Section 194R TDS of the Income Tax Act

Section 194R, introduced in the Union Budget of 2022, is a significant addition to the Income Tax Act 1961. This section deals with Tax Deducted at Source (TDS) on benefits and perquisites provided to residents concerning a business or profession. It means the benefit provider must deduct TDS from the benefit before providing it to the receiver. It helps the government prevent tax evasion and expand the tax base. This article focuses on giving information regarding section 194R, the threshold limit, and the guidelines which removed the difficulties in Section 194R TDS. IndiaFilings helps you calculate the deduction amount & file the TDS returns on time with expert assistance!! [shortcode_35]

What is the TDS on Section 194R?

TDS must be deducted at 10% under section 194R of the Income Tax Act, 1961. The new section requires any person providing a benefit or perquisite exceeding Rs.20,000 a year to a resident from their business or profession to deduct TDS @10%.

What is the Section 194R limit?

The limit under Section 194R is ₹20,000. If you're a resident Indian providing benefits or perquisites (monetary or non-monetary) to another resident in a financial year. If the total value of those benefits exceeds ₹20,000, you'll be responsible for deducting TDS (Tax Deducted at Source) at 10% before providing the benefit.

Why Section 194R was introduced?

Section 194R was introduced to address the issue of tax evasion on benefits and perquisites offered by businesses and professionals. Previously, such benefits, often provided in-kind, could be claimed as business expenses, potentially leading to under-reporting of income. By mandating TDS (Tax Deducted at Source) on these benefits, the government aims to:

Tax Base Expansion: By bringing these benefits under the tax net, the government increases the total amount of taxable income collected.
Ensure proper tax collection: TDS collects taxes on the benefits at the source, preventing under-reporting and increasing tax revenue.
Preventing tax evasion: The requirement to deduct TDS discourages businesses and professionals from claiming benefits as expenses to avoid paying taxes.

What are the Guidelines & Applicability of Section 194R?

As mentioned above, The CBDT issued guidelines regarding the applicability of new TDS provisions (Section 194R) regarding benefits received in a business or profession.

The perquisites can be in cash, in-kind, or partly in both forms.
The taxpayer does need to check the taxability of the sum in the hands of the recipient, and the nature of the asset given as a benefit or prerequisite is not relevant
The capital assets given as benefits or perquisites are covered within the scope of Section 194R of the Income-tax Act
Section 194R shall apply to sellers giving incentives, other than discounts or rebates, in cash or kind, e.g., cars, TVs, computers, gold coins, mobile phones, sponsored trips, free tickets, and medicine samples to medical practitioners.
CBDT clarified that Section 194R would apply to distributing free samples to the hospital for doctors receiving free samples of medicines while employed in a hospital. As an employer, the hospital may treat such samples as a taxable perquisite for employees and deduct tax under Section 192. For those, the threshold of ₹20,000 has to be seen concerning the hospital.
For doctors working as consultants with a hospital and receiving free samples, TDS would ideally apply to the hospital first, which in turn would require the deduction of tax under Section 194R for consultant doctors.
CBDT clarified that as an alternative to remove the difficulty, the original benefit or perquisite provider may directly deduct tax under Section 194R about the consultant doctor as a recipient.
The government department clarified that Section 194R would apply if the benefit or perquisite is provided to a government entity, like a government hospital, not carrying on business or profession.
Apart from hospitals, CBDT also provided a breather on sales discounts, cash discounts and rebates allowed to customers by excluding them from the purview of Section 194R, as their inclusion would put the seller into difficulties.

When is Section 194R not applicable?

Section 194R TDS does not apply in the following cases:

Section 194R doesn't apply to benefits provided by an employer to their employee. These benefits are taxed under Section 192 of the Income Tax Act. Similarly, for non-residents receiving benefits, tax is deducted under Section 195.
If the total value of benefits and perquisites provided to a resident in a financial year is less than ₹20,000, there's no need to deduct TDS under this section.
This TDS deduction under Section 194R does not apply to individuals and HUFs with an annual turnover of less than INR1 crore for businesses and INR 50 lakhs for professions.
If there is no business relationship involved, then deduction does not apply.

How is the TDS Deducted under Section 194R?

Here’s the brief process of TDS deduction under Section 194R, Step 1: Identify Applicable Benefits:

Determine if the benefits or perquisites provided to a resident in a financial year exceed the ₹20,000 threshold.
Consider monetary and non-monetary benefits (club memberships, discounts, etc.).

Step 2: Calculate TDS Amount:

If the threshold is crossed, calculate the TDS at a rate of 10% on the fair market value of the benefits exceeding ₹20,000.

Step 3: Timing of Deduction and Deposit:

Deduct the calculated TDS amount at the time of payment or provision of the benefit.
Deposit the deducted TDS with the government within the specified timelines as per the Income Tax Act.

Here's an example:

A company provides its employees with a club membership worth ₹30,000 in a financial year.
The benefit exceeds the ₹20,000 threshold.
TDS = (₹30,000 - ₹20,000) * 10% = ₹1,000

The company needs to deduct ₹1,000 as TDS when providing the club membership and deposit it with the government within the specified timeframe.

How is the Value of Benefit Calculated under Section 194R?

As per the Central Board of Direct Taxes (CBDT), the primary method for calculating the value of a benefit is its fair market value. But there are certain exceptions,

If the benefit provider purchased the benefit or perquisite themselves, the taxable value becomes the actual purchase price paid.
If the benefit provider manufactures the benefit they're offering (like a company car), the value for tax purposes will be considered the standard price they usually charge customers for that specific benefit.

Conclusion

In conclusion, Section 194R of the Income Tax Act mandates a 10% TDS on benefits exceeding ₹20,000 provided to residents in a financial year. This aims to broaden the tax base and ensure proper tax collection on perks offered by businesses and professionals. The value of benefits is generally based on fair market value, with exceptions for purchased benefits or those manufactured by the provider. Benefit providers must file a quarterly TDS return in Form 26Q to comply with Income tax regulations. File a TDS return in Form 26Q easily with IndiaFilings experts!! [shortcode_35]