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Contractor TDS under payment code 1002 (formerly Section 194C) carries two different rates (1% individual/HUF, 2% others) and a dual threshold (₹30,000 per payment, ₹1,00,000 aggregate per FY). Misclassifying contractor status, missing the aggregate threshold rollover, or confusing contractor payments with professional fees produces TRACES default notices and Form 168 mismatches that have to be resolved before the deductee can claim credit.
Reconciliation joins the AP ledger (contractor invoices and payments) with the TDS challan register and Form 168 lines on a composite key of deductor TAN, payment code 1002, quarter, and deductee PAN. The matching engine checks rate applied against contractor entity type, validates per-payment and aggregate thresholds against year-to-date payments, and flags any line where the gross-up implied by tax amount divided by gross amount does not equal 1% or 2%.
Vendor master annotated with contractor entity type (individual / HUF / firm / company), PAN, and any transport-carrier declaration on file. Reconciliation ruleset configured with payment code 1002 mapped to legacy 194C for cross-era matching, dual-rate tolerance (1% for individual/HUF, 2% for others), and threshold tracking on a per-vendor per-FY basis.
Form 168 contractor lines fully matched to AP ledger, rate variances flagged at invoice level, threshold breach dates documented, and a clean audit pack ready for statutory audit showing every contractor payment with the applicable rate justification.
Quick reference: Payment Code 1002 at a glance
| Attribute | Value |
|---|---|
| Payment code | 1002 |
| Parent section | 393 |
| Sub-clause | 393(1)(a) |
| Legacy section | 194C |
| Rate | 1% (individual / HUF) · 2% (others) |
| Threshold | ₹30,000 single payment OR ₹1,00,000 aggregate per FY |
| Applicability | Resident contractors and sub-contractors |
| Effective from | April 1, 2026 |
| Form 168 description | Contractor and sub-contractor payments |
| Challan | ITNS 281, payment code field = 1002 |
What payment code 1002 covers
Payment code 1002 captures the broadest sweep of business-to-business spend in the Indian TDS regime: anything paid to a resident party in pursuance of a contract for work or services that does not fall under the professional, commission, rent, or e-commerce buckets. The list is long. Civil construction contracts at site offices, transport contractors moving goods between warehouses, advertising agencies producing creative, event management firms running conferences, security agencies, housekeeping vendors, catering suppliers, manpower agencies, IT hardware AMC providers — all sit under code 1002.
The legal definition pulled from Section 393(1)(a) mirrors the 1961 Act’s Section 194C: any sum paid to a resident contractor for carrying out any work, including the supply of labour. “Work” is interpreted broadly and includes manufacturing or supplying a product to a customer’s specification where the raw material is provided by the customer.
A worked example for FY 2026-27: A manufacturing company pays its civil contractor (a partnership firm) ₹2,40,000 across three invoices in April and May 2026 (₹40,000, ₹85,000, ₹1,15,000). The first invoice breaches the ₹30,000 per-payment threshold; TDS at 2% (₹800) is deducted at the time of the first payment. The second and third invoices also trigger 2% TDS (₹1,700 and ₹2,300 respectively). All three challans are filed with payment code 1002 under parent Section 393.
Rate, threshold, and applicability rules
The 1% versus 2% distinction is the most error-prone aspect of code 1002. The rule is contractor entity type, not payer entity type: a Pvt Ltd payer pays an individual contractor at 1%, and the same Pvt Ltd payer pays a partnership firm contractor at 2%. Vendor master needs an explicit “contractor entity type” field to drive the rate selection in the ERP TDS engine.
The threshold trigger is bidirectional. A single payment of ₹35,000 triggers deduction immediately because it crosses the ₹30,000 per-transaction floor. Separately, eight payments of ₹12,500 each in a financial year aggregate to ₹1,00,000 and trigger deduction from the eighth payment onwards — and require retrospective deduction (or recovery from the next payment) on the cumulative amount.
The transport contractor exemption persists: no TDS on payments to a transport operator owning ten or fewer goods carriages, provided a written declaration with PAN is on file. This requires an annual collection cycle from logistics vendors.
What payment code 1002 replaced (1961 Act → 2025 Act)
Under the Income Tax Act 1961, contractor TDS was governed by Section 194C, introduced in 1972 and amended dozens of times across five decades. The Act 2025 absorbs 194C into Section 393(1)(a) without changing the substantive rate or threshold structure. The renumbering is a classification exercise, not a rate reset.
Cross-era reconciliation is the practical complication. A contractor invoice dated March 28, 2026 with payment on April 4, 2026 is a Q4 FY 2025-26 deduction under Section 194C — the challan must show 194C. The same vendor’s next invoice, dated April 15, 2026 and paid April 22, 2026, is a Q1 FY 2026-27 deduction under code 1002. Year-end vendor statements will contain both legacy and new-code lines, and the Section 393 TDS reconciliation framework explains how a dual-mode reconciliation engine treats the two codes as equivalent for matching purposes.
The Q4 FY 2025-26 return cycle closes on May 31, 2026 carrying 194C. The Q1 FY 2026-27 return is due by July 31, 2026 carrying code 1002.
Form 168 reconciliation for payment code 1002
Form 168 — which replaces Form 26AS from FY 2026-27 — surfaces contractor TDS credits filtered by payment code 1002. The reconciliation join key is deductor TAN plus quarter plus deductee PAN. Three columns matter most: gross amount paid (must match the AP invoice net of any retention), tax deducted (must match 1% or 2% of gross depending on entity type), and status (booked indicates the deductor’s return has been filed and processed; pending means challan deposited but return not yet matched).
Common pitfalls when joining to the receivable ledger:
- PAN mismatch: the deductor’s TAN-PAN mapping inside their return points to an outdated PAN of yours after a re-issue. The Form 168 line never lands in your statement.
- Quarter mismatch: a March payment received in April was deducted under FY 2025-26 Q4 (194C) but your AR posted it in April FY 2026-27, leading the recon engine to search code 1002 for what is actually a legacy 194C entry.
- Rate mismatch: Form 168 shows 2% deduction; your master flags the contractor as individual (expecting 1%). Either the deductor erred or your master is wrong.
Common reconciliation issues for payment code 1002
Beyond Form 168 matching, four operational issues recur on code 1002 reconciliations:
- Threshold rollover failures. Aggregate threshold tracking has to span the full FY across all invoices; ERPs that count threshold per-month or per-invoice silently miss the rollover.
- Contractor vs professional confusion. A digital marketing retainer paid to an LLP could be coded as 1002 (contractor, 2%) or 1003 (professional, 10%) depending on the nature of the deliverable. Misclassification creates an under-deduction default.
- Transport carrier declaration drift. Declarations expire annually; an out-of-date declaration on file does not protect against TDS demand on subsequent payments.
- Sub-contractor layer. Payments to sub-contractors are also covered under code 1002. A principal contractor who deducts TDS from a sub-contractor needs a separate code 1002 challan stream with the sub-contractor as deductee.
These reconciliation patterns are documented in detail in our TDS reconciliation software overview, and the broader Indian reconciliation surface is covered in reconciliation software India.
For the full set of codes across Sections 392 / 393 / 394 / 413, see the TDS payment codes 1001–1092 master reference. The CBDT’s published code list and official notifications are maintained on the Income Tax India e-filing portal, where the Income Tax Act 2025 enrolled text and CBDT notifications on payment code 1002 are published.
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