Section 194R | TDS on Gifts and Perquisites

Introduction to Section 194R

The introduction of Section 194R of the Income Tax Act, 1961, brought about a significant change in the tax landscape, specifically focusing on the taxation of benefits and perquisites provided to residents. This section, which came into effect on 1st July 2022, mandates the deduction of Tax Deducted at Source (TDS) on benefits or perquisites given to a resident by a business or professional. The move aims to increase compliance in the taxation of non-cash benefits and to ensure that such benefits are taxed properly, even if they are not provided in cash.

Scope and Applicability of Section 194R

Section 194R applies to a person (other than an individual or Hindu Undivided Family) who is providing benefits or perquisites to residents. This section targets a wide range of business and professional transactions, such as:

• Gifts or perks provided by businesses to employees, distributors, agents, or clients.
• Non-cash benefits, such as vouchers, discounts, or freebies, provided in connection with business activities.

The tax deduction is required when the value of these benefits exceeds ₹20,000 in a financial year. The tax rate for TDS under this section is 10% of the value of the benefit or perquisite, which is considered to be income in the hands of the recipient.

When Does Section 194R Apply?

The key conditions for the applicability of TDS under Section 194R are as follows:

• Resident Status: The benefits or perquisites must be provided to a resident (individual, HUF, or a company) within India.
• Value of Benefit: The value of the benefit provided to the resident must exceed ₹20,000 in a given financial year.
• Nature of Transaction: The provision of benefits or perquisites must be related to the business or professional activity of the person offering them.

What Constitutes a Benefit or Perquisite?

A benefit or perquisite can include:

• Gift vouchers, discounts, and other items provided to a business partner, distributor, or customer.
• Free or subsidized goods or services provided to employees or partners.
• Stock options, sponsorships, or commission payments that are not directly in cash but have monetary value.

Section 194R specifically focuses on transactions where benefits are not in the form of direct payments (cash), but the recipient still derives value from them.

Threshold Limit and TDS Rate under Section 194R

1. Threshold Limit

Under Section 194R, TDS is required to be deducted when the aggregate value of benefits or perquisites provided to a resident exceeds ₹20,000 during a financial year. This threshold applies to the total value of benefits provided during the year, and each individual benefit is not considered separately.

• Threshold for TDS applicability: ₹20,000 in a financial year.

This means that if the total value of all benefits or perquisites provided to a resident during the financial year exceeds ₹20,000, TDS must be deducted. If the value is below ₹20,000, TDS is not applicable.

2. Rate of TDS

• TDS rate: 10% of the value of the benefit or perquisite.

When is TDS u/s 194R deducted?

Tax must be deducted prior to providing any benefit or perquisite to a resident individual. Since the provision of benefits or perquisites may occur in multiple stages, there is no single rule for determining the exact point at which tax should be deducted. The timing must be assessed based on the specific nature of the benefit or perquisite being offered. It is essential to ensure that tax is deducted before the benefit or perquisite is actually provided.

For instance, consider a company offering a free vehicle to its employees as a reward for meeting certain performance targets. The process of providing the vehicle could unfold in the following stages:

1. The company makes an accounting provision for the estimated cost of the vehicle to be awarded to the employee who has met the target, as of the balance sheet date;
2. The employee selects the model and specifications of the vehicle they wish to receive;
3. The company places an order with the vehicle dealer and makes the necessary payment for the car;
4. The vehicle is delivered to the employee or made available for pick-up;
5. The employee takes possession of the vehicle.

In this case, it would be appropriate to deduct the tax at Stage (d), when the vehicle is either handed over or made available to the employee.

Calculation of TDS under Section 194R

TDS is computed based on the fair market value (FMV) of the benefit or perquisite provided. The formula is:

TDS = FMV × 10%

For example, if a business provides a benefit worth ₹50,000 to an employee, the TDS deduction will be 10% of ₹50,000, which equals ₹5,000.

What is the process for deducting tax on benefits or perquisites?

When a benefit or perquisite is provided entirely in kind, or partly in cash and partly in kind, and the cash portion is not sufficient to cover the full tax liability for the entire benefit or perquisite, the person responsible for providing the benefit or perquisite must ensure that the necessary tax has been deducted and paid before releasing it.

Since it is the responsibility of the person providing the benefit or perquisite to ensure that the tax is paid, the liability can be settled in the following ways:

1. The "payer" may choose to gross up the amount and pay the tax from their own funds;
2. The "payee" can provide the cash to the payer to cover the TDS liability;
3. The payer can debit the TDS amount to the payee’s account if it has a credit balance, ensuring that the payee receives the net amount after TDS when the balance is paid;
4. Alternatively, the "payee" can directly pay the tax and provide the challan as proof to the payer.

The CBDT has clarified the following regarding tax payment on benefits/perquisites:

• Tax Payment by Payee: If the payee directly pays the tax, it must be done as advance tax.
• Declaration and Challan: The tax deductor may rely on a declaration from the payee, along with a copy of the advance tax payment challan, confirming that the tax on the benefit has been paid.
• Reporting in TDS Return: The tax payment and challan number must be reported in the TDS return. Form 26Q has provisions for such reporting.

For tax deduction by the benefit provider under Section 194R:

• When the benefit provider deducts and remits tax, the tax amount should be computed after grossing up the value of the benefit, as the TDS itself is considered part of the benefit under Section 194R.
• The TDS amount should reflect the grossed-up value in Form 26Q, and the tax deducted on the benefit should be reported accordingly.

