Section 194R of the Income Tax Act, 1961, introduced in July 2022, mandates the deduction of tax at source (TDS) on benefits or perquisites provided to residents in connection with their business or profession. Here’s a breakdown:

Who deducts?

• Any person responsible for providing the benefit or perquisite (e.g., companies, businesses, individuals paying freelance fees).

Who is taxed?

• Residents receiving the benefit or perquisite. Non-residents are not covered.

What benefits/perquisites are covered?

• Any non-monetary benefit or perquisite arising from a resident’s business or profession (e.g., travel packages, gift cards, free use of assets, discounts, etc.).

What are the exemptions?

• Benefits/perquisites with an aggregate value of less than Rs. 20,000 during the financial year for the same beneficiary.
• Individuals or Hindu Undivided Families (HUFs) with total sales not exceeding Rs. 1 crore (business) or Rs. 50 lakh (profession) in the previous financial year.

What is the tax rate?

• 10% of the benefit or perquisite value.

When is the tax deducted?

• Before providing the benefit or perquisite.

EXAMPLE

State: Any state in India (Section 194R applies nationwide)

Threshold: Applicable only if the aggregate value of benefits/perquisites exceeds Rs. 20,000 during the financial year (FY) to one beneficiary.

Deduction Rate: 10% of the value of the benefit/perquisite.

Examples:

1. Doctor receives free medicine samples:

• A pharmaceutical company provides free medicine samples worth Rs. 30,000 to a doctor in a calendar year.
• Since the value exceeds the threshold of Rs. 20,000, the pharmaceutical company needs to deduct TDS at 10% (i.e., Rs. 3,000) before providing the samples.
• The doctor will show the remaining Rs. 27,000 as taxable income in their ITR.

2. Business owner sponsors employee travel:

• A business owner pays for their employee’s travel expenses (flight tickets, hotel stay) for a business trip amounting to Rs. 25,000.
• The owner needs to deduct TDS at 10% (i.e., Rs. 2,500) on the travel expenses before reimbursing the employee.
• The employee will need to include the remaining Rs. 22,500 as taxable income in their ITR.

3. Professional receives membership fees:

• A professional association pays Rs. 15,000 per year as membership fees to one of its members.
• Since the annual fees are below the threshold, no TDS is applicable.

4. Special cases:

• Section 194R doesn’t apply to individuals or Hindu Undivided Families (HUFs) with a turnover of less than Rs. 1 crore (business) or Rs. 50 lakh (profession) in the previous FY.
• Specific benefits like employee salary, retirement benefits, and leave encashment are already covered under other sections of the Income Tax Act and hence not covered by Section 194R.

FAQ QUESTIONS

Q1. What is Section 194R?

A1. Section 194R is a new provision introduced in the Income Tax Act, 1961, with effect from July 1, 2022. It mandates deduction of tax at source (TDS) at 10% on any benefit or perquisite provided by a resident individual or Hindu Undivided Family (HUF) to another resident individual during the course of business or profession, if the aggregate value of such benefits or perquisites exceeds Rs. 20,000 in a financial year.

Q2. What are the types of benefits/perquisites covered under Section 194R?

A2. Section 194R covers a wide range of benefits and perquisites, including:

• Value of perquisites under section 17(2) (e.g., free accommodation, car, etc.)
• Rent-free accommodation provided to an employee (exceeding Rs. 10,000 per month)
• Concessional sale of goods or services to an employee
• Provision of any food or beverage or meal vouchers (exceeding Rs. 50 per day)
• Contribution to an approved superannuation fund in excess of the prescribed limit (15% of salary)
• Any other benefit or perquisite not covered above (exceeding Rs. 20,000)

Q3. Who is responsible for deducting TDS under Section 194R?

A3. The person providing the benefit or perquisite (the deductor) is responsible for deducting TDS at source under Section 194R. This includes companies, individuals, and HUFs engaged in business or profession.

Q4. What is the threshold limit for applicability of Section 194R?

A4. The threshold limit for applicability of Section 194R is Rs. 20,000. If the aggregate value of benefits or perquisites provided to a resident individual during a financial year exceeds Rs. 20,000, TDS is deductible under Section 194R on the entire amount exceeding the threshold.

Q5. Does Section 194R apply to benefits provided before July 1, 2022?

