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Section 194R of the Income Tax Act

Updated on: 02 Dec, 2024 11:44 AM

Section 194R of the Income Tax Act was first introduced in the Union Budget of 2022. Gone are the days when you could claim benefits given in kind as an expense deduction. With the introduction of section 194R, you now have to deduct TDS on any such benefit before releasing it to the receiver. This has helped the government prevent the evasion of taxes and avoid the misrepresentation of income.

What is Section 194R?

Section 194R of the Income Tax Act deals with the taxation on any kind of benefits and perquisites received by an individual from a business or profession. This section applies to both monetary and non-monetary benefits and perquisites. As per the update in Budget-2022, 10% TDS should be deducted by any individual who extends any benefit or perquisite worth more than INR 20,000 to a resident.


What is the Applicability of Section 194R?

This section is applicable if any individual receives monetary or non-monetary gifts, perks, or incentives in either cash, kind, or both from a person carrying on any business or profession. The value of such perquisites or benefits should also exceed INR 20,000


Why was Section 194R introduced?

The government introduced section 194R of the Income Tax Act to discourage the evasion of taxes. Many companies used to give their dealers gifts, perquisites, and other benefits for promotions and claimed deduction of expenses from the business income. Also, the individuals receiving the benefit did not report this income, as it was in kind. This led to the evasion of taxes. Therefore, the government introduced section 194R, which states that any benefit, whether in cash or kind, received by a resident individual from a business or profession is liable for tax.

Here’s an example - Suppose ABC Ltd. is a car manufacturing company that decides to give cars as incentives to dealers on meeting their annual targets. The companies used to show this as a business expense and used to claim a deduction of expenses. Since the introduction of section 194R, all the benefits extended by a business or profession in the form of cash and kind are taxable. Section 194R has thus helped the government keep track of income and prevent tax evasion.


What is the TDS on Section 194R?

As per section 194R of Income Tax Act, 1961, the TDS should be deducted at 10%. Businesses or professions are responsible for deducting TDS @10% if the total value of the gifts or perquisites given is more than INR 20,000 during a financial year for every recipient.


When Does Section 194R Not Apply?

Given below are the scenarios where section 194R is not applicable -

  • Section 194R does not apply in cases where there exists an employer-employee relationship. When an employee receives benefits from an employer, it is taxed under section 192.
  • In case the recipient of the benefit is a non-resident Indian, then tax is deducted under section 195.
  • If there is no business relationship between the two transacting parties, then tax will not be deducted.
  • TDS is not deducted if the total value of the benefit is less than INR 20,000.
  • Not applicable to Individuals and HUFs with an annual sales or turnover of less than INR 1 crore for business and INR 50 lakhs for a profession.

Reimbursement Of Out-of-pocket Expenditures

If any expense, which is the liability of the person conducting the business, is either met or reimbursed by another party, it will be considered a benefit or perquisite for the individual who had the primary liability for that expense. For instance, travel expenses reimbursed by a consultant’s client will be treated as a benefit or perquisite and will be subject to TDS.

However, TDS is not applicable if the travel bills are issued in the client’s name, paid initially by the consultant, and later reimbursed by the client.


How is the TDS deducted under Section 194R?

The benefit provider shall deduct the TDS before releasing them. It is the provider’s responsibility to deduct the TDS from the amount before providing such perquisites.

Here are a few ways to deduct TDS -

  • The payer can either gross up the net amount or pay the TDS from his own pocket.
  • The payee can give cash to the payer to meet the TDS liability. The payer then deposits the same with the government.
  • If the payee has a credit balance with the payer, the payer can use it to deduct the tax and pay the net amount to the payee.

How is the Value of Benefit Calculated Under Section 194R of the Income Tax Act?

As per the CBDT, the value of the perquisite is calculated on the basis of the fair market value of the benefit. However, there are certain exceptions to this -

  • If the benefit provider has purchased or paid consideration for the benefit or perquisite. In this case, the value of the perquisite will be equal to its purchase price.
  • If the benefit provider is the manufacturer of the benefit, then the price charged to its customer will be the value of the perquisite.

Every benefit provider is required to file a quarterly TDS return in Form 26Q. All this can seem a little difficult to pull off, especially for someone who doesn’t have proper knowledge of tax provisions. Tax2win is the one-stop solution that provides easy access to a qualified CA and helps you with a smooth ITR filing process. Hire an eCA today!


TDS Certificate

The deductor is required to issue a quarterly TDS certificate to the deductee in Form 16A. This certificate can be downloaded by the deductor from their TRACES account, while the deductee can access it through their Form 26AS. Additionally, deductors liable to deduct tax under Section 194R must file quarterly returns using Form 26Q.


Frequently Asked Questions

Q- Is section 194R applicable when gifts, benefits, or perks are received on a marriage or a festival?

No, such gifts or benefits received on account of a marriage or a festival will not be taxed under section 194R. Section 194R specifically applies to benefits and perks arising out of a business relationship.


Q- Is section 194R applicable even when the benefit is received in the form of capital assets?

Yes, if the recipient receives the benefit or perquisite in the form of a capital asset, it is still taxable under section 194A.


Q- Is it necessary for the deductor to provide a TDS certificate?

The deductor is required to furnish a TDS certificate to the deductee every quarter, in form 16A. The deductor can find Form 16A from the TRACES account, and the deductee can see the details in Form 26AS.


Q- Is it necessary for the deductor to file TDS returns?

Yes, the deductor of the TDS is responsible for filing quarterly returns of the tax deducted under section 194R in Form 26Q.


Q- Does section 194R apply in the case of a government entity?

No, the provision given in section 194R of the Income Tax Act doesn’t apply if the benefit is provided to a government entity not having any business or profession.


CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.