Are you building a house or commercial property? Know when TDS applies to contractor payments under Income Tax Act 2025

Know when TDS applies to payments made to contractors for construction, repair, or renovation work. The rules specify who must deduct TDS, the applicable 1% or 2% rates, the ₹30,000 single-payment and ₹1 lakh annual thresholds, and separate rules for individuals and HUFs.

If you have hired a contractor to repair, renovate, design, or build your house, office, or business premises, you need to know whether TDS applies before making the payment.

For payments made on or after 1 April 2026, TDS on contractor payments is governed by Section 393(1) of the Income-tax Act, 2025.

So, when do you need to deduct TDS on payments to a contractor, what rate applies, and when is TDS not required? Here’s what you need to know.

Who must deduct TDS on construction payments?

The person making the payment to the contractor is responsible for deducting TDS.

For payments covered under Section 393(1), Table Sl. No. 6(i), the payer must be a “designated person” covered by the law. This includes specified entities such as companies, firms, government bodies, local authorities and other persons covered by the provision.

For payments to a resident contractor for carrying out work under a contract:

• 1% TDS applies when the contractor is an individual or HUF.
• 2% TDS applies when the contractor is any other person or entity.

TDS must be deducted either when the contractor's payment is recorded in the payer's books or when the payment is actually made, whichever happens first.