What is Section 194R of the Income Tax Act?
Section 194R of the Income Tax Act makes it mandatory to deduct TDS at 10% on free gifts or perquisites exceeding the value of Rs. 20,000. This section covers both monetary and non-monetary benefits. This section applies to free gifts, travel packages, discounts, and other benefits received by businesses. In simple words, this section accounts for the value of such gifts as the assessee’s income and subjects it to TDS.
Why was Section 194R Introduced?
The Indian government identified that most individuals often skipped reporting various benefits received by them. This was especially common in the case of payments made in kind instead of cash. Earlier, the value of perquisite or benefit was supposed to be added to the individual’s total income and taxed under the head “Profits and Gains from Business or Profession”. However, many of these benefits often went unreported. Therefore, the Indian government introduced section 194R to curb tax evasion and promote transparency in the reporting of such benefits and perquisites.
Various companies and established brands send freebies, gifts, and samples to social media influencers, asking them to promote these products on their digital platforms. Earlier, these freebies or gifts were not considered as income and were not subject to tax. However, after the introduction of Section 194R, any freebies, benefits, or perquisites such as a car, a television, a computer, a gold coin, foreign trips, mobile phones, and free tickets for events received by social media influencers will have to be disclosed in the ITR, be treated as a benefit or perquisite and taxed accordingly.
However, if these products are returned to the company, then they will not be treated as a perquisite or benefit. For example, a travel vlogger takes a flight for a sponsored trip. The company reimburses the flight ticket for Rs. 30,000 and provides him with a free stay, which costs Rs. 20,000. The company is also giving him money for promotion. The company will give that money only after deducting a tax of Rs. 5,000 from Rs. 50,000.
Similarly, suppose a company sends skincare products to a social media influencer for reviewing, and the influencer keeps them, then it is considered a benefit. However, if the influencer returns the products, it is not considered a benefit and is not subject to tax.
When is Section 194R Not Applicable?
Section 194R is not applicable in the following cases -
- The value of the benefit or perquisite during the financial year does not exceed Rs. 20,000.
- If the recipient is a non-resident, tax must be deducted under section 195.
- The business turnover in the preceding year is less than Rs. 1 crore, or total receipts from the profession do not exceed Rs. 50 lakhs of the person providing the benefit or perquisite.
- This section does not apply to employees receiving benefits from their employers. This section is not applicable in cases where there is no business relationship between the transacting parties.
Valuation and Taxability of Benefits and Perquisites
Under Section 194R, the provider of any perquisite or benefit must deduct TDS at 10%, regardless of whether it is taxable for the recipient. There is no need to check the specific section under which it is taxable.
This rule applies even if the benefit is a capital asset, like a car or immovable property such as land. TDS must be deducted on all benefits, whether provided fully in kind or partly in cash and partly in kind. If the cash component is insufficient to cover the required TDS, the provider must ensure that tax is paid before releasing the perquisite.
The valuation of perquisites received in kind is generally based on Fair Market Value (FMV). However, if the benefit provider has purchased or manufactured the perquisite, the purchase price or selling price will be considered for valuation.
If the responsible person or company fails to deduct TDS on a benefit or perquisite, they must ensure that the recipient has deposited the required tax as advance tax.
To verify this, they can rely on:
- A declaration from the recipient or social media influencer.
- A copy of the advance tax challan confirming tax payment.
As part of the reporting process, the government has included provisions in Form 26Q for such transactions, effective from FY 2022-23. Alternatively, the responsible entity can deduct TDS directly on the benefit or perquisite and deposit it with the government, ensuring proper disclosure in Form 26Q of the TDS return.
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