Section 194R of the Income Tax Act
addresses the tax deduction on benefits or perquisites provided to residents in relation to their business or profession. Introduced by the Finance Act 2022, this section mandates a tax deduction at source (TDS) for benefits offered by businesses to distributors, channel partners, agents, or dealers as a form of incentive. These benefits, often aimed at motivating and rewarding business associates, can take various forms such as travel packages, gift cards, product incentives, or access to business assets. By enforcing TDS on these non-monetary benefits, Section 194R ensures compliance and accurate tax reporting, as these perks contribute to the overall income of the recipients.
In this article, we will explore Section 194R of the Income Tax Act, introduced to regulate the tax treatment of benefits and perquisites offered in business or professional relationships. We’ll begin by discussing the meaning and intent behind Section 194R, outlining why it was implemented and what it seeks to address in terms of tax compliance. Next, we’ll examine its scope, highlighting the types of benefits covered and identifying the entities required to deduct tax under this section. Finally, we’ll delve into the key provisions, covering deduction rates, exclusions, and compliance requirements, followed by practical steps businesses can take to ensure compliance. This guide aims to equip readers with a comprehensive understanding of Section 194R and how to respond to its provisions effectively.
What is section 194R?
Section 194R of the Income Tax Act mandates taxation on any benefits or perquisites an individual receives from a business or profession. This section covers both monetary and non-monetary benefits. As per the 2022 Budget update, a 10% TDS must be deducted by any person providing a benefit or perquisite valued above Rs. 20,000 to a resident.
The purpose of Section 194R is to ensure that all benefits or perquisites provided by a business are accounted for as part of the recipient’s income, promoting transparency in tax reporting. This section applies broadly to various incentives like gifts, travel packages, free products, or special discounts given to business associates, dealers, or agents as motivation or rewards. Notably, the TDS obligation under Section 194R arises at the time of providing the benefit, irrespective of whether the recipient receives it in cash or kind, helping the government track income streams that may otherwise go unreported.
Scope of Section 194R
Section 194R mandates a 10% TDS on benefits or perquisites provided to resident recipients, effective from July 1, 2022. This TDS applies solely to resident recipients.
However, Section 194R is not applicable if the total value of benefits or perquisites for a single beneficiary is Rs. 20,000 or less during the financial year.
Additionally, individuals or Hindu Undivided Families (HUFs) are exempt from deducting TDS under this section if their total sales did not exceed Rs. 1 crore in business or Rs. 50 lakh in profession in the preceding financial year.
Coverage of Section 194R
Under Section 194R, deductors are not obligated to verify whether the benefit or perquisite is taxable for the recipient under any specific provisions of the Income Tax Act. Additionally, there is no requirement to confirm if the amount itself is taxable.
Section 194R applies in all scenarios where the benefit or perquisite is:
- Entirely in cash
- Entirely in kind
- A combination of cash and kind
- Provided as a capital asset (such as a car, land, etc.)
This section applies to any benefits or perquisites paid or credited on or after July 1, 2022.
Key provisions of section 194R
Here are the key provisions of section 194R of the Income Tax Act 1961:
- The payer is not required to check if the benefit or the perquisites given is taxable in the hands of the recipient. No such provision is there in any section included in the Income Tax Act 1961. Furthermore, there is no requirement to check whether such benefit or perquisite amount is taxable or not.
- Section 194R applies if the benefit or perquisite is entirely in cash, entirely in kind, or partly in cash and partly in kind.
- Such a benefit or perquisite can also include a capital asset such as land, car, etc.
- Section 194R is applicable on benefits or perquisites credited or paid after 1st July 2022.
- The value of such benefits or perquisites is calculated based on fair market value except in some cases specified in the section.
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Why was section 194R introduced?
The main aim of the Indian government in introducing section 194R was to curb tax evasion in India. As most businesses and professionals used to claim deductions on such benefits and perquisites under section 37 of the Income Tax Act, the Indian government realised that the benefits received by individuals are often not reported for. This practice was more common when the benefits or perquisites were received in kind and not in cash. Hence, to ensure there is effective income tax reporting for such benefits and perquisites, the Indian government introduced section 194R through the Finance Act 2020.
Entities covered under section 194R
Here are the entities covered under section 194R and are required to deduct TDS if they provide any benefit or perquisite to an individual or other eligible entity:
- Individuals
- Hindu Undivided Families (HUFs)
- Partnership Firms
- Companies
- Limited Liability Partnerships (LLPs)
- Associations of Persons (AOPs)
- Bodies of Individuals (BOIs)
- Artificial Juridical Persons
However, it does not apply to individuals or HUFs whose total sales, gross receipts, or turnover does not exceed Rs. 1 Crore in the case of business or Rs. 50 lakh in the case of the profession during the financial year immediately preceding the financial year in which the benefit or perquisite is provided.
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Rate of TDS under section 194R
The applicable TDS rate under section 194R on the benefits and perquisites provided by a business or profession to an individual or other eligible entity is 10%. The TDS rate of 10% is applicable for all the benefits and perquisites provided after July 1, 2020. The payer is liable to deduct the TDS at 10% only if the value of the benefits and perquisites exceed Rs. 20,000 in a financial year.
How is TDS calculated under section 194R?
Under section 194R, TDS is calculated at a rate of 10% on the fair market value of the benefit or perquisite provided to a resident by a business or profession. Here are the steps to calculate TDS under section 194R:
- Determine the total value of benefits or perquisites provided during the financial year.
- Check if the total exceeds the threshold of Rs. 20,000.
- If the value exceeds Rs. 20,000, calculate 10% of the total value of the benefits and perquisites.
- Deduct this amount as TDS before providing the benefit or perquisite.
