Section 194R of IT Act: TDS on perquisites or benefits on business & professions

Union Budget 2022, a new TDS section 194R, has been proposed in the Finance Bill 2022, w.e.f. 01^st July 2022.

Purpose for Introducing of Sec 194R

It was observed by department that many companies claimed expenses for business promotions by offering various gifts/ perks/ benefits to its dealers (on fulfillments of conditions of under agreement or as per prevalent norms/ tradition practice followed by over the years by business entity) under section 37 of Income Tax Act 1961, however majority of dealer did not declare the said gifts/ perks/ benefits under business income as required by sec 28 (iv) of Income Tax Act 1961. So to bring such gifts/ perks/ benefits received due to business connections by resident dealers TDS U/s 194R is introduced to track the undeclared income.

Section 194R connection with Business Or Profession

As per section 194R – 

If a resident individual receive cash or kind from other resident individual (any benefit or perquisite arising from business or profession), TDS is to be deducted under section 194R when any benefits or perquisite are provided within a business or professional context between residents.

Section 194R Applicable to  

Section 194R are applicable to business, company or professional when they provide any benefits to resident individual during the financial year exceeding Rs.20,000.

Business, company or professional is liable to deduct TDS @ 10% under Section 194R when they give perquisites in cash or kind to an agent, or any other person.

When TDS Under Section 194R is not applicable?

• Employers are not required to deduct TDS under section 194R if they provide any benefits to employees, as this section is does not applicable for the  benefits provided by employers.
• Section 194R will not be applicable if there is no business relationship involved between the parties.
• Section 194R is not applicable if benefits are for non-residents. When non-resident are provided any benefits, the tax will be deducted under Section 195.
• If threshold limit is below Rs 20,000 TDS under section 194R is not required.
• Section 194R is not applicable if Individuals and HUFs with business income not exceeding Rs 1 crore and professional income not exceeding Rs 50 lakhs.

How To Deduct TDS Under Section 194R?

The company, business, or professional providing the benefits is responsible to deducting TDS u/s 194R and needs to be paid by the 7th of the succeeding month.

Now, the question is how to deducted -

There are several ways:

• The payer may either increase the amount along with the benefit to cover the TDS, which means grossing up the net amount and pay TDS from their own funds.
• The payee can provide cash to the payer, which the payer has deposited with the government.
• If the payee has a credit balance with the payer, the payer can adjust the same in future.

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

The value of the benefit is based on its fair market value but there some are exceptions to this rule:

• If provider of the benefit purchased the perquisite, the value of the perquisite will be equal to its purchase price.
• If provider of the benefit is the manufacturer of the perquisite, then the price which is charged to its customer will be considered as the value of the perquisite.