Section 194R Of Income Tax Act: What You Need to Know

Introduced in Budget 2022, Section 194R of Income Tax Act is designed to bring clarity to the complex tax deductions. The Tax Deducted at Source (TDS) rate under Section 194R is 10% of the amount paid or credited to the resident.  

In this blog, we will try to explain the implications of the 194R TDS of Income Tax Act, who it affects, and how it can impact your financial dealings.

What is Section 194R?

According to Budget 2022, Section 194R of Income Tax Act declares that if you provide a benefit or prerequisite valued over INR 20,000 to a resident, TDS of 10% is deducted. This means that if you offer any form of benefit, and its value exceeds INR 20,000, you are required to deduct 10% of its value as tax before giving it to the recipient. 

194R TDS mandates that the benefits, monetary or non-monetary, received by individuals or entities are appropriately taxed, promoting transparency and compliance in financial transactions, further widening the tax base, and reducing tax evasion.

What is TDS and How is it Deducted?

TDS, or Tax Deducted at Source, is income tax deducted at the time of payments like rent, commission, professional fees, salary, and interest. The company, business, or professional providing benefits or perquisites deducts a certain percentage of tax and deposits this tax to the government on behalf of the recipient. The recipient receives the net amount (after TDS) and adds the gross amount to their income. The deducted TDS is then adjusted against their final tax liability, allowing them to claim credit for the tax already paid. This process helps the government collect taxes in advance and effectively track transactions. The deducted TDS needs to be paid by the 7th of the succeeding month.

According to Section 194R of the Income Tax Act, 1961, TDS on gifts or perquisites must be deducted at a rate of 10%. Businesses or professionals are required to deduct TDS at 10% if the total value of gifts or perquisites provided to any recipient exceeds INR 20,000 in a financial year.

Consider the following example to understand TDS deduction under Section 194R:

Imagine a company gives a salesperson a smartphone worth ₹15,000 and a holiday package worth ₹10,000 in the same financial year, adding to ₹25,000 in total.

Since this total is more than ₹20,000, the company must deduct TDS at 10% on the entire ₹25,000. This means that they’ll deduct ₹2,500 as TDS, and the salesperson will receive the gifts, but the company will withhold ₹2,500.

Here are a few ways to deduct TDS:

• The payer can increase the net amount to cover TDS or pay the TDS themselves.
• The payee can provide cash to the payer to cover the TDS, which the payer then deposits with the government.
• If the payee has a credit balance with the payer, the payer can use it to deduct the tax and pay the remaining amount to the payee.

Why was Section 194R Introduced?

• The government introduced 194R TDS to prevent tax evasion.
• Many companies used to give gifts or other benefits to their dealers for promotions and then claim these as business expenses. The individuals receiving these benefits often didn’t report them as income since they were in kind, leading to tax evasion.
• Now with 194R TDS, any benefit, whether in cash or kind, received by a resident individual from a business or profession is taxable.

Here’s example to understand this better:

Suppose ABC Ltd., a car manufacturer, gives cars as incentives to dealers for meeting their annual targets. Previously, the company would claim these cars as a business expense. However, with the introduction of Section 194R, TDS on incentives is now applicable, ensuring proper income tracking and reducing tax evasion.

When is TDS Not Required Under Section 194R?

• When the total value of benefits or perquisites provided to a resident does not exceed ₹20,000 in a financial year.
• TDS applicability is not subjected to non-resident recipients.
• If an individual or HUF does not have income from a business up to Rs. 1 crore or a profession up to Rs. 50 lakhs.
• Benefits given in an employer-employee relationship are taxed under Section 192, not 194R

Why is Section 194R Important?

• Prevents tax evasion by claiming business promotion expenses while providing various gifts, perks, or benefits to distributors, dealers, or channel partners. 
• Under the Income-tax Act, 1961, any benefit or perquisite from business or profession should be declared as business income by the recipient.
• By mandating the deduction of TDS on these benefits, Section 194R also aids in widening the tax base and ensuring that proper tax is reported and deducted for non-monetary benefits and perquisites

Key Obligations Under Section 194R

Both providers and recipients have key obligations to comply with to ensure transparency and accuracy in tax reporting.

• Applies to both monetary and non-monetary benefits and perquisites worth more than INR 20,000 given to a resident.
• 10% TDS must be deducted on the value of benefits or perquisites.
• Issue TDS certificates to recipients, ensuring transparency and accountability. Ensure accurate and timely filing of TDS returns to avoid penalties.
• Maintain detailed records of all transactions involving benefits and perquisites.

Section 194R of the Income Tax Act facilitates fair taxation practices across businesses and professions, promoting accountability and accuracy in tax reporting. Whether you’re a provider or recipient, understanding 194R TDS ensures a system where financial transactions are conducted with clarity and responsibility.