Section 194R of the Income Tax Act

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 plug 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.

How is the TDS deducted?

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!