Section 194R of Income Tax Act

Section 194R of the Income Tax Act mandates a 10% TDS deduction on gifts or perquisites exceeding INR 20,000. Benefits should be valued at fair market value (FMV), impacting social media influencers, though dealer conference expenses may be exempt.
From tax rules to returns mutual funds make your money work.
3 mins read
12-November-2024

If you’ve ever received a reward from a company—like a gift, gadget, trip, or incentive for doing well in business you may not have thought about tax. But the Income Tax Department has. That’s where Section 194R comes in. Introduced in 2022, this rule ensures that even non-cash rewards or perks you get from a business or professional relationship are tracked and taxed.

This article will help you understand what Section 194R is all about—why it was introduced, who it applies to, and how it can impact both businesses and individuals. Whether you’re running a business or receiving perks as part of your profession, knowing this section can help you avoid unnecessary penalties and stay compliant with the law.

While tax on business perks is one part of compliance, how you invest your earnings also impacts your overall tax outgo. Planning smarter can help you grow wealth while staying within tax rules.
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What is section 194R?

At its core, Section 194R deals with TDS (Tax Deducted at Source) on benefits or perquisites received by a resident from a business or profession. These benefits don’t always have to be in cash—they can include free products, holiday packages, gift cards, or even the use of a company car. If the value of such benefits exceeds Rs. 20,000 in a year, the person or entity offering them must deduct 10% TDS before providing them.

The key idea here is transparency. Earlier, many of these perks went unreported, especially when given in kind. By introducing this section, the government ensures such benefits are included as income in the recipient’s tax return. And importantly, this TDS needs to be deducted even if the benefit is non-monetary.

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Scope of Section 194R

Section 194R applies only to residents and kicks in when the value of total benefits or perquisites provided during a financial year exceeds a20,000. It doesn’t matter whether the benefit is fully in cash, kind, or a mix of both—the rule still holds. However, there are a couple of exceptions.

For example, individuals or HUFs (Hindu Undivided Families) are exempt from deducting TDS under this section if their business turnover is less than Rs. 1 crore or professional receipts are below Rs. 50 lakh in the previous financial year.

This helps keep small-scale providers out of the compliance burden while ensuring larger businesses play fair and follow the tax rules.

Key provisions of section 194R

Section 194R has a few important rules that businesses need to keep in mind. First, the person providing the benefit doesn’t need to check whether the benefit or perquisite is actually taxable in the hands of the recipient. That’s right — there’s no requirement in the law to confirm this.

Also, this rule applies to all kinds of benefits. Whether it’s entirely in cash, fully in kind, or a mix of both even if it includes something like a car or land the TDS must be deducted. The provision applies to all benefits or perquisites credited or paid after July 1, 2022.

When it comes to value, these benefits are usually calculated based on their fair market value unless the section says otherwise. So even if the benefit is not in cash, it still needs to be valued fairly for the purpose of TDS.

Why was section 194R introduced?

The government introduced Section 194R to make tax reporting more transparent and prevent tax evasion. In many cases, businesses would offer non-cash incentives — like foreign trips or luxury items — to dealers, agents, or channel partners. While the businesses claimed deductions for these under Section 37 of the Income Tax Act, the recipients often didn’t report them as income.

This loophole made it harder for tax authorities to track all income sources. That’s where Section 194R came in. By making it mandatory to deduct TDS on such benefits or perquisites, especially those provided in kind, the government ensured better reporting and compliance.

In short, Section 194R was brought in to bring fairness and accountability into the system.

Entities covered under section 194R

Section 194R applies to a wide range of entities that provide benefits or perquisites in the course of business or profession. This includes:

  • Individuals

  • Hindu Undivided Families (HUFs)

  • Companies

  • Partnership Firms

  • LLPs (Limited Liability Partnerships)

  • Associations of Persons (AOPs)

  • Bodies of Individuals (BOIs)

  • Artificial Juridical Persons

However, there are some exceptions. If an individual or HUF has a total turnover or receipts of less than Rs. 1 crore in the case of a business or Rs. 50 lakh in the case of a profession in the preceding financial year, then they’re not required to deduct TDS under Section 194R.

Rate of TDS under section 194R

Under Section 194R, the applicable TDS rate is 10%. This rate applies to all benefits or perquisites provided to a resident by a business or profession. But remember, this rule kicks in only if the total value of such benefits in a financial year exceeds Rs. 20,000.

So, if you're offering gifts, incentives, or rewards to business associates — and their total value crosses Rs. 20,000 — you’ll need to deduct 10% of that value as TDS. This rule has been effective from July 1, 2022.

In simple terms: if your company gives out benefits worth Rs. 50,000 in a year, you're required to deduct Rs. 5,000 as TDS before providing those benefits.

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How is TDS calculated under section 194R?

