Section 194R of Income Tax: Scope and Applicability

The Finance Act 2022 introduced Section 194R, which focused on the tax deduction on benefits or perks given to a resident in connection with a business or profession.

It’s common for businesses, companies, or entities to offer various benefits and perks to their distributors, channel partners, agents, or dealers. These incentives—like travel packages, gift cards or vouchers, products from incentive schemes, or even the use of business assets—are often designed to encourage and motivate these partners to drive further business growth.

What Is Section 194R of Income Tax?

Section 194R was introduced to close loopholes allowing tax evasion in business or professional transactions. Often, companies claim tax deductions for business promotions under Section 37 of the Income Tax Act of 1961 while offering various gifts, perks, or incentives to their distributors, dealers, or channel partners. These might include anything from travel vouchers to the use of company assets.

For instance, imagine a tech company that offers top-performing dealers the latest smartphones as rewards. The company records these as promotional expenses in its profit and loss account, claiming tax benefits. However, the recipients often don’t report these non-cash incentives in their income returns, leading to an incomplete disclosure of income.

Under Section 28(iv) of the Income-tax Act, any benefit or perquisite, whether or not it can be converted into money, should be treated as business income for the recipient. With Section 194R, if a business provides such perquisites, whether in cash or kind, they must deduct TDS. If the incentive is entirely in kind, the company has to pay the TDS on the value of that benefit.

Take another example: a car dealership gives its top sellers luxury watches as rewards. The dealership needs to deduct TDS on the value of these watches, ensuring the recipient properly reports this income. The goal of Section 194R is to broaden the tax base and ensure that such income doesn’t slip through the cracks.

Also Read More About Section 194H

Scope of Section 194R of the Income Tax Act

This section, effective from July 1, 2022, requires a 10% TDS deduction on any benefit or perquisite received by a resident in connection with their business or profession. However, if the total value of such benefits or perquisites for a single recipient doesn’t exceed ₹20,000 in a financial year, TDS under Section 194R doesn’t apply.

Moreover, individuals or Hindu Undivided Families (HUFs) are exempt from this TDS deduction under Section 194R of the Income Tax Act if their total annual turnover is below ₹1 crore for businesses or ₹50 lakh for professions.

For instance, suppose a business rewards its top sales agent with an international trip. If the trip’s value exceeds ₹20,000, the company must deduct TDS at 10% under Section 194R of the Income Tax Act. However, if the business’s turnover is under ₹1 crore, this obligation may not apply.

TDS Deduction Process

Under Section 194R, if a business provides benefits worth more than ₹20,000, they must deduct TDS at a rate of 10%. This became effective on July 1, 2022. A TDS certificate, issued quarterly as Form 16A, must be provided to the recipient. The deductor can download this form from the Traces portal, and recipients can also verify the details in their Form 26AS.

Filing TDS Returns

Those responsible for deducting tax under Section 194R must file TDS returns quarterly using Form 26Q. The TDS must be deducted before providing the benefits, and the payer can either pay the TDS amount themselves or deduct it from the net amount payable to the recipient.

For instance, let’s say a real estate firm rewards its top-performing agents with vacation packages. Before handing over these perks, the firm must deduct 10% of the value as TDS if the total benefit exceeds ₹20,000 for the financial year.

Rate of Deduction under Section 194R of the Income Tax Act

Under Section 194R of the Income Tax Act, the TDS rate is set at 10% of the value of any benefit or perquisite provided. This rate is straightforward and doesn’t get a boost from surcharges or the Health & Education Cess since it applies to residents.

However, if the recipient doesn’t provide their PAN, the tax will be deducted under Section 206AA at whichever rate is higher: the rate specified in the provision, the rate in force, or 20%. If the person fails to file their return of income, Section 206AB kicks in, and the TDS rate could be twice the specified rate, twice the rate in force, or 5%, whichever is higher.

Even if the recipient’s tax liability is low enough to justify a Nil deduction, there’s no provision for a certificate allowing for a Nil or lower TDS rate under sec 194R of the Income Tax Act.

How To Deduct TDS Under Section 194R?

When it comes to deducting TDS under Section 194R, the company, business, or professional providing the benefits or perquisites must handle the TDS deduction before distributing these perks. The deducted TDS should be paid to the government by the 7th of the following month.

But what happens when the benefit is provided “in kind”? How do you manage TDS on something that isn’t cash?

Here are a few approaches:

1. Grossing Up the Value: The company can calculate the value of the benefit and then “gross it up” to include the TDS amount. For example, if a business gives ₹80,000 worth of gadgets as a reward, it can gross up the amount to ₹88,888. The company then pays the TDS of ₹8,888 from its own funds.
2. Reimbursing the Cash Component: Another option is for the company to ask the recipient to cover the TDS in cash. In this scenario, the company might request the recipient to pay ₹7,000 in cash for the gadgets.
3. Adjusting Against a Credit Balance: If the recipient has a credit balance with the company, the TDS can be adjusted against that balance.

These methods help ensure compliance with Section 194R, even when the transactions involve non-monetary benefits.

Threshold Limit for Deduction under Section 194R of the Income Tax Act

Section 194R triggers TDS if the total value of the benefits or perquisites provided during a financial year exceeds ₹20,000. Whether these perks are given all at once or spread out over multiple instances doesn’t matter; the threshold is calculated from April 1st of the financial year.

For example, if a company gives out luxury gift hampers worth ₹25,000 to its top sales agents over the year, the tax deduction under section 194R of the Income Tax Act would apply. Starting from July 1st, 2022, if the benefits cross the ₹20,000 mark at any point during the financial year, TDS must be deducted.

By ensuring compliance with Section 194R, businesses can avoid complications and ensure that their transactions remain transparent and tax-compliant.

Exceptions and Exemptions Under Section 194R

Certain benefits and perquisites are exempt from TDS under Section 194R. For example, benefits like leave travel concession and house rent allowance, which fall under Section 10 of the Income Tax Act, aren’t subject to TDS. Similarly, salary and bonuses, which are already taxed under Section 192, are not included under Section 194R.

Individuals earning below the basic exemption limit of ₹2,50,000 annually are also exempt from TDS under this section. Moreover, non-resident employees whose income isn’t taxable in India due to the Double Taxation Avoidance Agreement (DTAA) are exempt. The same goes for residents but not ordinarily resident employees whose income doesn’t accrue or arise in India, as per Section 6 of the Income Tax Act.

Compliance and Reporting Requirements Under Section 194R

Employers are required to deduct tax at source on the benefits provided to employees at a rate of 10%. However, if the employee doesn’t have a PAN or Aadhaar, the rate shoots up to 20%. This tax must be deposited with the government by the 7th of the following month (or by April 30th for March deductions).

Additionally, employers must issue Form 16B to employees within 15 days after filing quarterly TDS statements (Form 26Q). These quarterly statements are due by the 31st of the following month, with May 31st being the deadline for the last quarter. Employees then report these benefits as “Income from other sources” on their tax returns and can claim credit for the TDS deducted.

Wrapping Up

Section 194R focuses on providing tax relief specifically designed for senior citizens, making retirement a bit easier through various tax benefits and exemptions. These senior citizen tax benefits include deductions on pension income, helping to ease the tax implications for retirees. 

By reducing the tax burden, elderly tax exemptions ensure that retirees can keep more of their hard-earned money. Understanding these rules is crucial for effective retirement planning, especially when managing taxation on pension funds to maximise benefits.

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