Understanding TDS obligations on running account bills in Engineering, Procurement, and Construction (EPC) contracts is critical for compliance and cash flow management. Under Section 194C of the Income Tax Act, contractors and project owners must deduct Tax Deducted at Source on payments exceeding ₹30,000 per contract or ₹1,00,000 annually. For EPC projects involving multiple running bills, each payment triggers fresh TDS calculations. This guide covers threshold exemptions, applicable TDS rates (1-2%), GST treatment, deposit deadlines, and compliance requirements essential for EPC project stakeholders. Whether you're a contractor submitting running bills or a principal managing TDS compliance, Taxocity provides expert guidance to ensure 100% compliance while optimizing your tax position.

What is Section 194C and How Does it Apply to EPC Running Bills?

Section 194C mandates Tax Deducted at Source when any person pays a resident contractor in pursuance of a work contract. EPC contracts fall squarely within this scope because they involve payments for work execution, material supply, and labor services.

For EPC projects structured with running account bills (also called stage payments or interim certificates), TDS must be deducted on each bill payment that crosses the threshold limit. The critical distinction is that running bills are treated as separate payment events—each bill is evaluated individually for the ₹30,000 threshold, while cumulative annual payments determine whether the ₹1,00,000 threshold is breached.

This means if you issue 5 running bills of ₹25,000 each, no TDS applies to individual bills, but once cumulative payments reach ₹1,00,000, subsequent bills trigger TDS liability from the first bill payment of the new financial year.

TDS Threshold Limits for Running Account Bills: When TDS Applies

The threshold mechanism under Section 194C operates on a dual criterion:

• Single Bill Threshold: ₹30,000 per contract (if any single bill payment exceeds this, TDS applies to that payment)
• Annual Threshold: ₹1,00,000 aggregate payments per contractor per financial year (once crossed, all subsequent bills trigger TDS)

No TDS is required if payment is ≤₹30,000 per contract and ≤₹1,00,000 in a year. For EPC running bills, both limits must be monitored concurrently. Once either threshold is crossed, TDS obligations commence.

Practical Example: If you're making monthly running bill payments of ₹40,000 each on an EPC contract:

• Bill 1 (₹40,000): TDS applies (exceeds ₹30,000 single bill limit)
• Bills 2-3: TDS continues to apply
• All bills in next financial year: TDS recalculates based on new ₹1,00,000 annual threshold

TDS Rates for EPC Contractor Payments: 1% vs 2%

The applicable TDS rates are 1% for individuals/HUF, 2% for others (20% if no PAN). The rate depends on the contractor's classification:

Contractor Type	TDS Rate	Condition
Individual / HUF	1%	With valid PAN
Firms / Companies	2%	With valid PAN
Goods Carriage Operators	0%	Own fewer than 10 vehicles + declaration
Any Contractor	20%	No PAN provided

The 20% rate acts as a penalty for non-cooperation, making PAN collection critical for both parties. TDS calculation is done on the net contract value, excluding GST if mentioned separately on the invoice.

GST Exclusion from TDS Calculation: Key Compliance Point

GST should be excluded if it is mentioned separately in the invoice when calculating TDS amounts. This is a crucial detail often missed in EPC running bill processing.

For example:

• Contract value (excluding GST): ₹50,000
• GST @ 18%: ₹9,000
• Invoice total: ₹59,000
• TDS calculation base: ₹50,000 (not ₹59,000)
• TDS @ 1%: ₹500

Contractors should always clearly delineate GST on invoices to avoid inflated TDS deductions. This also eases GST credit recovery for the principal and reduces cash flow drag.

Timing of TDS Deduction: When to Deduct and Deposit

TDS deposits are due by the 7th of the following month; March deductions require deposit by April 30th. Critically, TDS must be deducted whenever payment is made or credited, whichever comes first.

For EPC running bills paid via bank transfer, TDS deduction timing depends on when funds leave your account (payment made) versus when the contractor's bank credits the amount (payment credited). Both trigger TDS obligations.

Deposit Timeline:

• TDS deducted in months April–February: Deposit by 7th of next month
• TDS deducted in March: Deposit by April 30th

Delays in TDS deposit incur interest penalties under Section 220(1), making timely deposit non-negotiable.

Who Must Deduct TDS Under Section 194C?