A5. No, Section 194R is only applicable to benefits or perquisites provided on or after July 1, 2022.

Q6. Who is exempt from deducting TDS under Section 194R?

A6. The following are exempt from deducting TDS under Section 194R:

• Individuals or HUFs whose total sales, gross receipts, or turnover does not exceed Rs. 1 crore in case of business or Rs. 50 lakhs in case of profession during the preceding financial year.
• The Government of India, State Governments, local authorities, and any institution established under an Act of Parliament or State Legislature.

Q7. How is the TDS deducted under Section 194R deposited?

A7. The deducted TDS must be deposited to the government within 10 days from the end of the month in which the deduction is made. The deductor needs to file TDS return in prescribed form (e.g., Form 26QB) quarterly.

Q8. What are the consequences of not deducting TDS under Section 194R?

A8. The deductor is liable to pay interest and penalty for not deducting or depositing TDS as per the provisions of the Income Tax Act.

These are just some of the frequently asked questions on Section 194R. For specific guidance on your situation, it is recommended to consult a tax advisor.

CASE LAWS

Section 194R of the Income Tax Act, 1961, introduced in July 2022, deals with the deduction of tax at source (TDS) on benefits or perquisites provided to residents in relation to their business or profession. While there are no specific case laws related to Section 194R yet, as it’s a new provision, I can explain the key features and provide relevant information to help you understand its implications:

Applicability:

• Deductor: Any person responsible for providing a benefit or perquisite to a resident (individual or HUF) comes under the ambit of Section 194R. This includes companies, businesses, and individuals making such payments.
• Recipient: The provision applies only to resident individuals and Hindu Undivided Families (HUFs).
• Threshold limit: TDS is not deductible if the aggregate value of benefits or perquisites provided to a resident during the financial year does not exceed Rs. 20,000. However, certain specific benefits like leave travel concession have a higher threshold of Rs. 50,000.
• Exemptions: Some categories are exempt from TDS deduction under Section 194R, such as benefits provided to employees covered under Section 192C and benefits arising from perquisites exempt under Section 10.

Benefits/Perquisites covered:

The scope of Section 194R is broad and encompasses various benefits or perquisites arising from carrying out a business or profession. Some examples include:

• Travel expenses
• Car or conveyance allowance
• Accommodation
• Club memberships
• Food and beverages
• Mobile phone
• Gifts
• Educational allowances for children
• Medical reimbursements beyond specified limits

Tax rate and Deduction Process:

• The TDS rate under Section 194R is a flat 10%.
• The deduct or needs to deduct tax at source before providing the benefit or perquisite and deposit the deducted amount with the government within the prescribed timeframe.
• The deduct or must also furnish TDS return in the prescribed form and issue TDS certificates to the recipient.

                                         EXAMPLE

Scenario 1: Doctor receiving free medicine samples from a pharmaceutical company:

• Value of samples: Rs. 25,000 per year.
• TDS liability: Since the value exceeds Rs. 20,000, the pharmaceutical company must deduct 10% TDS, i.e., Rs. 2,500, before providing the samples.
• State applicability: This applies across all states in India.

Scenario 2: Company providing free mobile phone to its employees:

• Cost of phone: Rs. 18,000.
• TDS liability: As the cost is below Rs. 20,000, no TDS is applicable.
• State applicability: This applies across all states in India.

Scenario 3: Law firm providing free subscription to a legal database to its lawyers:

• Annual subscription fee: Rs. 30,000.
• TDS liability: The law firm must deduct 10% TDS, i.e., Rs. 3,000, before providing the subscription.
• State applicability: This applies across all states in India.

Scenario 4: Individual freelancer providing services to a company exceeding Rs. 50 lakh in the previous year:

• Payment for services: Rs. 1 lakh per month.
• TDS liability: The company must deduct 10% TDS, i.e., Rs. 10,000, from each monthly payment.
• State applicability: This applies across all states in India.

Additional factors to consider:

• The threshold limit of Rs. 20,000 is calculated for the aggregate value of benefits/perquisites provided to the same recipient during the entire financial year.
• Section 194R is not applicable to benefits/perquisites provided by individuals or HUFs with a turnover of less than Rs. 1 crore (business) or Rs. 50 lakh (profession) in the previous year.
• These are just examples, and the actual applicability of Section 194R may vary depending on the specific circumstances. It is recommended to consult with a tax professional for specific advice.

