TDS on freelancers and agencies: 194C or 194J, and the new rules
TDS on freelancers and agencies: 194C or 194J, and the new rules
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The 194C vs 194J question still decides how much TDS you cut, even though both sections were renumbered on 1 April 2026. Work done to order, like printing or event production, is a contract: 1% for an individual and 2% for a company. Professional and technical work, like consulting, legal or IT services, is a fee: 10% for professional services and 2% for technical services. Both now sit under section 393(1) of the Income-tax Act, 2025.
Who this is for: founders and finance leads who pay freelancers, consultants and agencies, and want to get the deduction right the first time.
What changed on 1 April 2026
The Income-tax Act, 2025 replaced the 1961 Act from tax year 2026-27. Most TDS on payments to residents moved into one section, 393, with a table of payment types. People still say "194C" and "194J", and so does this post, because that's what your CA and your vendors will say. The new names matter for your challans and returns.
| Payment | Old section | New entry | Rate | When TDS starts |
|---|---|---|---|---|
| Contract work, individual or HUF | 194C | 393(1), table 6(i) | 1% | Over ₹30,000 in one payment, or over ₹1,00,000 in the year |
| Contract work, company, firm or LLP | 194C | 393(1), table 6(i) | 2% | Same limits |
| Professional fees | 194J(b) | 393(1), table 6(iii) | 10% | Over ₹50,000 in the year |
| Technical services and royalty | 194J(a) | 393(1), table 6(iii) | 2% | Over ₹50,000 in the year |
| Director's fees (not salary) | 194J | 393(1), table 6(iii) | 10% | From the first rupee |
| Commission or brokerage | 194H | 393(1), table 1(ii) | 2% | Over ₹20,000 in the year |
| Rent of office or furniture | 194I(b) | 393(1), table 2(ii) | 10% | Over ₹50,000 a month |
The limits are per vendor, per year. No PAN means 20%. Your quarterly return is now Form 140 (it was 26Q), and the certificate you give the vendor is Form 131 (it was 16A).
How to tell a contract from a fee
Ask one question: am I paying for a job to be carried out, or for someone's skill and judgement?
- Contract (old 194C): the vendor carries out work you specified. Printing, catering, event production, housekeeping, supplying labour, making goods to your design, transport, and producing or running advertising.
- Professional fee (old 194J, 10%): someone applies a profession. Legal, accountancy, medical, engineering, architecture, interior decoration, advertising as a profession, technical consultancy, and professions the government has notified, which include information technology and company secretaries.
- Technical services (2%): managerial, technical or consultancy services that aren't a profession in the list above. This is the grey zone, and the one CAs argue about most.
When in doubt, many companies deduct at the higher rate. The vendor can claim the excess back in their return, but they won't thank you, so ask your CA for the common cases once and write the answer down.
Five real cases
These are the payments startups make most often. The amounts are examples.
1. A freelance designer
Riya designs your pitch deck and brand guide for ₹80,000 across the year. Design is a creative, skill-based service, and most CAs treat it as a professional fee. Once the total crosses ₹50,000, deduct 10%. On ₹80,000 that is ₹8,000 for the year.
If instead you send a printer a finished file and ask for 2,000 brochures, that is a contract. The printer is carrying out a job to your specification.
2. An advertising agency running a campaign
You pay an agency ₹3,00,000 to produce and run a campaign. Producing and running advertising is treated as contract work. The agency is a company, so deduct 2%: ₹6,000.
If the same agency charges a separate fee for brand strategy, that part may be a professional fee at 10%. Ask them to show it as a separate line.
3. A management consultant
A former CFO helps you build a financial model for ₹1,20,000. That is a professional fee: 10%, so ₹12,000. If she is paid monthly, start deducting from the month the total crosses ₹50,000, and deduct on the full amount from then on.
4. A freelance developer
Arjun builds part of your app for ₹60,000 a month. Information technology is a notified profession, so most companies deduct 10% as a professional fee: ₹6,000 a month. If a firm supplies a developer and invoices for "technical services", some CAs apply 2%. Agree the treatment before the first invoice.
5. A housekeeping agency
You pay a facilities company ₹25,000 a month to clean the office. That is a contract. No single payment crosses ₹30,000, but the year's total goes over ₹1,00,000 in the fifth month, when it reaches ₹1,25,000. Once the yearly limit is crossed, TDS applies to the whole year's total so far, so the fifth payment carries 2% of ₹1,25,000: ₹2,500. After that, deduct 2% of each payment, which is ₹500 a month.
GST and TDS together
Deduct TDS on the invoice value before GST, provided the invoice shows GST separately. On a ₹1,00,000 professional fee plus ₹18,000 GST, TDS is ₹10,000, not ₹11,800. You pay the vendor ₹1,08,000.
When to deposit and file
TDS deducted in a month is deposited by the 7th of the next month (March's by 30 April). The quarterly Form 140 return is due on 31 July, 31 October, 31 January and 31 May. A late return costs ₹200 a day. The full calendar is in GST and TDS due dates for 2026-27.
Common mistakes
- Waiting for the ₹50,000 limit on each invoice. The limit is for the year. Track totals by vendor.
- Deducting on GST. Only the value before GST, if GST is shown separately.
- Not collecting PAN upfront. No PAN means 20%.
- Booking the expense but forgetting the deduction. Interest runs from the date TDS should have been deducted.
- Paying the vendor in full, then asking for the TDS back. It never goes well. Deduct at the time of payment or credit, whichever comes first.
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Questions people ask
Is 194J still valid in 2026?
The old section numbers no longer apply to payments made on or after 1 April 2026. Professional and technical fees now fall under section 393(1) of the Income-tax Act, 2025, table entry 6(iii). The rates and the ₹50,000 limit are the same as the last version of 194J.
What is the TDS rate on a freelancer in 2026-27?
It depends on the work. Professional services, such as consulting, legal or IT services, carry 10% once payments cross ₹50,000 in the year. Work done under a contract, such as printing or event production, carries 1% for an individual and 2% for a company or firm.
Do I deduct TDS on GST too?
No, as long as GST is shown separately on the invoice. Deduct TDS on the amount before GST. If the invoice shows one combined figure, deduct on the whole amount.
What if the freelancer has no PAN?
Deduct at 20%, or the normal rate if that is higher. Ask for a PAN before the first payment. It is quicker than explaining a higher deduction to someone you work with every month.
Sources
- Income Tax Department: Income-tax Act, 2025 (opens in a new tab)
- TDS rates and thresholds for tax year 2026-27 (Taxguru) (opens in a new tab)
- TDS on professional and technical fees, section 393(1) (TDSMAN) (opens in a new tab)
- TDS on contractor payments, section 393(1) (Busy) (opens in a new tab)
- TDS and TCS due dates for tax year 2026-27 (Studycafe) (opens in a new tab)
This is general information, not tax advice. Check with your CA for your company's situation.