Section 194R

What is Section 194R?

Section 194R was introduced in the Finance Act, 2022 to ensure tax deduction at source on benefits or perquisites received by residents in connection with their business or profession.

Earlier, many businesses provided incentives such as free products, international trips, luxury goods, and other perquisites to their dealers, agents, and distributors. These were often claimed as business expenses, but the recipients did not report them as taxable income. Section 194R addresses this loophole by requiring businesses to deduct TDS at a rate of 10% on the value of such benefits before providing them to recipients.
 

Scope and Applicability of Section 194R

The provisions of Section 194R apply in cases where:

• The benefit or perquisite is provided in cash or in kind.
• The total value of such benefits exceeds ₹20,000 in a financial year for a single recipient.
• The recipient is a resident of India.

It applies to various business entities, including:

• Companies
• Partnership firms
• Sole proprietorships
• Hindu Undivided Families (HUFs)
• Professionals engaged in business

However, small businesses and professionals are exempted from deducting TDS under Section 194R if:

Their turnover is below ₹1 crore (for businesses) or ₹50 lakh (for professionals) in the preceding financial year.

Examples of Benefits Covered Under Section 194R

Some common examples of benefits and perquisites attracting TDS under Section 194R include:

Business Incentives:

• Luxury gifts such as watches, smartphones, or vehicles given to high-performing dealers.
• Free annual vacations for top-performing distributors.

Sponsorships:

• Fully sponsored events or conferences for specific clients.
• Sponsoring a leisure trip for dealers and their family members.

Free Samples:

• Complementary goods provided to doctors, influencers, or distributors for business promotion.

Company Assets Given for Use:

• Providing a company-owned car for personal use by an agent or distributor.

Financial Assistance:

• Loans given at zero interest rates or concessional rates.

Rate of TDS Deduction Under Section 194R

• TDS is deducted at a flat rate of 10% on the value of benefits provided.
• If the recipient does not provide a PAN, TDS will be deducted at 20% as per Section 206AA.
• The deductor is responsible for ensuring TDS is deposited with the government before distributing the benefit.
   

Compliance and TDS Deduction Process

Entities must follow the below steps to comply with Section 194R:

1. Identify Eligible Transactions

Assess all benefits or perquisites provided to business associates, agents, or professionals exceeding ₹20,000 in a financial year.

2. Deduct TDS Before Disbursing the Benefit

1. If the benefit is provided in cash, deduct 10% TDS before transferring the amount.
2. If the benefit is in kind, ensure that the recipient pays TDS in cash before receiving the benefit.

3. Deposit TDS with the Government

The deducted TDS must be deposited by the 7th of the following month via an authorised bank or online payment through the income tax portal.

4. Issue TDS Certificate

The entity must issue Form 16A (TDS Certificate) to the recipient as proof of deduction. This certificate can be downloaded from the Traces portal.

5. File Quarterly TDS Returns (Form 26Q)

The deductor must file quarterly TDS returns using Form 26Q to report all deductions made under Section 194R. The due dates for TDS return filing are:

Exemptions Under Section 194R

Certain benefits and perquisites are exempt from TDS under Section 194R, including:

Employee Benefits

• Perquisites received by employees from their employers are taxed under Section 192 and not Section 194R.

Non-Residents

• Section 194R applies only to Indian residents. For non-residents, Section 195 is applicable.

Cash Discounts & Rebates

• Trade discounts, cash discounts, and rebates offered to customers are not covered under Section 194R.

Low-Value Benefits

• If the total value of benefits provided does not exceed ₹20,000 in a financial year, TDS is not applicable.
   

Impact of Section 194R on Businesses and Professionals

Increased Compliance Burden

• Businesses and professionals must keep track of all benefits provided and ensure timely deduction and deposit of TDS.

Stricter Tax Monitoring

• This section closes tax evasion loopholes by ensuring that business-related benefits and perquisites are brought under the tax net.

Greater Transparency in Financial Transactions

• Section 194R makes it easier for tax authorities to track undeclared income received in non-cash transactions.
   

Penalty for Non-Compliance

Failure to deduct and deposit TDS under Section 194R can lead to:

• Penalty equal to the TDS amount not deducted.
• Interest at 1% per month for failure to deduct TDS.
• Interest at 1.5% per month for failure to deposit deducted TDS.
• Disallowance of expenses while computing taxable income.
   

Conclusion

Section 194R of the Income Tax Act plays a vital role in bringing non-monetary benefits and perquisites under the tax framework. By mandating 10% TDS on business-related incentives, it ensures greater transparency and reduces the scope for tax evasion.

Businesses and professionals must track all benefits provided, ensure timely deduction of TDS, and comply with quarterly filing requirements. With increased scrutiny from tax authorities, staying compliant with Section 194R is essential to avoid penalties and interest liabilities.

Understanding the scope, applicability, and compliance measures of this section can help businesses seamlessly integrate tax deductions into their financial transactions while remaining fully compliant with India’s evolving tax regulations.