TDS under Section 194R is calculated at 10% of the fair market value of the benefits or perquisites provided. Here’s how to go about it:

  1. First, calculate the total value of all benefits or perquisites provided during the financial year.

  2. If the combined value exceeds Rs. 20,000, then 10% of that amount must be deducted as TDS.

  3. The deduction must be done before handing over the benefit to the recipient.

  4. The deducted amount needs to be deposited to the government using the deductor’s TAN (Tax Deduction and Collection Account Number).

There are a few ways to manage this TDS:

  • You can gross up the value and bear the TDS cost yourself.

  • You can ask the recipient to reimburse the TDS amount.

  • If there’s a credit balance with the recipient, you can deduct the TDS from that.

This flexibility ensures businesses can stay compliant while handling different types of benefits, especially when they’re not in cash.

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

The law is pretty clear — TDS under Section 194R must be deducted before the benefit or perquisite is given out. This applies whether the benefit is in cash, kind, or a combination of both.

So, before you hand over a travel voucher, a smartphone, or any other incentive to a business associate, you need to calculate the fair market value, deduct 10% TDS, and ensure the deducted amount is deposited with the government on time.

In essence, the tax has to be handled before the benefit changes hands — not after. Failing to do this can lead to penalties, interest charges, and even disallowance of expenses.

Exemptions or thresholds for TDS under section 194R

Not every business or benefit falls under the TDS net of Section 194R. There are some exemptions and thresholds you should know about.

1. Non-business or non-professional relationships:
If the benefit is given outside of a business or professional setting, Section 194R doesn’t apply. For instance, personal gifts or gestures are exempt from TDS under this section.

2. Value below Rs. 20,000:
If the total value of benefits or perquisites provided to a person in a financial year does not exceed Rs. 20,000, no TDS needs to be deducted.

3. Small businesses and professionals:
Individuals or HUFs whose turnover is below Rs. 1 crore (for business) or Rs. 50 lakh (for profession) in the previous financial year are not required to deduct TDS under Section 194R.

These thresholds ensure that small-scale transactions and smaller businesses aren’t burdened with unnecessary compliance.

Applicability of Section 194R

Section 194R becomes applicable when a business or professional provides any benefit, incentive, or gift to a resident individual during the financial year, where the total value exceeds Rs. 20,000.

It doesn't matter if the benefit is entirely in cash, entirely in kind, or a mix of both — once the Rs. 20,000 threshold is crossed, TDS has to be deducted. This rule covers a wide range of scenarios: from offering free trips to partners, to giving out expensive gadgets or product discounts.

In short, if you’re in business and giving out perks to boost engagement or reward performance, you’ll likely fall under Section 194R.

Who should deduct TDS under section 194R?

The responsibility for deducting TDS under Section 194R lies with the provider of the benefit not the receiver.

So, if you’re a business, a company, or a professional entity offering perks or incentives to agents, dealers, channel partners, or distributors, then you're the one who needs to deduct 10% TDS before handing over the benefit.

This includes benefits of any form from gift hampers and luxury travel packages to asset transfers like cars or gadgets. As long as the recipient is a resident and the total benefit value exceeds Rs. 20,000 in a financial year, you’re expected to deduct TDS.

When does Section 194R not apply?

While Section 194R casts a wide net, there are clear cases where it does not apply — and it’s important to know them to avoid unnecessary deductions.

  • First, employee benefits are out of scope. These are already taxed under Section 192, so Section 194R does not interfere.

  • Second, if the recipient is a non-resident, then Section 195 takes over — not Section 194R.

Also, if there’s no business relationship between the provider and the recipient, or if the benefit is valued at Rs. 20,000 or less, then TDS under 194R is not applicable.

Moreover, individuals and HUFs with business income under Rs. 1 crore or professional income under Rs. 50 lakh are not liable to deduct TDS.

Even discounts or rebates given during normal sales transactions aren’t counted as benefits or perquisites under Section 194R so they’re excluded too.

Penalties for non-compliance with section 194R provisions

Failing to deduct TDS under Section 194R doesn’t just invite scrutiny it can get expensive too.

If a business or professional doesn’t deduct TDS, they may have to pay interest at 1% per month for late deduction and 1.5% per month for late payment.

There’s more non-compliance can also lead to disallowance of expenses, meaning the benefit or perquisite won’t be allowed as a deduction when calculating taxable income. This could increase your tax outgo.

In extreme cases, persistent non-compliance could even lead to penalties or prosecution.

In short, TDS deduction under Section 194R isn’t optional — it’s a mandatory compliance step for qualifying entities. Missing it can damage both finances and reputation.

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How to deduct TDS under Section 194R

Deducting TDS under Section 194R is straightforward — but you must follow the process accurately.

Here’s how it works:

  • TDS must be deducted at the time the benefit is either paid or credited, whichever is earlier.

  • The deducted amount should be deposited with the government by the 7th of the following month.

  • You’ll also need to quote your TAN (Tax Deduction and Collection Account Number) while depositing the amount.

