fewer goods carriages gives the payer a declaration with a PAN, and the payer files the prescribed particulars (section 393(4), Sl. No. 8(a)).
- Personal use. No deduction under Sl. No. 6(i) when an individual or HUF pays exclusively for personal purposes, and none under 6(iii) in the same case (section 393(4), Sl. Nos. 8(b) and 9).
- BSNL and MTNL public call office franchisees. Commission payable by them is not subject to Sl. No. 1(ii) (section 393(4), Sl. No. 1).
- Certain interest. Examples are interest on a firm's payment to its partner, interest paid by the Central Government under tax laws, and interest on deposits other than time deposits with a banking company (section 393(4), Sl. No. 7).
- Payments to the Government or the Reserve Bank of India. Section 393(5) excludes them from deduction altogether.
Where the tax is borne by the payer under an agreement, section 393(10) increases the income to the gross amount that leaves the agreed net amount after tax.
When and how is the TDS deposited and reported?
Tax is deducted at the earlier of the time the sum is credited to the payee's account and the time it is paid (section 393(1)(c)). The deposit and reporting dates then follow.
| Step | Sl. Nos. 1(ii), 5, 6(i), 6(iii) | Sl. No. 6(ii) |
|---|---|---|
| Deposit the tax | By the 7th of the month after deduction; by 30 April for deduction in March (rule 218(2)) | Within 30 days from the end of the month of deduction, with a challan-cum-statement in Form 141 (rule 218(3)) |
| Report the deduction | Quarterly statement in Form 140 (rule 219(1)): 31 July, 31 October, 31 January, 31 May (rule 219(4)) | Form 141 itself within 30 days from the end of the month of deduction (rule 219(5)) |
| Issue the certificate | Form 131, within 15 days from the due date of the statement (rule 215) | Form 132, within 15 days from the due date of Form 141 (rule 215) |
| TAN | Required (section 397(1)(a)) | Not required (section 397(1)(c)(i)) |
A late deposit for a March deduction in Sl. No. 6(i) is due on 30 April. A deduction made in October under the same row is due by 7 November, and it is reported in the Form 140 for the October to December quarter by 31 January. Section 395(4) and rule 215 govern the certificate. In special cases the Assessing Officer can permit quarterly deposit for Sl. No. 1 and 5(ii), (iii) deductions (rule 218(4)). A Form 140 deduction can include Sl. No. 1(ii), 6(i), 6(iii), 5(i), 5(ii) and 5(iii) together.
Can the payee get a lower or nil TDS certificate?
Yes. Under section 395(1), a payee whose total income justifies it can apply to the Assessing Officer for deduction at a lower rate or no deduction. The application is made in Form 128 (rule 213(1)). The Assessing Officer considers the tax on the year's estimated income, the tax position of the last four tax years, existing liabilities and advance tax or TDS already credited (rule 213(3)). Once a certificate is issued, the payer deducts at the rate stated in it, or deducts nothing, until it expires (section 395(1)(c)). See our guide to the lower or nil TDS certificate.
What if the payee has no PAN?
Section 397(2) requires the payee to furnish a valid PAN. If not, tax is deducted at the higher of the rate in the relevant provision, the rate in force, or 20% (section 397(2)(b)(i)). A declaration in Form 121 without a PAN becomes invalid, and the payer must deduct at that higher rate (section 397(2)(f) and (g)).
Example: a company pays a Rs 2,00,000 contract bill to a firm that gives no PAN. The normal rate is 2%, so tax would be Rs 4,000. Without a PAN the rate becomes 20%, so tax is 20% x Rs 2,00,000 = Rs 40,000.
What happens if you do not deduct or deposit the tax?
Under section 398 the payer becomes an "assessee in default". On top of that, simple interest is charged at 1% per month or part of a month from the date tax was deductible until it is deducted, and 1.5% per month or part of a month from the date of deduction until it is paid (section 398(3)(a)). The interest must be paid before the statement is filed (section 398(3)(b)). Section 398(2) gives relief where the payee has filed a return, included the income, paid the tax, and the payer has an accountant's certificate. An order deeming a person in default cannot be made after six years from the end of the tax year in which the tax was deductible, or after two years from the end of the tax year in which a correction statement is delivered, whichever is later (section 398(5)).