FAQ QUESTIONS

Q1. What is Section 194R and when did it come into effect?

A1. Section 194R is a new provision introduced in the Income Tax Act with effect from July 1, 2022. It mandates Tax Deducted at Source (TDS) at 10% on benefits or perquisites exceeding Rs. 20,000 provided by any person (individual or entity) to a resident individual during a financial year.

Q2. What kind of benefits or perquisites are covered under Section 194R?

A2. Section 194R applies to a wide range of benefits and perquisites arising from business or profession, including:

• Value of perquisites under section 17(2) (e.g., free accommodation, car, mobile phone)
• Employer’s contribution to superannuation or gratuity funds exceeding prescribed limits
• Payments towards medical treatment, education, etc. under sections 17(2)(ii) and 17(2)(iii)
• Any other benefit or perquisite not chargeable under any other head of income

Q3. Who is responsible for deducting TDS under Section 194R?

A3. The person providing the benefit or perquisite (the deductor) is responsible for deducting TDS at 10% and depositing it with the government. This includes individuals, companies, partnership firms, etc.

Q4. What is the threshold limit for applicability of Section 194R?

A4. TDS under Section 194R is applicable only if the aggregate value of benefits or perquisites provided to a resident individual during a financial year exceeds Rs. 20,000.

Q5. Are there any exemptions to Section 194R?

A5. Yes, there are a few exemptions, including:

• Benefits or perquisites provided to an individual or Hindu Undivided Family (HUF) whose total sales, gross receipts, or turnover in the preceding financial year did not exceed Rs. 1 crore for business or Rs. 50 lakhs for profession.
• Benefits provided in kind (e.g., free meals, travel tickets) up to a limit of Rs. 50 per day.
• Certain other allowances specifically exempted under the Income Tax Act.

Q6. How is the TDS amount deposited under Section 194R?

A3. The deductor must deposit the TDS amount electronically through the online banking portal of the authorized bank using challan 281. They must also file quarterly TDS returns in Form 26QB.

Q7. What are the consequences of non-compliance with Section 194R?

A7. Non-deduction or late deduction of TDS under Section 194R can attract penalties and interest charges on the deductor.

These are just some of the frequently asked questions about Section 194R. For more detailed information and specific situations, it is recommended to consult a tax advisor.

CASE LAWS

Section 194R of the Income Tax Act, 1961, introduced in July 2022, deals with the deduction of tax at source (TDS) on benefits or perquisites provided to residents in relation to their business or profession. While there are no specific case laws related to Section 194R yet due to its recent introduction, I can provide you with a comprehensive overview of its provisions and relevant circulars issued by the Central Board of Direct Taxes (CBDT) for its practical application.

Applicability of Section 194R:

• Deductor: Any person responsible for providing any benefit or perquisite to a resident (individual or Hindu Undivided Family – HUF).
• Recipient: Resident individual or HUF.
• Threshold Limit: The aggregate value of the benefit or perquisite provided during the financial year should exceed Rs. 20,000.
• Exemptions:
  • Individuals or HUFs whose total sales/gross receipts/turnover in the preceding financial year did not exceed Rs. 1 crore (business) or Rs. 50 lakhs (profession).
  • Benefits or perquisites provided on or before June 30, 2022.

Types of Benefits/Perquisites Covered:

• Value of perquisites under section 17(2) of the Act (e.g., free meals, use of car).
• Rent-free accommodation provided to an employee.
• Concession in respect of supply of electricity or water.
• Concession in respect of supply of any other service.
• Any other benefit or perquisite not provided in cash.

Key Points to Remember:

• The TDS rate under Section 194R is 10%.
• The deduction needs to be made at the time of providing the benefit or perquisite.
• The deduct or is required to file TDS return in Form 26QB within the prescribed timeframe.
• The CBDT has issued various circulars to clarify ambiguities and address practical difficulties in implementing Section 194R. Some important ones include:
  • Circular No. 12 of 2022: Clarifies that the deduct or is not required to verify the taxability of the benefit/perquisite in the hands of the recipient.
  • Circular No. 18 of 2022: Provides additional guidelines for determining the aggregate value of benefits/perquisites for threshold limit calculation.