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 01.07.2022.

The new Section 194R casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @ 10%, whether the benefit or perquisite is in cash or in kind. The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business, or from exercising a profession, by such resident.

This deduction is not required to be made, if the value or aggregate of value of the benefit or perquisite provided or likely to be provided to the resident during the financial year does not exceed Rs. 20,000/-.

To summarise,

Some clarifications are provided hereunder:

1. Since the threshold of Rs. 20,000/- is with respect to the financial year, calculation of value or aggregate value of the benefit or perquisite triggering deduction of tax under this provision shall be counted from 1st April of the financial year. Hence, if the value or aggregate value of the benefit or perquisite provided or likely to be provided to a resident exceeds Rs. 20,000/- during the financial year 2022-23 (including the period up to 30th June 2022), the tax shall be required to be deducted in respect of any benefit or perquisite provided on or after 01-07-2022.

It is to be noted that this provision is applicable with effect from 01-07-2022. Thus, the benefit or perquisite which has been provided on or before 30-06-2022, would not be subjected to tax deduction under this provision.

2. The person who has agreed to provide the benefit or perquisite and makes payment for the same to a third party shall be liable for deduction of tax and not the third party who actually provides or delivers the benefit or perquisite after accepting payment from the person who agrees to provide it.

3. TDS u/s 194R is to be deducted @ 10%, irrespective of whether the benefit or perquisite is taxable or not in the hands of the recipient.

4. The CBDT has clarified that the valuation would be based on fair market value of the benefit or perquisite except in following cases:-

• • The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In that case, the purchase price shall be the value for such benefit/perquisite.
  • The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

5. GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R.

6. If the expenditure in respect of which the reimbursement is made is invoiced in the name of the person who is making the reimbursement then it shall not be treated as benefit or perquisite for the purpose of section 194R. However, if the invoice is not in the name of the person making the reimbursement, then it shall be treated as a benefit or perquisite for the recipient, and, accordingly, tax shall be deducted under section 194R.

7. in the following situations, the tax shall not be deducted under this provision:

• • If an employer-employee relationship exists, Perquisites under Salary Head given by a company to its Directors and Employees, like ESOPs, Cars, Rent Free Accommodations, Free Tours, LTCs, Mobiles, Performance Linked Incentives etc. as the tax shall be deducted under Section 192;
  • If the recipient is a non-resident, the tax shall be deducted under Section 195;
  • If the benefits or perquisites do not have a connection with the business or profession of the resident recipient/deductee;
  • If benefits or perquisites are provided to a customer who does not engage in business or exercise of a profession.

8. It is clarified that no tax is required to be deducted under Section 194R of the Act on sales discount, cash discount and rebates allowed to customers.