What are the common mistakes?
- Checking one bill, not the aggregate. For contractors the Rs 1,00,000 test is on the total of sums, so many small bills still trigger deduction.
- Using the wrong payer test. A trader with Rs 1.2 crore turnover last year is a designated person under Sl. No. 6(i), not a 6(ii) payer. Check the preceding tax year's turnover.
- Deducting 1% for a firm. The 1% rate is only for an individual or HUF contractor. Firms, companies and others attract 2%.
- Applying the 7th-of-next-month date to Sl. No. 6(ii). That row has its own 30-day, Form 141 route.
- Ignoring Form 121 reporting. Declarations received must be reported in the statement even for quarters with no deduction (rule 211(4)).
- Assuming the interest rate. The Table says "rates in force". Confirm the current rate before deducting.
Quick reference
| Item | Rule |
|---|---|
| Deposit, most rows | 7th of next month; 30 April for March (rule 218(2)) |
| Deposit, Sl. No. 6(ii) | 30 days from end of month, Form 141 (rule 218(3)) |
| Quarterly statement, Form 140 | 31 July, 31 October, 31 January, 31 May (rule 219(4)) |
| No-PAN rate | Higher of provision rate, rate in force, or 20% (section 397(2)(b)) |
| Interest for not deducting | 1% per month or part of a month (section 398(3)(a)(i)) |
| Interest for deducting but not paying | 1.5% per month or part of a month (section 398(3)(a)(ii)) |
How does this fit into a CA firm's workflow?
For a practice, the hard part is not the arithmetic. It is knowing which clients cross the contractor or professional-fee thresholds, which are designated or specified persons this year, and when each deposit and statement is due. Finexo's practice management software tracks these deadlines across your client book and sends reminders before they pass. It does not calculate TDS or file the statements for you.
For the same framework applied to rent, read our guide to TDS on rent under the Income Tax Act 2025.
Where this is in the Act
- Section 393(1), Table Sl. No. 1: commission or brokerage.
- Section 393(1), Table Sl. No. 5: interest.
- Section 393(1), Table Sl. No. 6: contractors, professional and technical fees.
- Section 393(4), (5), (6), (7), (10): no-deduction cases, declarations, gross-up.
- Section 397: TAN, PAN, quarterly statements.
- Section 398: consequences of failure to deduct or pay.
- Section 402(7), (10), (11), (28), (37), (47): definitions.
- Rules 211, 215, 218, 219 of the Income-tax Rules, 2026: Form 121, certificates, deposit and statements.
Last reviewed against the Act as amended by the Finance Act, 2026 and the Income-tax Rules, 2026 on 10 November 2026.
Frequently Asked Questions
What is the TDS rate on contractor payments under the Income Tax Act 2025?
Under section 393(1), Table Sl. No. 6(i), it is 1% if the contractor is an individual or HUF and 2% for any other contractor. The payer must be a designated person under section 402(11).
What is the TDS threshold for contractor payments?
Rs 30,000 for any single sum, or Rs 1,00,000 for the total of such sums in the year (Sl. No. 6(i)). Once either is crossed, tax is deducted on the entire amount.
Does an individual who is not a designated person deduct TDS on contract payments?
Yes, under Sl. No. 6(ii), at 2%, but only where the sum exceeds Rs 50 lakh. This applies to an individual or HUF who is not a designated person or specified person, and covers contract work, professional fees, commission and brokerage.
What is the TDS rate on professional fees?
Under Sl. No. 6(iii), professional fees paid by a specified person attract 10%, with a Rs 50,000 threshold. Fees for technical services that are not professional services attract 2%.
What is the TDS threshold on bank interest?
Under Sl. No. 5(ii), it is Rs 1,00,000 for a senior citizen and Rs 50,000 for anyone else. The rate is the "rates in force".
When must TDS on contractor and commission payments be deposited?
By the 7th of the month after deduction, or 30 April for March (rule 218(2)). For Sl. No. 6(ii), within 30 days from the end of the month of deduction with Form 141 (rule 218(3)).
Can a contractor or interest earner ask for lower or nil TDS?
Yes. The payee applies in Form 128 to the Assessing Officer under section 395(1) and rule 213. If a certificate is issued, the payer deducts at the certified rate, or nothing, until its validity ends.