Section 194R of Income Tax Act

Section 194R is a section included in the Income Tax Act of 1961 that mandates the deduction of Tax Deducted at Source (TDS) on the benefit or perquisite provided by a business or profession to an individual or eligible entity. Corporations, companies, and other entities rely on other individuals or entities, such as agents, dealers, vendors, distributors, etc., to carry out their business effectively. Such businesses frequently provide benefits and perks as rewards or motivation for their hard work and overall contributions to third-party contributors. However, the Indian government introduced section 194R to ensure that businesses and other entities deduct TDS on such benefits granted to Indian citizens by businesses or professionals.

If you are running a business or profession, or if you are someone who provides services to businesses and professionals and have given or received benefits or perquisites, you may fall under the provisions of section 194R of the Income Tax Act. This article will help you understand all the provisions of section 194R to ensure you effectively comply with the taxation laws.

What is section 194R?

Section 194R of the Income Tax Act of 1961 deals with deducting and depositing TDS on benefits and perquisites given by a business or profession to an Indian citizen. Under section 194R, every time a benefit or perquisite is given, the payer is liable to deduct the TDS amount on the value and deposit it with the Indian government before the due date. The Indian government introduced section 194R in 2020 through the Finance Act 2020 to ensure there is no tax evasion for the funds sent as benefits or perquisites.

Previously, businesses or registered professionals sending such benefits or perquisites used to claim them as business promotion expenses under section 37 of the Income Tax Act. However, the Indian government, fearing tax evasion on such expenses, now mandates that TDS be deducted from such benefits and perquisites. As per section 194R, the payer is liable to deduct 10% TDS on the value of benefits or perquisites if the total value exceeds Rs. 20,000.

Key provisions of section 194R

Here are the key provisions of section 194R of the Income Tax Act 1961:

• The payer is not required to check if the benefit or the perquisites given is taxable in the hands of the recipient. No such provision is there in any section included in the Income Tax Act 1961. Furthermore, there is no requirement to check whether such benefit or perquisite amount is taxable or not.

• Section 194R applies if the benefit or perquisite is entirely in cash, entirely in kind, or partly in cash and partly in kind.

• Such a benefit or perquisite can also include a capital asset such as land, car, etc.

• Section 194R is applicable on benefits or perquisites credited or paid after 1st July 2022.

• The value of such benefits or perquisites is calculated based on fair market value except in some cases specified in the section.

Why was section 194R introduced?

The main aim of the Indian government in introducing section 194R was to curb tax evasion in India. As most businesses and professionals used to claim deductions on such benefits and perquisites under section 37 of the Income Tax Act, the Indian government realised that the benefits received by individuals are often not reported for. This practice was more common when the benefits or perquisites were received in kind and not in cash. Hence, to ensure there is effective income tax reporting for such benefits and perquisites, the Indian government introduced section 194R through the Finance Act 2020.

Entities covered under section 194R

Here are the entities covered under section 194R and are required to deduct TDS if they provide any benefit or perquisite to an individual or other eligible entity:

• Individuals

• Hindu Undivided Families (HUFs)

• Partnership Firms

• Companies

• Limited Liability Partnerships (LLPs)

• Associations of Persons (AOPs)

• Bodies of Individuals (BOIs)

• Artificial Juridical Persons

However, it does not apply to individuals or HUFs whose total sales, gross receipts, or turnover does not exceed Rs. 1 Crore in the case of business or Rs. 50 lakh in the case of the profession during the financial year immediately preceding the financial year in which the benefit or perquisite is provided.

Rate of TDS under section 194R

The applicable TDS rate under section 194R on the benefits and perquisites provided by a business or profession to an individual or other eligible entity is 10%. The TDS rate of 10% is applicable for all the benefits and perquisites provided after July 1, 2020. The payer is liable to deduct the TDS at 10% only if the value of the benefits and perquisites exceed Rs. 20,000 in a financial year.

How is TDS calculated under section 194R?