But what if the benefit is not in cash?

You have three options:

  1. Gross-up method – The provider pays the TDS from their own funds.

  2. Ask the recipient to reimburse the TDS amount in cash.

  3. Adjust against any credit balance maintained by the recipient.

No matter the approach, what matters is that TDS is deducted before the benefit is given and reported on time.

 

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

Valuing the benefit or perquisite accurately is key under Section 194R, especially since the TDS is based on this figure. But how exactly is it done?

As per CBDT guidelines, the fair market value (FMV) is the default standard. However, there are some exceptions based on the nature of the benefit.

If the benefit is manufactured by the business itself (say, a company giving away its own product), then the cost of that product as booked in their accounts is considered.

If the benefit is purchased externally (e.g., a phone or travel package), then the actual purchase price is used.

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Conclusion

TDS might sound technical, but it plays a crucial role in ensuring the smooth functioning of India’s tax ecosystem. Section 194R of the Income Tax Act, with its focus on taxing non-cash benefits and perquisites, is a step toward greater transparency. It ensures that recipients of gifts, rewards, or business incentives also contribute fairly through taxes — just as they would for direct income.

For businesses and professionals, it’s a reminder to stay compliant: deduct TDS on time, report it accurately, and understand what counts as a benefit under this section. After all, timely compliance helps avoid interest, penalties, and reputational risk — all while keeping your tax records clean.


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Frequently asked questions

What is reimbursement of expenses u/s 194R?
Under section 194R, if any expenditure is reimbursed or met by some other individual, the same is regarded as a benefit or perquisite for the person with the initial liability to deduct TDS. However, a TDS deduction is not required if travel bills are in the name of the client, paid by the consultant, and reimbursed by the client in the end.

Is section 194R applicable to free samples?
Yes, section 194R is applicable to free samples provided by businesses. When a business provides free samples as a benefit or perquisite to a resident, it is considered a benefit arising from business or professional activities. Therefore, the business must deduct TDS at 10% on the value of these free samples if the aggregate value exceeds Rs. 20,000 in a financial year.

What are the deductions u/s 194R of the Income Tax Act?
Section 194R mandates a 10% TDS on benefits or perquisites exceeding Rs. 20,000 in a financial year provided to a resident by a business or profession. The payer must deduct TDS before providing the benefit, whether in cash or in kind.

What is the difference between sections 194R and 194B?
Section 194R deals with TDS on benefits or perquisites provided by a business or profession to an individual, with a 10% rate on amounts exceeding Rs. 20,000 annually. Section 194B deals with TDS on winnings from lotteries, crossword puzzles, card games, and other similar games, with a 30% rate on winnings exceeding Rs. 10,000.

Is 194R applicable to bad debts?

Section 194R is not applicable to bad debts. TDS under Section 194R is intended for benefits or perquisites offered in business or professional transactions, whereas bad debts involve the write-off of unpaid receivables. Since bad debts do not qualify as benefits or perquisites provided, they do not attract TDS under this section. Section 194R’s scope focuses on incentivising benefits, which are separate from financial losses like bad debts.

Is 194R applicable to discounts?
No, section 194R does not apply to discounts provided by businesses or professions. Discounts offered on sales transactions are typically considered adjustments to the sale price rather than benefits or perquisites subject to TDS. However, TDS may apply if the discount is given as a benefit or perquisite.

Where do I show 194R income while filing my income tax return?
If you are liable to deduct TDS from the benefits and perquisites fair market value under section 194R, you are required to file quarterly returns in Form 26Q.

How to calculate TDS u/s 194R?
To calculate TDS under section 194R, identify the total value of benefits or perquisites provided annually. If this amount exceeds Rs. 20,000, deduct 10% of the excess as TDS. For example, if benefits total Rs. 30,000, TDS applies to Rs. 10,000 at a rate of 10%, resulting in a TDS of Rs. 1,000.

Who is 194R applicable to?
Section 194R is applicable to any business or profession that is giving a benefit or perquisite to any individual, such as a channel partner, vendor, distributor, etc, exceeding Rs. 20,000 in a financial year.

Is GST applicable on 194R TDS?

GST is not directly applicable on TDS under Section 194R. TDS is a tax deduction on benefits or perquisites given by businesses, while GST pertains to the supply of goods and services. However, if a benefit or perquisite falls under the purview of goods or services liable for GST, then GST is applicable on the benefit’s value, though not on the TDS amount deducted under Section 194R.

How to report 194R income in ITR?

Income from benefits or perquisites received under Section 194R should be reported as “Income from Other Sources” in the Income Tax Return (ITR) form. The gross value of benefits, including those subject to TDS, should be disclosed. Any TDS deducted under Section 194R can be claimed as a tax credit in the ITR, ensuring accurate tax calculations. Proper documentation of received benefits is also recommended for tax compliance.

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