- Deposit the deducted TDS amount to the government by quoting the Tax Deduction and Collection Account Number (TAN).
There are a few ways to deduct and deposit TDS:
- The payers can gross up the net amount or deposit the TDS by paying the amount from their own pockets.
- The payer can receive cash from the payee to meet the TDS liability. The payer can deposit the TDS amount received as cash from the payee with the government.
- If the payee and payer maintain a credit balance, the payer can use the balance amount to deduct the TDS and pay the net amount to the payee.
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When is TDS under section 194R required to be deducted?
Section 194R of the Income Tax Act specifies the conditions that require the payer to deduct TDS at 10% from the total fair market value of the benefits and perquisites paid to an individual. Whether the benefits and perquisites are entirely in cash or kind or partly in cash and partly in kind, the payer is liable to deduct TDS and deposit it with the government. The TDS must be deducted before such benefits and perquisites are credited or paid to the individual by a business or profession.
Exemptions or thresholds for TDS under section 194R
Along with avoiding tax evasion, section 194R also aims to promote equity and transparency. For this, the section lists a host of exemptions as follows:
1. Non-business or non-professional connection
Section 194R applies only to benefits or perquisites provided in the course of business or profession to add value to the business or profession. Benefits or perquisites not arising from business or professional activities are exempt from TDS under this section, and the payer is not liable for deducting any TDS.
2. Low-value perquisites or benefits
If a business or profession has provided benefits or perquisites with a fair market value lower than Rs. 20,000, the provisions of section 194R do not apply, and the payer is not liable to deduct any TDS from the benefit or perquisite amount.
3. Deductor’s gross receipts and sales turnover
Individuals or Hindu Undivided Families (HUFs) are exempt from deducting TDS under section 194R if their total sales, gross receipts, or turnover does not exceed Rs. 1 crore in the case of business or Rs. 50 lakh in the case of the profession during the financial year immediately preceding the financial year in which the benefit or perquisite is provided.
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Applicability of Section 194R
Section 194R applies when a business, company, or professional provides perks, gifts, incentives, or any other form of benefit—whether monetary, non-monetary, or a combination of both—that exceeds Rs. 20,000 to an individual during the financial year.
Who Should Deduct TDS Under Section 194R?
Any business, company, or professional providing benefits or perquisites to agents, dealers, channel partners, distributors, or other individuals during the financial year is responsible for deducting TDS under Section 194R.
When does Section 194R not apply?
Section 194R does not apply to employee benefits, as they fall under Section 192.
If the recipient is a non-resident, tax deduction falls under Section 195.
This section is also not applicable if there is no business relationship, or if the total benefit value is Rs. 20,000 or less.
The provision does not apply to individuals and Hindu Undivided Families (HUFs) with business income not exceeding Rs. 1 crore or professional income not exceeding Rs. 50 lakhs.
Additionally, discounts and rebates are not subtracted from the sale value when calculating benefit values.
Penalties for non-compliance with section 194R provisions
Under section 194R, a business or profession paying a benefit or perquisite must deduct TDS at 10% from the fair market value of such a benefit or perquisite before sending them to the individual. However, the Indian government has set some penalties for non-compliance by a business or profession in deducting TDS:
Consequences of non-compliance
If a business or profession fails to deduct TDS at 10% from the benefits or perquisites paid to an individual, it may be subject to a penalty of 1% interest per month for late deduction and 1.5% for non-payment of TDS. Furthermore, non-payment of TDS under section 194R may also lead to disallowance of interest levies, expenditure, penalties, and prosecution.
How to deduct TDS under Section 194R
TDS under Section 194R must be deducted and paid by the company, business, or professional providing the benefits or perquisites before these are granted.
The deducted TDS should be deposited by the 7th of the following month.
A common question arises: how to handle TDS on non-monetary benefits or perquisites?
- Gross-up method
The provider can “gross up” the value of the benefit and pay the TDS from their own funds.
Example: If a company offers mobile phones worth Rs. 1,00,000 as a commission, they may gross up the value to Rs. 1,11,111, and pay Rs. 11,111 as TDS from their pocket. - Beneficiary reimbursement
Alternatively, the provider may request the beneficiary to pay the cash equivalent of the TDS.
Example: In the case of the mobile phones, the company can ask the recipient to reimburse Rs. 10,000 as TDS. - Adjustment against credit balance
If the beneficiary has a credit balance in the company’s books, this amount can be adjusted for TDS purposes.
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How is the value of benefit calculated under section 194R of the Income Tax Act?
According to the Central Board of Direct Taxes (CBDT), under Section 194R, the value of benefits and perquisites is generally determined based on their fair market value, with certain exceptions:
- If the benefit provider is a manufacturer, the cost of the benefit is included in the price charged to or paid by the recipient or consumer. This means that the advantage’s cost forms part of the final price of the goods or services offered.
- In cases where the provider of these benefits has purchased or otherwise incurred an expense for these items, the valuation of such benefits will match the purchase price.
These guidelines ensure a consistent approach to valuing benefits, so they are appropriately accounted for in tax obligations. The fair market value rule and specific exceptions provide clarity in cases where benefits may otherwise be undervalued, ensuring transparent reporting and compliance under Section 194R.
Conclusion
TDS is one of the most common taxes charged by the Indian government on eligible payments. Section 194R of the Income Tax Act mandates that a business or profession deduct a 10% TDS on benefits exceeding Rs. 20,000 annually. The section aims to reduce tax evasion and promote equity and transparency when it comes to providing benefits or perquisites to individuals. If a business or a profession fails to deduct TDS, they may incur penalties as interest. Hence, it is essential for businesses and professionals to understand their obligations under this section to avoid non-compliance.
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