Let's break down the concept with a numerical example to illustrate the process of grossing up the TDS under Section 194R when the tax paid by the benefit provider is also considered a benefit:

Scenario:

A company (Payer) provides a benefit worth ₹1,00,000 to an individual (Payee).

Step 1: Determine the tax liability.

First, we need to find out the total tax liability. Since the tax is to be deducted on the grossed-up amount, we need to account for both the value of the benefit and the tax.

Let the grossed-up value of the benefit be X. After deducting 10% TDS from this amount, the remaining amount should equal the value of the benefit, ₹1,00,000.

X - 10% * X = ₹1,00,000
X(1 - 0.10) = ₹1,00,000
0.90X = ₹1,00,000
X = ₹1,00,000 / 0.90 = ₹1,11,111.11

So, the grossed-up value of the benefit is ₹1,11,111.11.

Step 2: Calculate the TDS amount.

Now, we can calculate the TDS amount based on the grossed-up value of ₹1,11,111.11:

TDS = 10% * ₹1,11,111.11 = ₹11,111.11

Step 3: Show the TDS in Form 26Q.

In this case, the company (payer) will deduct ₹11,111.11 as TDS before providing the benefit of ₹1,00,000 to the payee. In Form 26Q, the total amount of tax deducted on the benefit provided would be shown as ₹11,111.11.

Summary of the Example:

• Grossed-up value of the benefit: ₹1,11,111.11
• Benefit provided to the payee: ₹1,00,000
• TDS deducted: ₹11,111.11
• The payee receives: ₹1,00,000 after tax

The payee receives the full value of the benefit while the tax deduction is appropriately accounted for.

In Form 26Q, the company will report the tax deducted of ₹11,111.11, which is based on the grossed-up value of the benefit.

How is the value of a benefit or perquisite determined for TDS purposes?

The CBDT has clarified that, in most cases, the valuation of a benefit or perquisite for TDS purposes should be based on its fair market value. However, there are exceptions:

• Purchased Benefits/Perquisites: If the provider has purchased the benefit or perquisite before giving it to the recipient, the purchase price will be considered as the value for TDS purposes.
• Manufactured Benefits/Perquisites: If the provider manufactures the benefit or perquisite, the price charged to customers for similar items will be considered the value for TDS.

When to Deposit TDS u/s 194R?

Time to deposit:

For example, TDS is deducted on 15th December and needs to be deposited on or before 7th January. Tax is deducted on 21st March and needs to be deposited on or before 30th April.

Note: If the deductor is a government office, the tax is required to be deposited on the same day on which it has been deducted.

Exemptions from TDS under Section 194R

Tax must be deducted under this provision when a benefit or perquisite is provided to a resident individual, and the benefit arises from the individual’s business or professional activities. However, there are certain exceptions where tax is not required to be deducted:

• Benefits under a business promotion scheme for customers or clients: Where the value of the benefit is low and falls below the threshold of ₹20,000.
• Employer-Employee Relationship: If the recipient is an employee and an employer-employee relationship exists, tax will be deducted under Section 192.
• Non-Resident Recipients: If the recipient is a non-resident, tax will be deducted under Section 195.
• Unrelated Benefits: If the benefits or perquisites are not related to the business or professional activities of the resident recipient/deductee.
• Non-Business Customers: If the benefits or perquisites are given to a customer who is not engaged in business or a profession.

For instance, if a company offers expensive gifts, luxury items, or other perks to its resident customers, no tax would be deducted under Section 194R, provided the recipient customer is not involved in any business or professional activity.

Consequences of Default

Following are the consequences and penalties for non-compliance with section 194R:

Penalty u/s 271C:

A penalty may be imposed for failure to deduct the correct amount of TDS. The penalty can be equal to the amount of TDS not deducted or short deducted. The penalty amount cannot exceed the amount of TDS required to be deducted.

TDS is not deducted:

If a deductor has not deducted the TDS as required under Section 194R, it charges interest of @1% per month till the date TDS is deducted.

TDS is deducted but not deposited:

If a deductor has deducted the TDS as required under Section 194R but has not deposited the collected tax to the government, then it charges interest @1.5% from the date when tax is deducted to the date of deposition.

Failure to furnish TDS Statement:

Person responsible for deducting TDS is required to furnish quarterly TDS Statement, failing which makes him liable for payment of fees u/s 234E, ₹200 per day subject to maximum amount of TDS.

Why Choose Bizfoc for TDS?

At Bizfoc, we specialize in providing you the best accounting services in filing your TDS. Here are the reasons why we are known for our services to our clients on filing TDS:

• Assist in suggesting the right documents for TDS filing.
• Providing valuable insights on sections of TDS computations.
• Prescribe forms as per the necessity.
• Helps in accurate computations for TDS computations and returns.
• Tailored advice and guidelines for TDS filing.

In general, we assist the client to solve their queries and doubts regarding the documentation, procedures, and fees for filling out the form. Other than making your filing successful, we help you make a better decision by covering every aspect of what you actually need to get your TDS.

Conclusion

Section 194R of the Income Tax Act is a crucial step towards streamlining the taxation of non-cash benefits and perquisites. The application of TDS on such benefits ensures that businesses, professionals, and individuals comply with tax regulations, and that all forms of income are taxed appropriately. By mandating TDS at a rate of 10%, the government aims to capture a wide range of benefits that were previously not subject to tax, thus boosting compliance and transparency in the tax system.

For taxpayers, businesses, and professionals, it is essential to understand the implications of Section 194R and ensure proper compliance to avoid penalties and ensure smooth tax filings.

Frequently Asked Questions