Section 194R of Income Tax Act, 1961, deals with the deduction of tax at source (TDS) on benefits or perquisites provided to a resident in the course of business or professional activities. The section was introduced by the Finance Act, 2022. These benefits or perquisites could be in cash (money) or in-kind (non-monetary items like goods, services, discounts, travel packages, etc.). Its primary objective is to bring more clarity and structure to the taxation of benefits and perquisites provided to residents, arising from business or professional activities.
This section ensures that businesses, companies, and professionals deduct tax at source when they provide certain benefits or perquisites to residents. The intent is to curb tax evasion and make sure that these benefits are appropriately taxed at the time they are provided. This article will give a detailed explanation of Section 194R, its key provisions, the mechanism of tax deduction, exemptions, and its implications for taxpayers.
What is a Benefit or Perquisite?
A benefit or perquisite is any reward, gift, or incentive provided by a business or professional to a resident. These benefits can take various forms:
Cash: Direct monetary rewards or payments.
Non-Cash: This includes free goods, services, travel packages, products, or any form of benefits that are not directly convertible into cash. For example, promotional gifts, free samples, discounts, or event tickets provided to clients would fall under this category.
Section 194R applies to both cash and non-cash benefits or perquisites, with the aim to ensure that tax is deducted on their value before they are provided to the recipient. This section is applicable only when these benefits are provided in the context of business or professional activities.
Elevate your career with our Advanced Certification Program in Mergers & Acquisitions designed to transform your professional journey in just six months. This high- engagement course emphasizes real-world applications and features master classes from NLU and industry partners led by expert faculty.
Who is Responsible for Deducting Tax?
The person providing the benefit is responsible for deducting tax. This person must ensure that tax is deducted at the time the benefit is provided. If the benefit is in cash, it is easy to calculate and deduct the tax. However, if the benefit is in kind, the person providing it must calculate its value and ensure that the tax is deducted before releasing the benefit.
Rate of Tax Deduction
The rate of tax deduction under Section 194R is 10%. The tax is calculated on the value or the total value of the benefit or perquisite. It is the responsibility of the person providing the benefit to deduct this tax. For example, if the value of the benefit is ₹50,000, then the tax deducted will be ₹5,000 (10% of ₹50,000).
This is the basic requirement under Section 194R. However, there is a provision for situations where the benefit is entirely in kind or partly in cash and partly in kind.
Check out the article and find corporate law courses to gain specialisation in this field of law.
Special Case for Benefits in Kind
If the benefit is given in kind (not cash), the process is different. In such cases, if the cash provided is not enough to cover the tax liability, the person providing the benefit must ensure that the tax is paid. This payment must be made before releasing the benefit or perquisite. For instance, if a company provides a car or a product as a gift and the total value exceeds ₹20,000, it needs to deduct tax on this value and ensure the tax is paid before the product is provided.
Exemptions and Thresholds
While Section 194R mandates tax deduction on benefits there are certain exemptions and thresholds designed to ease compliance for smaller businesses or professionals.
1. Threshold Limit of ₹20,000:
The provisions of Section 194R do not apply if the aggregate value of the benefits provided to a resident during the financial year does not exceed ₹20,000.
If a business or professional gives benefits worth ₹15,000 in a year, they do not need to deduct tax on it. However, if the value exceeds ₹20,000, they must ensure that the tax is deducted at 10%.
2. Exemption for Small Businesses and Professionals:
Small businesses and professionals with a turnover below a certain limit are also exempt from the requirements of Section 194R.
If an individual or Hindu Undivided Family (HUF) has total sales, gross receipts, or turnover of less than ₹1 crore (for business) or ₹50 lakh (for professionals like doctors, consultants, etc.) in the immediately preceding financial year, they are exempt from the TDS deduction under this section.
For instance, a small shop with ₹80 lakh turnover or a freelance consultant earning ₹40 lakh will not have to deduct tax on the benefits they provide, even if the value exceeds ₹20,000.
Also, get to know about the principles of corporate governance.
Handling Difficulties: Role of CBDT
If any issues arise while implementing Section 194R, the Central Board of Direct Taxes (CBDT) can issue guidelines with the approval of the Central Government. These guidelines are designed to help resolve any difficulties faced by taxpayers or authorities in applying the provisions of the section. Once issued, these guidelines must be placed before both Houses of Parliament, and they are binding on both the tax authorities and the person providing the benefit.
The guidelines are especially helpful when situations come up that aren't clearly spelt out in the law. This way, businesses and tax authorities can handle them quickly.
Application to Companies
When it comes to businesses, the person in charge of the business is responsible for tax deductions, not just the business itself. As a result, TDS must be deducted from any benefits or perquisites given, according to senior company officials. Penalties and interest on the tax that should have been deducted may apply to the company if it fails to do so.
Summing Up
When it comes to businesses, the person in charge of the business is responsible for tax deductions, not just the business itself. As a result, TDS must be deducted from any benefits or perquisites given, according to senior company officials. Penalties and interest on the tax that should have been deducted may apply to the company if it fails to do so.
It is very important for businesses and professionals to keep track of the benefits they offer to residents and make sure they get the right tax breaks. They can avoid fines and help make sure tax laws are followed smoothly if they do this.
Related posts
Section 194R of Income Tax Act: FAQs
Q1. What is Section 194R of Income Tax Act?
Section 194R mandates the deduction of tax at 10% on benefits or perquisites provided by businesses or professionals to residents. The tax is deducted before providing the benefit.
Q2. Who is responsible for deducting tax under Section 194R?
The person providing the benefit or perquisite is responsible for ensuring that tax is deducted at the prescribed rate.
Q3. What is the rate of tax deduction under Section 194R of Income Tax Act?
The tax rate is 10% of the value or aggregate value of the benefit or perquisite provided.
Q4. Is there a threshold for tax deduction under Section 194R?
Yes, the section does not apply if the total value of the benefits or perquisites does not exceed ₹20,000 in a financial year.
Q5. Are small businesses exempt from Section 194R of Income Tax Act?
Yes, businesses with turnover less than ₹1 crore (business) or ₹50 lakh (profession) in the previous year are exempt from Section 194R.
Q6. What happens if the benefit is provided in kind?
If the benefit is in kind, tax must still be deducted. If the cash provided isn't enough to cover the tax, the person must ensure that the required tax is paid before releasing the benefit.
Q7. Can guidelines be issued for implementation?
Yes, the CBDT can issue guidelines to remove any difficulties in implementing Section 194R. These guidelines are binding on the authorities and the person providing the benefit.
