Section 194R of Income Tax Act 1961 – TDS on Benefit or Perquisite arising from Business or Profession
Introduction
Finance Act, 2022 inserted a new provision, Section 194R in the Income Tax Act, 1961 (hereinafter referred to as the “Act”) which came into effect from 1st July 2022. The section provides that where a Resident, or a Non Resident, provides , any benefit or perquisite (either in money or kind) to a person who is a Resident of India, which arises from business or profession of such Resident, the person providing such benefits or perquisite shall deduct tax at the specified rate from the value of such benefit or perquisite.
| Section 194R of The Income Tax Act, 1961: A Nutshell | |
| Date of Application | On or after 1st July 2022 |
| Deductor | Resident or Non-resident providing benefit or perquisite to a resident (arising out of Business or profession of resident) |
| TDS deducted on | Benefit or perquisite arising out of Business or profession of resident) |
| Applicability on | Benefit or perquisite received by a Resident |
| Rate of Deduction | 10% |
| Exemption from Deduction | Aggregate Value of benefit or perquisite is below Rs.20,000 in a year |
| Non Application (Only for Individual and HUF) |
|
Scope of Section 194R of Income Tax Act
To give a brief overview about this provision, Section 194R of the Act talks about deducting TDS, on any benefit or perquisite, earned by a Resident from exercise of their business or profession. This Section is applicable from 1st July 2022 and requires deduction of tax @ 10% of the value of the perquisite or benefit. In case aggregate annual value of the benefit or perquisite of a single beneficiary does not exceed Rs. 20,000, such deduction will not be applicable.
Furthermore, an individual or HUF is exempt from deduction of TDS under Section 194R if its aggregate annual turnover from :
- Business, does not exceed Rs. 1 Crore; or
- Profession does not exceed Rs. 50 Lakhs
Purpose of Section 194R of Income Tax Act
Section 28(iv) of the Act states that any benefit or perquisite (in cash or kind), arising from any business or profession, shall be termed as ‘business income’. However, before this Section came into effect, various businesses were providing benefits and perquisites such as foreign travel, gift and other non-monetary benefits to their suppliers, agents etc. Such benefit in kind were not being offered to tax, since they were neither reported by the business, nor they were offered to tax by the recipient.
The payor claimed such benefits as “Expenses” under the, Profit and Loss Account, thus taking advantage of the tax benefits in the Act. However, since it was a non-monetary expenditure, many recipients did not include it in their financial statements thus escaping tax on them.
Now once TDS is deducted under Section 194R , the transaction shall automatically come within the purview of tax authorities since the TDS deduction would be reported.
Who can deduct TDS under Section 194R of Income Tax Act?
Any person responsible for providing any benefit or perquisite to a Resident, is liable to deduct tax at a specified rate on the value of such transaction. The person providing the benefit may be a Resident or Non-Resident. It is to be noted that the provision of TDS shall apply after 1st July 2022.
All transactions of similar nature , even if they are covered within this Section, but which took place on or before 30th June 2022, shall not be covered under the purview of Section 194R of Income Tax Act and shall not be liable for deduction of TDS under the Act.
Furthermore, this provision is not applicable in following circumstances : –
- Where the value or aggregate of value of the benefit or perquisite to such resident during the financial year does not exceed twenty thousand rupees (Rs. 20,000);
- Where an Individual or a HUF whose total sales, gross receipts or turnover does not exceed Rs. 1,00,00,000 (Rs.1 Crore) in case of business or Rs. 50,00,000 (Rs. 50 Lakhs) in case of profession during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person. For example, if the total sales of a business, does not exceed Rs. 1 Crore during FY 2021-22, then these provision shall not be applicable during FY 2022-23.
Note: A person who has agreed to provide the benefit or perquisite and makes payment for the same to a third party , shall be liable for deduction of tax and not the third party who actually provides or delivers the benefit or perquisite. For example, if a cement company provides foreign trips to its distributors, and appoints a travel agency to manage the trip and make arrangements, in such a case, the cement company would be liable to deduct TDS, and not the travel agency.
Who are liable for deduction under Section 194R of Income Tax Act ?
Tax is required to be deducted under this provision if the benefit or perquisite is provided to a Resident person and it is arising from a business or profession by such Resident.
However, in the following situations, tax shall not be deducted under Section 194R of Income Tax Act : –
| Payor | Payee | TDS deduction under Section |
| Employer | Employee | 192 |
| Resident or Non-resident | Non-resident | 195 |
| Resident or Non-resident | Benefits or perquisites are unrelated to business or profession of recipient | |
| Resident or Non-resident | Customer who does not engage in business or exercise of a profession |
When is tax to be deducted under Section 194R ?
Income tax under Section 194R is to be deducted before providing benefit or perquisite to the Resident person.
Further, in case where the benefit of perquisite is wholly in kind or partly in cash and partly in kind, but cash part is not sufficient to deduct and deposit the TDS under section 194R of Income Tax Act, the person providing such benefit or perquisite shall ensure that the tax required to be deducted has been paid before releasing the benefit or perquisite
Let’s look an example to understand this better : –
Example
Arun Minati, is a social media influencer. He is given a new phone to promote on his Youtube Channel. However after the promotion ad, Arun did not return the phone and kept it as a freebie. Will the provision of such benefit, be liable for deduction of TDS under Section 194R by the company that provided the phone ?
Answer: Yes, the company that provided the phone will be liable to deduct TDS if Arun retains the phone after the promotion. On the other hand if Arun returns the phone, then he won’t be liable to pay TDS under Section 194R.
Rate of deduction under Section 194R of Income Tax Act
The rate of deduction is 10% of the value or aggregate of the value of such benefit or perquisite. The rate shall not be further increased by Surcharge and Health & Education Cess as the deductee/recipient is a Resident.
