Section 194R of the Income Tax Act
The Indian government has consistently introduced reforms to enhance transparency and curb tax evasion. One such significant development is the introduction of Section 194R of the Income Tax Act 1961, which aims to bring into the tax net benefits and perquisites offered in the course of business or profession. Effective from 1st July 2022, this provision has significant implications for businesses, professionals, and vendors. In this article, we delve into the nuances of Section 194R, its applicability, exclusions, and compliance requirements.
What is Section 194R of the Income Tax Act?
It mandates the deduction of tax at source (TDS) on any benefit or perquisite provided, whether in cash or kind, arising from business or professional relationships. The primary objective is to ensure that non-monetary benefits or freebies, often escaping income taxation, are now under the scanner.
Applicability of Section 194R
It applies to all resident recipients who receive any benefit or perquisite exceeding ₹20,000 in a financial year from a person providing such benefits during the course of business or profession.
Applicability Criteria:
The benefit provider needs to be working in a business or profession.
TDS is applicable whether or not the benefit is convertible into money.
Applies to both cash and kind benefits.
Threshold Limit: Benefits exceeding ₹20,000 annually per recipient.
TDS Rate: 10% of the perk or perquisite’s value.
Exceptions:
Individual or HUF providers with turnover below ₹1 crore (business) or ₹50 lakhs (profession) in the previous financial year are exempt from deducting TDS.
Example:
If a pharmaceutical company gives a mobile phone worth ₹25,000 to a doctor as part of a promotional scheme, it must deduct TDS at 10% on ₹25,000 before handing over the benefit.
Nature of Benefits Covered
It casts a wide net over various forms of business and professional benefits. The benefits can include:
Free products, samples, or demo goods
Sponsored travel and accommodation
Discounts not in the ordinary course of business
Loyalty rewards, bonus schemes, gifts
Reimbursements that qualify as perquisites
Notably:
Cash benefits are directly covered.
Benefits in kind, such as gifts or sponsored foreign trips, are also included.
The obligation lies with the provider to ensure TDS compliance.
Valuation of Benefits
Valuing a benefit or perquisite for TDS purposes can be challenging. The CBDT has issued guidelines for standardization:
Fair Market Value (FMV) is used for products or services.
In case of purchased items, the invoice value is considered.
For self-manufactured goods, FMV or comparable market price applies.
GST is excluded from valuation if the supplier separately charges it and claims an input tax credit.
TDS Payment and Reporting
The deductor must deposit the TDS to the government account within the due date prescribed under Section 200 of the Act. The details of these deductions must also be submitted on Form 26Q.
Not deducting or depositing TDS may result in:
The deductor must deposit the TDS to the government account within the due date prescribed under Section 200 of the Act. Furthermore, Form 26Q must be filled out with information on these deductions.
Interest under Section 201
Penalty equal to the amount not deducted
Disallowance of the expense under Section 40(a)(ia)
Practical Challenges and CBDT Clarifications
Since its rollout, Section 194R of the Income Tax Act has raised multiple implementation challenges, particularly for pharma, FMCG, automobile, and tech sectors. In response, the CBDT issued circulars (No. 12/2022 and 18/2022) to provide clarity on the following:
No TDS is required on employee benefits (already taxed under salary provisions).
TDS is not applicable to capital assets transferred as gifts.
Clarification on perquisites to social media influencers, doctors receiving free samples, etc.
Section 194R vs. Other TDS Sections
It’s important not to confuse Section 194R with similar provisions:
| Section | Coverage | TDS Rate | Who deducts |
| 194R | Benefits or perquisites | 10% | Person giving the benefit |
| 194C | Contractual payments | 1%-2% | Service receiver |
| 194J | Professional/technical fees | 10% | Service receiver |
| 195 | Payments to non-residents | Varies | Payer |
Best Practices for Compliance
To ensure seamless compliance follow this steps:
Maintain a benefits register tracking non-monetary perks.
Evaluate each promotional or business activity for TDS implications.
Obtain PAN of beneficiaries for TDS documentation.
If TDS is on a kind-only benefit, ensure the recipient deposits the tax or the deductor pays on behalf.
The Final Thought:
Navigating tax reforms like Section 194R demands a clear understanding of TDS implications on promotional expenses, gifts, and other business benefits. At Cretum Advisory, we specialize in offering end-to-end tax advisory, including TDS compliance, documentation support, business structuring, and tax audit readiness.
Whether you’re a manufacturer, service provider, or professional entity, our team ensures your income tax compliance is up-to-date and aligned with the latest regulatory changes.
📩 For expert assistance, reach out to us at info@cretumadvisory.com
Frequently Asked Questions (FAQs)
1. What is Section 194R of the Income Tax Act?
10% TDS is required on perks or privileges given in the course of business or profession under Section 194R.
2. Who is required to deduct TDS under Section 194R?
Any person providing benefits or perquisites in the course of business or profession must deduct TDS if their turnover exceeds ₹1 crore (business) or ₹50 lakh (profession) in the previous year. Before the benefit may be given, the TDS must be subtracted.
3. What is the threshold limit for the applicability of Section 194R?
TDS is applicable only if the aggregate value of benefits or perquisites given to a recipient exceeds ₹20,000 in a financial year. It does not need TDS below this value.
4. Are cash and kind both covered under Section 194R?
Yes, it covers both monetary and non-monetary prizes or perquisites. The law covers all benefits, whether convertible into money or not.
5. Is TDS applicable to employee benefits under Section 194R?
No, employee benefits are taxable under the head “Salary” and governed by TDS under Section 192, not Section 194R. Section 194R does not apply to employer-employee relationships.
6. What is the TDS rate under Section 194R?
The TDS rate is 10% of the benefit or perquisite’s value. This applies before giving the benefit to the recipient.