Section 194R Of Income Tax Act
Section 194R Of Income Tax Act
As a business owner or professional, you may provide benefits or perquisites to the dealers, distributors, agents, etc., to encourage them to grow your revenue. These may include gift cards, leisure trips, products, etc.
Previously, you could claim these benefits as a business promotion expense and the recipients did not report them as income while filing income tax returns. However, the Union Budget 2022 brought Section 194R as an essential aspect of the Income Tax Act, 1961 to curb tax evasion and broaden the tax base.
This write-up discusses the key elements of the new TDS Section 194R, including its rates, applicability, exceptions and other provisions.
What is Section 194R of Income Tax Act?
Section 194R of the Income Tax Act is a new TDS section related to benefits and perquisites a resident receives from businesses or professions. In other words, Section 194R ensures that you as a business owner or professional deduct tax before providing a benefit or perquisite to a resident if applicable.
Applicability of Section 194R
The Central Board of Direct Taxes has issued guidelines related to Section 194R applicability. It applies to any business, professional or similar entities that offer benefits and perquisites in cash, kind or combination over ₹20,000 in a financial year to a resident.
In other words, Section 194R comes into effect if the aggregate value of benefits or perquisites in monetary terms exceeds ₹20,000 in a financial year for an individual. According to Section 194R, you must deduct tax at 10 per cent of the value of the perquisite or benefit before releasing it to the beneficiary. A few examples where TDS on incentive under Section 194R will apply include:
Incentives in cash.
Incentives in kind such as mobile phones, cars, motorcycles, gold coins, electronic items, etc.
Sponsoring a leisure trip.
Offering a free ticket for an event.
Offering free medical samples to doctors.
Here are a few terms/provisions related to Section 194R you must know about before moving forward:
| Deductor | An individual providing a benefit or perquisite resulting from a business or profession to a resident |
|---|---|
| Deductee | Resident individual receiving the benefit or perquisite |
| Rate of TDS | 10 per cent |
| Time of TDS deduction | Before proving the benefit or perquisite to the beneficiary or deductee |
| Applicability | Benefits or perquisites credited or paid on or post 1st July 2022 |
Non-applicability of Section 194R
Section 194R TDS does not apply to the following:
Benefits received by employees from their employers. Section 192 is applied in such cases.
Benefits received by non-residents. Section 195 applies in such cases.
The total value of the perquisite or benefit to a single beneficiary does not exceed ₹20,000 in a financial year.
Absence of any business relationship between the two parties.
Individuals and Hindu Undivided Families (HUFs) with sales or turnover of less than ₹1 crore in a business or INR 50 lakh in a profession in a financial year.
Cash discounts, sales discounts and rebates offered to customers.
Freebies offered on buying some products (for example, one item offered for free on purchase of three items).
Purpose of Section 194R
The goal behind Section 194R is to fix the tax leakages in businesses and professions. Before 2022, you were allowed to claim the perks and benefits given to the dealers, distributors and other persons as a business expense. The recipients did not show such benefits as their income while filing the income tax returns. This led to incorrect income details. Thus, the government introduced Section 194R to tackle the under-reporting of income and avoid tax evasion.
The value of the benefit or perquisite convertible into cash or not is now considered the recipient’s income. Section 194R mandates you to deduct Tax Deducted at Source (TDS) on such benefits. Let us consider an example to understand Section 194R.
Suppose you own a car manufacturing company XYZ Ltd. You decide to give cars to dealers on accomplishing specific annual targets. Before Section 194R, you could categorise these benefits as your business expense. The dealers also did not disclose the benefit in their incomes since it is in kind.
However, Section 194R now requires you to deduct tax on benefits (cash or kind) given to the dealers. The new TDS on business promotion expenses led to effective monitoring of income and tax compliance.
Who Deducts TDS Under Section 194R?
You must deduct Section 194R TDS if you own a business or are a professional and provide benefits or perquisites exceeding ₹20,000 to an agent, distributor, channel partner or other person in a financial year. You must pay the tax by the seventh of the succeeding month.
How to Deduct the TDS Under Section 194R?
The benefits and perquisites can be in cash, kind or a combination of both. Let us see how tax deductions can be done in non-monetary transactions. Consider the following example:
You own a car manufacturing company XYZ Ltd. You offered 6 cars worth ₹5 lakh each to dealers as a commission. It is mandated to deduct tax from the benefit as per Section 194R. You can do so in the following ways:
You can gross up the entire value of the benefits and pay TDS from your pocket.
You can ask the beneficiaries to pay the tax in cash. You can then deposit it with the government.
You can adjust the amount in case a recipient has a credit balance in your company’s books.
How is The Value of Benefit Calculated?
The CBDT has laid down a method to calculate the value of the benefits and perquisites under Section 194R. Usually, the fair market value of the benefit is considered for TDS calculation. However, the following exceptions may come into the picture:
Case 1: You purchased or paid consideration for the benefit
The purchase price of the benefit or perquisite is taken as its value for the TDS deduction.
Case 2 : If you manufacture the benefit or perquisite (in the case of company XYZ above)
The price you charge to customers is considered the value of the benefit or perquisite if you manufacture it yourself.
Note: Goods and Services Tax (GST) is not taken into account for valuation purposes.
Few Other Provisions in Section 194R of the Income Tax Act
The CBDT has clarified several issues related to Section 194R. A few are as follows:
While deducting tax under Section 194R, you are not required to check if the benefit or perquisite is taxable in the recipients’ hands under Section 28 of the Income Tax Act.
You are not required to check if the amount is taxable or not.
The tax is deductible irrespective of the type of benefit or perquisite (revenue or capital).
The tax is deductible no matter whether the benefit or perquisite is wholly in cash, wholly in kind or a combination of both.
Social Media Influencers
Social media has become a popular way of promoting a business. You may connect and provide your product to a social media influencer to promote it. In such cases, determining whether it is a benefit or not depends on the following scenarios:
Case 1: If the product is returned
There is no benefit if the product you provided to a social media influencer is returned.
Case 2: If the product was retained
There is a benefit or perquisite if the product you provided to a social media influencer is retained.
Section 194R Of Income Tax Act Overview
Section 194R of the Income Tax Act has been introduced to tackle incorrect income furnishings. It ensures tax is deducted before a benefit exceeding ₹20,000 is offered to a resident in a financial year. Section 194R thus helps in tax compliance and income transparency.
Besides this, the Income Tax Act has provisions that allow you to claim tax deductions and lower your tax liability. Learning about them can help you make informed decisions. Section 80D offers tax benefits to encourage investments in medical insurance.
You can claim tax deductions of up to ₹25,000 in a financial year on health insurance premiums. This goes up to ₹50,000 for senior citizens. However, tax saving is just one advantage of a health insurance plan. Other benefits worthy of a discussion include protection against various illnesses, access to quality healthcare services, financial support and peace of mind.
At Tata AIG, you can enjoy customisation flexibility, cashless hospitalisation, pre and post-hospitalisation benefits, pre-existing disease health insurance, room tariff cover and more.
Our hassle-free buying and claim procedures make us a trusted health insurance provider for millions of Indians. You can compare different plans on our website from the comfort of your home and buy health insurance online within a few minutes.
Disclaimer / TnC
Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.
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