Section 194R of the Income Tax Act was introduced in the Union Budget of 2022. This rule requires businesses to deduct TDS (Tax Deducted at Source) on benefits provided in kind, making it harder to evade taxes and misreport income.
Applicability of Section 194R
Section 194R deals with the taxation of both monetary and non-monetary benefits (also known as perquisites) that individuals receive from businesses or professions. This means that not just cash, but also other forms of benefits, like gifts or services, are now subject to tax deductions at source.
When Does It Apply?
Section 194R applies when an individual receives monetary or non-monetary gifts, perks, or incentives, whether in cash or kind, from someone involved in a business or profession. However, this rule only applies if the total value of these benefits exceeds ₹20,000.
TDS Rate
As per the Budget 2022 update, a TDS rate of 10% must be deducted if the value of the benefit or perquisite exceeds ₹20,000 given to a resident.
Why Was Section 194R Introduced?
Section 194R was introduced to prevent tax evasion.
Companies often gave gifts and perks to dealers and claimed these as business expenses, while the recipients often did not report these as income since they were in kind. This led to a loss in tax revenue.
The introduction of Section 194R ensures that all benefits, whether cash or kind, received by individuals from businesses are taxed.
Example
If ABC Ltd., a car manufacturer, gives cars as incentives to dealers for meeting sales targets, they used to write these off as business expenses. Now, under Section 194R, such benefits are taxable, helping the government track income and prevent evasion.
TDS Under Section 194R
Under Section 194R, TDS must be deducted at a rate of 10% if the total value of gifts or perks exceeds ₹20,000 during the financial year for each recipient.
When Section 194R Does Not Apply
Section 194R does not apply in the following situations:
- Employer-Employee Relationship: Benefits provided by employers to employees are taxed under Section 192.
- Non-Resident Recipients: If the recipient is a non-resident Indian, TDS is deducted under Section 195.
- No Business Relationship: If there is no business relationship between the parties, TDS is not deducted.
- Value Below ₹20,000: TDS is not deducted if the total value of benefits is less than ₹20,000.
- Small Businesses: Not applicable to individuals and HUFs with annual sales or turnover below ₹1 crore for businesses and ₹50 lakh for professions.
How is TDS Deducted?
The provider of the benefit must deduct TDS before issuing it. Here are a few methods for deducting TDS:
- Gross Up: The provider can either adjust the net amount or cover the TDS from their own funds.
- Payee Contribution: The payee can pay cash to the provider to cover the TDS, which the provider then deposits with the government.
- Credit Balance: If the payee has a credit balance with the provider, it can be used to cover the TDS, and the net amount is paid to the payee.
Calculating the Value of Benefits
According to the CBDT, the value of the benefit is based on its fair market value, with some exceptions:
- If the provider has purchased the benefit, its value equals the purchase price.
- If the provider manufactures the benefit, the value is the price charged to customers.
Every benefit provider must file quarterly TDS returns using Form 26Q. While this process can be complex, it is essential for compliance with tax regulations.
Frequently Asked Questions (FAQs)
Is Section 194R applicable to gifts, benefits, or perks received for marriage or festivals?
No, gifts or benefits received for marriage or festivals are not taxed under Section 194R. This section specifically applies to benefits arising from a business relationship.
Does Section 194R apply if the benefit is received as a capital asset?
Yes, if the benefit or perquisite is received in the form of a capital asset, it is still taxable under Section 194R.
Is it necessary for the deductor to provide a TDS certificate?
Yes, the deductor must issue a TDS certificate (Form 16A) to the deductee every quarter. The deductor can access this form from their TRACES account, and the deductee can view the details in Form 26AS.
Must the deductor file TDS returns?
Yes, the deductor is responsible for filing quarterly TDS returns for the tax deducted under Section 194R using Form 26Q.
Does Section 194R apply when benefits are provided to a government entity?
No, Section 194R does not apply if the benefit is given to a government entity that is not engaged in any business or profession.