Under section 194R, TDS is calculated at a rate of 10% on the fair market value of the benefit or perquisite provided to a resident by a business or profession. Here are the steps to calculate TDS under section 194R:

• Determine the total value of benefits or perquisites provided during the financial year.

• Check if the total exceeds the threshold of Rs. 20,000.

• If the value exceeds Rs. 20,000, calculate 10% of the total value of the benefits and perquisites.

• Deduct this amount as TDS before providing the benefit or perquisite.

• Deposit the deducted TDS amount to the government by quoting the Tax Deduction and Collection Account Number (TAN).

There are a few ways to deduct and deposit TDS:

• The payers can gross up the net amount or deposit the TDS by paying the amount from their own pockets.

• The payer can receive cash from the payee to meet the TDS liability. The payer can deposit the TDS amount received as cash from the payee with the government.

• If the payee and payer maintain a credit balance, the payer can use the balance amount to deduct the TDS and pay the net amount to the payee.

When is TDS under section 194R required to be deducted?

Section 194R of the Income Tax Act specifies the conditions that require the payer to deduct TDS at 10% from the total fair market value of the benefits and perquisites paid to an individual. Whether the benefits and perquisites are entirely in cash or kind or partly in cash and partly in kind, the payer is liable to deduct TDS and deposit it with the government. The TDS must be deducted before such benefits and perquisites are credited or paid to the individual by a business or profession.

Exemptions or thresholds for TDS under section 194R

Along with avoiding tax evasion, section 194R also aims to promote equity and transparency. For this, the section lists a host of exemptions as follows:

1. Non-business or non-professional connection

Section 194R applies only to benefits or perquisites provided in the course of business or profession to add value to the business or profession. Benefits or perquisites not arising from business or professional activities are exempt from TDS under this section, and the payer is not liable for deducting any TDS.

2. Low-value perquisites or benefits

If a business or profession has provided benefits or perquisites with a fair market value lower than Rs. 20,000, the provisions of section 194R do not apply, and the payer is not liable to deduct any TDS from the benefit or perquisite amount.

3. Deductor’s gross receipts and sales turnover

Individuals or Hindu Undivided Families (HUFs) are exempt from deducting TDS under section 194R if their total sales, gross receipts, or turnover does not exceed Rs. 1 crore in the case of business or Rs. 50 lakh in the case of the profession during the financial year immediately preceding the financial year in which the benefit or perquisite is provided.

Penalties for non-compliance with section 194R provisions

Under section 194R, a business or profession paying a benefit or perquisite must deduct TDS at 10% from the fair market value of such a benefit or perquisite before sending them to the individual. However, the Indian government has set some penalties for non-compliance by a business or profession in deducting TDS:

Consequences of non-compliance

If a business or profession fails to deduct TDS at 10% from the benefits or perquisites paid to an individual, it may be subject to a penalty of 1% interest per month for late deduction and 1.5% for non-payment of TDS. Furthermore, non-payment of TDS under section 194R may also lead to disallowance of interest levies, expenditure, penalties, and prosecution.

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How is the value of benefit calculated under section 194R of the Income Tax Act?

As per the Central Board of Direct Tax (CBDT), under section 194R, the value of benefits and perquisites is calculated based on their fair market value except in the following cases:

• If the payer is a manufacturer, the cost of advantage is also included in the price charged from or paid by the consumer.

• If the payer of such benefits has purchased or received payment for such benefits, the value of benefits will be equal to the purchase price.

Conclusion

TDS is one of the most common taxes charged by the Indian government on eligible payments. Section 194R of the Income Tax Act mandates that a business or profession deduct a 10% TDS on benefits exceeding Rs. 20,000 annually. The section aims to reduce tax evasion and promote equity and transparency when it comes to providing benefits or perquisites to individuals. If a business or a profession fails to deduct TDS, they may incur penalties as interest. Hence, it is essential for businesses and professionals to understand their obligations under this section to avoid non-compliance.

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