Guide to new TDS Section 194R of the Income Tax Act

The Finance Act 2022 introduced section 194R which deals with the deduction of tax on benefits or emoluments to businesses or professions. Businesses, companies or entities often extend various kinds of perks and benefits to their distributors, distribution partners, agents, or salespeople to motivate and encourage them to support further business growth. A few examples would include but are not limited to, travel packages, gift cards, or vouchers, products in incentive programs, or use of the business property. In this article, we will deal with Section 194R of the Income Tax Act of 1961.

What is Section 194R of the Income Tax Act 1961?

The Finance Act, 2022 inserted a new section 194R in the Income Tax Act, 1961 with effect from 1 July 2022. The new section requires deduction of tax at source at the rate of 10 percent by any person giving any benefit or gratuity exceeding Rs. 20,000 per annum to a resident arising out of the business or profession of such resident.

Scope of Section 194R

TDS under Section 194R is 10% with effect from 1 July 2022. Applicable only to the resident recipient (beneficiary) of benefits or benefits.

It is to be noted that section 194R does not apply if the aggregate value of the benefit does not exceed Rs 20,000 during a financial year for a single beneficiary.

Also, an individual or a Hindu Undivided Family (HUF) is not eligible for TDS deduction in case of business if the total turnover is up to Rs 1 crore or Rs 50 lakh in case of the profession in the immediately preceding financial year.

Who is required to pay tax under Section 194R?

Every person responsible for providing any benefit or benefit, whether exchangeable for money or not, is required to ensure that the tax required to be deducted is deducted in respect of such benefit under Section 194R. The deductor can have a status of a resident or a non-resident.

It should be noted that this provision is applicable from 07/01/2022. Therefore, a benefit or reward that was provided on or before 30/06/2022 would not be subject to tax deduction under this provision.

However, this provision does not apply to individuals or HUFs whose total sales, gross receipts, or turnover in case of business does not exceed Rs. 1 crore or Rs. 50 lakhs in the case of a profession during the financial year immediately preceding the financial year in which such person provides such benefit or remuneration, as the case may be.

Who is the deductee for Section 194R?

Tax is required to be withheld under this provision if the benefit or benefit is provided to a resident and results from the resident’s business or profession.

However, the tax will not be deducted under this provision in the following situations:

• If there is an employer-employee relationship, the tax is withheld according to section 192;
• If the recipient is a non-resident, the tax is withheld according to section 195;
• If the benefits or perquisites are unrelated to the business or occupation of the resident recipient/deductor;
• If benefits or advantages are provided to a customer who is not carrying on a business or profession.

For example, if a business entity gifts valuables, cars, etc. to its residential customers, no tax will be deducted under Section 194R if the resident customer does not carry on any business or profession.

Condition for the tax deduction

The benefit or reward may or may not be exchangeable for money, but should be derived from either the business or profession of such resident.

This deduction is not claimed if the value or aggregate value of the benefit is given or likely to be given to the resident during the financial year does not exceed Rs.20, 000.

Section 194R: Nexus with business or profession

Any individual who provides a resident with any benefit or advantage, whether exchangeable for money or not, arising from the business or exercise of a profession of such resident shall, before providing such benefit or benefit, as the case may be, to such resident, ensure that the tax is deducted.

Simply put, under Section 194R, TDS applies to any resident who provides any benefit or advantage to another resident in kind or cash and could come from business promotions.

When does the provision of section 194R not apply?

No tax will be deducted under this provision under the following circumstances.

• No TDS if the value of benefit or benefit is less than Rs. 20,000

No tax shall be deducted under this provision if the value or aggregate of the value of the benefit or benefit is given or likely to be given during the financial year does not exceed Rs. 20,000.

• No TDS if the provider is a specific person or HUF

This provision does not apply to individuals or HUFs whose total sales, gross receipts, or turnover does not exceed, in the case of business, Rs. 1 crore or Rs. 50 lakhs in the case of a profession during the financial year immediately preceding the financial year in which such benefit or remuneration is provided by such person or HUF, as the case may be.

Final words

Thus the government has clarified the new section 194R TDS in the Income Tax Act in the Budget 2022-23. The amended section stated that 10% TDS will be deducted by any individual providing any benefit or remuneration to a resident above Rs 20,000 per annum.