"Specified persons" include governments, corporations, companies, trusts, firms, and individuals/HUFs with annual business income exceeding ₹1 crore or professional income exceeding ₹50 lakh.

In EPC contracts, the principal (project owner or construction company) is typically the "specified person" obligated to deduct TDS from contractor payments. Contractors generally do not have to deduct TDS on sub-contractor payments unless they exceed the turnover thresholds.

This distinction matters: if the principal is an individual sole proprietor without significant turnover, TDS might not apply. However, most EPC principals are companies or large trusts, making TDS mandatory.

Compliance Requirements: Form 26Q, Form 16A, and Quarterly Reporting

Form 26Q must be filed quarterly, with Form 16A certificates issued to contractors. This reporting ensures transparency and helps contractors claim TDS credits in their ITR filings.

Key Compliance Checklist:

• Collect PAN from all contractors before making payments
• Calculate TDS on each running bill correctly (excluding GST)
• Deduct TDS at the applicable rate (1%, 2%, or 20%)
• Deposit deducted TDS by statutory deadlines
• File Form 26Q quarterly with all contractor details
• Issue Form 16A to contractors showing TDS deducted
• Maintain supporting documentation (invoices, payment proofs, TDS statements)

Non-compliance attracts penalties up to ₹10,000 per offense under Section 271G, plus interest on delayed TDS deposits.

Common Pitfalls in EPC TDS Compliance

EPC project managers often make these mistakes:

• Ignoring the cumulative annual threshold: Tracking only single bill amounts and missing when the ₹1,00,000 threshold is crossed
• Including GST in TDS calculation: Not excluding GST results in over-deduction and contractor disputes
• Missing multiple running bills: Treating running bills as a single contract instead of evaluating each payment separately
• Late TDS deposits: Delaying TDS deposits beyond the 7th of following month triggers interest and penalties
• No Form 16A issuance: Forgetting to provide TDS certificates to contractors, creating compliance gaps
• Inadequate PAN collection: Proceeding with 20% TDS when PAN verification could reduce it to 1-2%

How Taxocity Simplifies EPC TDS Compliance

Managing TDS obligations across multiple running bills on large EPC projects can be complex, especially when coordinating with contractors, tracking thresholds, and meeting deposit deadlines. Taxocity provides end-to-end compliance support tailored to EPC projects:

• TDS Calculation & Compliance: Expert calculation of TDS on running bills, ensuring correct threshold tracking and rate application
• Form 26Q Filing: Quarterly filing of Form 26Q with accurate contractor details and TDS amounts
• Form 16A Issuance: Timely issuance of TDS certificates to all contractors
• Deposit Management: Ensuring TDS deposits are made by statutory deadlines to avoid penalties
• Documentation Support: Maintaining organized records and audit-ready documentation
• 100% Compliance Guarantee: Real human tax experts review all compliance, not just automated systems

With Taxocity's support, EPC principals can focus on project execution while compliance responsibilities are handled systematically and accurately.

Key Takeaways for EPC Running Bill TDS Compliance

• Section 194C applies to EPC running bills exceeding ₹30,000 per bill or ₹1,00,000 annually
• TDS rates are 1% (individuals), 2% (companies/firms), or 20% (no PAN)
• Always exclude GST from TDS calculation base
• Deduct TDS when payment is made or credited, whichever is earlier
• Deposit TDS by the 7th of the following month (April 30th for March deductions)
• File Form 26Q quarterly and issue Form 16A to contractors
• Collect PAN from all contractors to avoid the 20% penalty rate
• Track cumulative annual payments to identify when thresholds are crossed

Talk to a Compliance Expert for Your EPC Project

EPC contracts involve substantial TDS obligations that, if mishandled, can create contractor disputes, compliance penalties, and operational delays. Taxocity's tax specialists have decades of experience managing TDS compliance for large construction and engineering projects across India.

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Sources

• Section 194C of ITA: TDS on Contractor Payments Explained
• Section 194C of Income Tax Act: TDS on Payments to Contractors 2026
• Section 194C - Easy Guide on TDS on Payment to Contractor
• Section 194C: TDS on Payments to Contractors & Sub-Contractors

Disclaimer: This article is for informational purposes only and is not tax advice. TDS obligations vary based on specific contract terms, contractor classification, and jurisdictional requirements. Please consult a qualified tax advisor or Taxocity's compliance experts before implementing any TDS deduction strategy on your EPC projects.