Plan contractor hiring in India

Most contractors here trade as a proprietorship, which means the person and the business are one taxpayer under one Permanent Account Number. Practices that take on staff, or that want to bill under a firm name, usually convert to a limited liability partnership or a private limited company. The choice reaches the payer, because withholding on contract work runs at 1% where the contractor is an individual or a Hindu undivided family and at 2% for everyone else. All of this moved house on 1 April 2026, when the Income-tax Act, 2025 replaced the 1961 Act. The rates and the thresholds carried across unchanged. The form numbers did not.

Sources: Income-tax Act, 2025, Gazette of India, Ministry of Finance, the Income-tax Act, 2025 comes into force

If the line is crossed

Reclassification lands on whoever paid, so a buyer outside India is normally reached through its Indian subsidiary rather than directly. The bill is provident fund and state insurance contributions for the period, both shares, with interest and damages, and gratuity where the service ran long enough. Tax runs on a separate track. An Indian payer that should have deducted and did not owes simple interest at 1% for every month or part of a month from the date the tax was deductible until it deducts, then 1.5% for every month or part of a month from deduction until it actually pays. One escape exists and it is narrow: the payer is not treated as in default if the contractor has filed a return, taken the amount into income and paid the tax on it, and the payer produces an accountant's certificate to that effect.

Sources: Income-tax Act, 2025, section 398

Form 131

Certificate of tax deducted on payments other than salary, formerly Form 16A

The contractor cannot claim credit for tax withheld from their invoices without it, so this is the document they will chase. It is a certificate under section 395(4)(a) of the Income-tax Act, 2025 and it carries the number 131 for tax year 2026-27 onward. For anything up to 31 March 2026 the same certificate is still Form 16A, and asking for the wrong one is the fastest way to lose a week.

Issued by: The deducting payer, who downloads it from the tax department's reconciliation portal and signs it digitally or by hand. A certificate typed up any other way is not a valid certificate.

Timing: Within 15 days of the due date for the matching quarterly statement, which puts it at 15 August, 15 November, 15 February, and 15 June for the January to March quarter.

Sources: Income-tax Department, Form No. 131 questions and answers, Income-tax Act, 2025, section 395

Form 140

Quarterly statement of tax deducted on payments other than salary, formerly Form 26Q

The quarterly return in which a payer reports every deduction it made from resident contractors. It matters to the payer more than it looks, because the certificate in Form 131 is generated from this statement. Until the statement is filed and processed, no certificate exists to issue.

Issued by: Filed electronically by the deducting payer with the Income-tax Department.

Timing: 31 July, 31 October, 31 January, and 31 May for the January to March quarter. A correction can be filed within two years of the end of the tax year in which the original was due.

Sources: Income-tax Department, Form No. 140 questions and answers, Ministry of Finance, the Income-tax Act, 2025 comes into force

Form 168

Annual Information Statement, formerly Form 26AS

The contractor side of the same ledger: everything reported against their Permanent Account Number, including tax deducted by every payer, taxes paid, and specified financial transactions. When a contractor says the credit has not shown up, this is the screen they are looking at, and the usual cause is an unfiled or unprocessed statement at the payer's end rather than anything the contractor did.

Issued by: Generated by the Income-tax Department and posted into the contractor's account on the filing portal. Nobody files it.

Timing: Updated through the year as each quarterly statement and payment is processed.

Sources: Income-tax Department, Form No. 168 questions and answers, Ministry of Finance, the Income-tax Act, 2025 comes into force

Two switches decide whether an Indian invoice carries tax. The first is registration under the goods and services tax, which is turnover-driven and granted state by state, so two contractors doing identical work can differ on whether they charge anything at all. The second is where the buyer sits. Work for a buyer outside India counts as an export of services only when five conditions hold together, and a supply that qualifies is zero-rated. That is why a well-drawn invoice to a foreign client shows no tax and states on its face why.

Sources: Integrated Goods and Services Tax Act, 2017, section 2(6)

What an invoice has to show

• The contractor's Permanent Account Number, on the bill

  The statute puts the number on the bills and vouchers themselves, so a payer that holds it only in an onboarding folder is one step short. An Indian payer deducting without it has to deduct at the higher of the rate that applies, the rates in force, or 20%.

  Sources: Income-tax Act, 2025, section 397

• A serial number of no more than sixteen characters, unique within the financial year

  The invoice rules fix the length and require uniqueness for the year, so a contractor who restarts numbering in the middle of a year creates a mismatch the payer will eventually be asked to explain.

  Sources: Central Board of Indirect Taxes and Customs, tax invoice rules

• The accounting code for the service, the taxable value, and the rate and amount of tax shown separately

  The taxable value has to be stated after any discount, apart from the tax itself. For an inter-state supply the invoice also has to name the place of supply and the state, which is what tells a reviewer which tax should have been charged.