If the deductee doesn’t provides his PAN to the deductor, the tax will be deducted under Section 206AA at the following rates : –
- Rate specified in the relevant provision;
- Rate or rates in force; or
- 20%.
If the person fails to file return of income, then Section 206AB will be attracted.
In case, where 206AB attracted, the applicable rate shall be higher of:-
-
- Twice the rate specified in the relevant provision of the Act; or
- Twice the rate or rates in force; or
- At the rate of five per cent.
The deduction as above has to be made even if the estimated tax liability of recipient justifies Nil deduction, as there is no provision to apply for certificate for a NIL or lower TDS rate certificate
Threshold Limit for deduction under Section 194R of Income Tax Act
TDS will be deducted under Section 194R of the Act if the aggregate value of the benefit or perquisite provided during the financial year (whether its one time or several time) exceeds Rs. 20,000.
The Central Board of Direct Taxes (CBDT) has stated in its Circular dated 16th June 2022 that since the threshold of Rs. 20,000 is with respect to the financial year, calculation of value or aggregate value of the benefit or perquisite triggering deduction of tax under this provision shall be counted from 1st April of the financial year.
Hence, if the value or aggregate value of the benefit or perquisite provided or likely to be provided to a resident exceeds Rs. 20,000 during the financial year 2022-23 (including the period up to 30th June 2022), the tax shall be required to be deducted in respect of any benefit or perquisite provided on or after 01st July 2022.
Guidelines issued by CBDT
The Central Board of Direct Taxes has issued certain guidelines from time to time to address doubts that might be faced by taxpayers.
Question : – Is the deductor required to check the taxability of benefit or perquisite in the hands of the recipient ?
No , the deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under Section 28(iv) or under any other relevant Section
Question : – Is the deductor required to check whether the benefit or perquisite is taxable under the Income Tax Act, 1961 or DTAA ?
No
Question : – Would TDS be required to be deducted, if the benefit or perquisite is a capital asset in the hands of the recipient ?
Yes, TDS would be required to be deducted in such a case.
Question : – Please elaborate if the following are covered under section 194R of Income Tax Act
| Nature of Benefit or Perquisite | Whether TDS is required to be deducted ? |
| Sales discounts, cash discounts or rebates allowed to customers from the listed retail price | No |
| Buy more get more | No |
| ● Free samples
● Incentives in the form of cash or kind such as car, bikes, TV, furniture, etc ● Sponsoring of trip by a Company to its employee and his relatives on reaching a certain target. ● Free ticket to an event ● Medicine samples given freely to medical practitioners |
Question : – XYZ is a Government entity, not carrying on a business or profession . Would it be covered under Section 194R of Income Tax Act ?
No, Section 194R of Income Tax Act shall not be applicable if benefit or perquisite is being provided to Government entity, like Government hospital, not carrying on business or profession
Question. Mr. Bhushan is facing a dilemma. He is unsure as to whether GST shall be included for the purposes of valuation of benefit or perquisite for deduction of TDS under Section 194R.
GST is not to be included for the purposes of valuation of benefit or perquisite.
Question. TDS under section 194R of Income Tax Act on social media influencers ?
Where benefits or perquisites in the form of products like cosmetics, accessories, clothing, etc. are provided to social media influencers for the purposes of advertising , the implications are as under : –
- If the products are retained by them and not returned to the respective companies , it shall be liable to TDS under Section 194R.
- If the products are returned by them to the respective companies, it shall not be liable to TDS under Section 194R of Income Tax Act .
Question: What would be the treatment in case of reimbursement against amount mentioned in invoice?
When it comes to treatment of reimbursement, there can be two cases:
- Invoice in the name of the person who is making such reimbursement – No TDS will be deducted on such reimbursement.
- Invoice not in the name of the person who is making such reimbursement – TDS will be deducted on such reimbursement.
Question: Mr. Vikram is a dealer and is wanting to hold a conference to educate customers about a new product that he is launching. Will expenditure incurred on the conference be liable for deduction under Section 194R? Are there any other activities that have a similar treatment?
- The Board has clarified that expenditure made for a dealer/business conference shall not be liable to deduction under the purview of Section 194R if it is conducted with the purpose of educating dealers/customers about:
- new product being launched;
- discussion as to how the product is better than others
- obtaining orders from dealers/customers
- teaching sales techniques to dealers/customers
- addressing queries of the dealers/customers
- reconciliation of accounts with dealers/customers.
However, such conferences must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets.
Exception to the abovementioned rule
In the following cases the expenditure would be considered as benefit or perquisite for the purposes of Section 194R:
- When expense is attributable to a leisure trip or a leisure component, even if it is incidental to the dealer/business conference.
- When certain expenditure is incurred on family members accompanying the person attending such dealer/business conference.
- When expenditure is incurred on prior stay or overstay i.e., beyond the dates of the conference of participants of such dealer/business conference.
Reference – https://www.incometaxindia.gov.in/communications/circular/circular-no-12-2022.pdf
TDS Sections
- Section 192 of Income tax act
- Section 193 of Income tax act
- Section 194 of Income tax act
- Section 194B of Income tax act
- Section 194C of Income tax act
- Section194EE of Income tax act
- Section 194H of Income tax act
- Section 194I of Income tax act
- Section 194IA of Income tax act
- Section 194 J of Income tax act
- Section 194K of Income tax act
- Section 194LD of Income tax act
- Section 194LBB of Income tax act
- Section 194M of Income tax act
- Section 194N of Income tax act
- Section 194O of Income tax act
- Section 194Q of Income tax act
- Section 194R of Income tax act
