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.

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:

Before applying the provisions of Section 194R, it is essential to ensure that the total value of benefits and perquisites exceeds ₹20,000. For calculating the total value, you must add the benefits and perquisites provided on or before 30th June 2022 separately. It is because the amounts paid between 1st April 2022 and 30th June 2022 are TDS-free.

Let us understand the computation of the threshold with the following examples.

Example 1: An individual receives benefits worth ₹11,000 up to 30th June 2022, and benefits worth ₹12,000 between 1st July 2022 and 31st March 2023.

The benefits from both periods will be considered to calculate the threshold, and since the sum (11000 + 12000 = 23,000) exceeds ₹20,000, there will be a TDS deduction under Section 194R. However, the benefit worth ₹11,000 will not be considered while calculating TDS as it was received before 30 June 2022. TDS calculation will be on ₹12,000 at 10%, which computes to ₹1,200.

Example 2: An individual receives benefits worth ₹12,000 up to 30th June 2022. After 1st July 2022 and up to 31st March 2023, the benefits received are worth ₹40,000.
In this scenario, TDS under Section 194R will be deducted only on ₹40,000 since benefits received between 1st April 2022 and 30 June 2022 are TDS-free.

Example 3: An individual receives benefits worth ₹25,000 up to 30th June 2022. However, between 1st July 2022 and 31st March 2023, no benefits were received.

Here, since the benefits received after 1st July 2022 are lower than ₹20,000 and do not exceed the threshold, no TDS is deducted under Section 194R.

Section 194R TDS does not apply to the following:

• Benefits employees receive 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).

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.

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.

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. For instance, if a company provides smart watches worth ₹75,000 as commission, it can gross up the value to ₹82,500 to pay the TDS of ₹7,500 from its pocket.
• You can ask the beneficiaries to pay the tax in cash. You can then deposit it with the government. For instance, continuing with the above example, the company can ask the employees to pay ₹7,500 in cash in exchange for the smart watch.
• You can adjust the amount in case a recipient has a credit balance in your company’s books.

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.

A TDS certificate is issued by the deductor to the deductee every quarter in Form 16A. For the deductor, it is available through Form 16A in their TRACES account, while for the deductee, it is available in 26AS. If you’re liable to deduct tax u/s 194R, you must file returns every quarter in Form 26Q.

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.

Reimbursement of out-of-pocket expenses

If an expense that is the liability of a person carrying on business or profession is either paid directly or reimbursed by another party, it will be considered a benefit or perquisite for the person who had the primary liability. Accordingly, such payments may attract TDS under Section 194R.

Example:

Suppose a consultant has a professional meeting with a client. The consultant incurs ₹20,000 as airfare and ₹10,000 as hotel expenses, making a total of ₹30,000.

Case 1: Reimbursement treated as a benefit/perquisite

If the consultant pays these expenses in their own name (air ticket and hotel bills issued in the consultant’s name) and the client reimburses the full ₹30,000, this reimbursement is regarded as a benefit or perquisite. The client must deduct TDS under Section 194R before making payment.

Case 2: Not treated as a benefit/perquisite

If the travel and hotel bills are directly issued in the client’s name (i.e., the legal liability is of the client), the consultant only makes the payment upfront as a facilitator. Later, when the client reimburses the ₹30,000, it is not treated as a benefit or perquisite for the consultant, and hence TDS under Section 194R will not apply.

Section 194R of the Income Tax Act has been introduced to tackle incorrect income furnishing. It ensures tax is deducted before a benefit exceeding ₹20,000 is offered to a resident in a financial year. Thus, Section 194R helps in tax compliance and income transparency.

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