  Sources: Central Board of Indirect Taxes and Customs, tax invoice rules

• On an export invoice, an endorsement saying whether integrated tax has been charged

  The rules require the invoice to carry an endorsement stating either that the supply is meant for export on payment of integrated tax, or that it is meant for export under bond or letter of undertaking without payment of it. The same invoice has to carry the name and address of the recipient, the address of delivery, and the country of destination.

  Sources: Central Board of Indirect Taxes and Customs, tax invoice rules

Monthly in arrears is the ordinary shape, and retainers are common in consulting. Long software engagements carry a rule of their own that most buyers have never met: an exporter of software has to bill an overseas client at least once a month or at each contractual milestone, and the final invoice has to be raised no later than 15 days after the contract finishes. A buyer that would prefer one invoice at the end of a six-month build is asking the contractor to break their own filing obligations.

Sources: Reserve Bank of India, Master Direction on export of goods and services

When invoices are settled

India sets no general statutory payment term between businesses, and 30 days from invoice is the usual contractual position. There is one hard edge. Where the contractor is a micro or small enterprise for the purposes of the enterprise development law, the period agreed cannot exceed 45 days from acceptance or deemed acceptance, and a buyer who runs past it owes compound interest with monthly rests at three times the Bank Rate the Reserve Bank of India notifies. That duty is written around the buyer, so it reaches an Indian group entity paying the invoice rather than an offshore one. An Indian payer also loses the deduction for anything paid to a micro or small enterprise outside that limit, and cannot repair it by paying before the return is filed, which is the relief that applies to almost every other late payment.

Sources: Reserve Bank of India, Master Direction on lending to the MSME sector, Income-tax Act, 2025, section 37

The currency on the invoice

Contractors working for overseas clients almost always invoice in the client currency, most often US dollars. That choice carries more weight here than it does in most markets. One of the conditions for treating the work as an export of services is that the contractor receives payment in convertible foreign exchange, or in rupees where the Reserve Bank of India permits it. A buyer that settles in rupees out of an Indian account because its own treasury finds that simpler can push the supply out of export treatment, and the tax then has to go somewhere.

Sources: Integrated Goods and Services Tax Act, 2017, section 2(6), Integrated Goods and Services Tax (Amendment) Act, 2018

Local currency rules

Exchange control here works on the receiving side. The exporter has to realise and repatriate the full value of goods, software or services within nine months of the date of export, and the receipt has to come through an authorised dealer bank in the prescribed manner. The bank records the receipt and generates an electronic bank realisation certificate from it. That certificate, or the bank's foreign inward remittance certificate, is what the contractor has to produce when claiming a refund on a zero-rated export, so a payment that lands with no clean reference to the invoice creates work at the contractor's end. Ordinary professional services need no declaration form. Software exports do: a Softex declaration goes to the certifying authority within 30 days of the invoice date.

Sources: Reserve Bank of India, Master Direction on export of goods and services, Central Board of Indirect Taxes and Customs, refund rules

Settling the invoice in rupees from an Indian group account because it saves a conversion

Receipt in convertible foreign exchange is one of the five conditions for treating the work as an export of services, with rupee receipt allowed only inside the settlement arrangements the Reserve Bank of India permits. A contractor who loses export treatment has to charge integrated tax on the supply, and the argument about who absorbs it arrives on the next invoice. Pay from outside India in a hard currency unless the contractor has confirmed in writing that their rupee receipt qualifies.

Sources: Integrated Goods and Services Tax Act, 2017, section 2(6)

Assuming an offshore buyer is outside Indian withholding, and onboarding without the Permanent Account Number

The withholding duty is written around the payer, and for contract work the statute lists a government of a foreign state, a foreign enterprise, and any body established outside India among the payers it covers, so the assumption is not safe on the face of the law. In practice a payer with no Indian presence cannot easily deduct, because deducting requires a tax deduction and collection account number and a way to deposit, and the contractor funds the liability through advance tax instead. Settle in the contract who deducts. If any Indian entity in the group pays the invoice, that entity needs its own deduction and collection account number and the contractor's Permanent Account Number before the first payment, because deduction without the latter runs at the higher of the rate that applies, the rates in force, or 20%, and the contractor cannot claim the difference back from you.

Sources: Income-tax Act, 2025, sections 393, 397 and 402

Holding a long software build to a single invoice at the end

An exporter of software has to bill an overseas client at least once a month or at each milestone, raise the last invoice within 15 days of completion, and file the Softex declaration within 30 days of the invoice date. A single closing invoice also strands the contractor's cash, because advance tax falls due on 15 June, 15 September, 15 December and 15 March whether or not anyone has paid, and a contractor cannot net off tax that no payer has deducted. Agree the monthly or milestone schedule at signature rather than at the first missed date.

Sources: Reserve Bank of India, Master Direction on export of goods and services, Income-tax Act, 2025, sections 405 and 408