Section 194R: TDS on Benefits or Perquisites

In recent years, the Indian Income-tax authorities have significantly strengthened the Tax Deducted at Source (TDS) mechanism to improve compliance and transparency. One of the key introductions in this effort is Section 194R of the Income-tax Act, 1961, which came into effect from 1st July 2022. This provision targets benefits and perquisites provided in the course of business or profession and aims to widen the tax base.

In this blog post, we’ll dive deep into what Section 194R is, why it was introduced, its applicability, exemptions, valuation method, practical examples, legal challenges, and much more.

What is Section 194R?

Section 194R mandates that any person providing a benefit or perquisite to a resident in the course of business or profession must deduct TDS at the rate of 10% of the value of such benefit or perquisite before providing it.

It is irrelevant whether the benefit/perquisite is:

• In cash or kind, or
• Convertible into money or not.

This provision was introduced through the Finance Act, 2022, and is effective from 1st July 2022.

Objective Behind Introducing Section 194R

The Income-tax Department observed that many businesses were offering non-monetary incentives or benefits—such as free trips, gold coins, or expensive gifts—to agents, distributors, and professionals as part of promotional strategies.

While these were claimed as business expenses by the provider under Section 37, there was no matching tax disclosure by the recipient. Since such benefits often went unreported in the recipient’s income tax returns, Section 194R was introduced to create a compliance trail.

Thus, the government ensured:

• Tax is collected at source,
• Benefits are tracked via Form 26AS and AIS, and
• Wider reporting of income.

Applicability of Section 194R

Section 194R applies when:

• A resident is given a benefit or perquisite,
• In relation to a business or profession carried on by that resident.

The responsibility lies with any person (individual, company, firm, etc.) providing the benefit. However, individuals or HUFs are exempt from deducting TDS under this section if their business turnover does not exceed ₹1 crore, or professional receipts do not exceed ₹50 lakhs in the preceding financial year.

TDS Rate & Threshold

• TDS Rate: 10% of the value of the benefit/perquisite.
• Threshold: No TDS if the aggregate value of benefits/perquisites provided to a person during the financial year is ≤ ₹20,000.

Note: The value of benefits provided from 1st April 2022 is to be considered for threshold computation, but the actual TDS liability applies only for benefits given after 1st July 2022.

Does 194R Apply to Employees?

No. Benefits or perquisites provided to employees fall under Section 17(2) (as part of salary/perquisite) and are taxed under Section 192 (TDS on salary).

However, if a person receives benefits as a professional (e.g., consultant, doctor, influencer) and not as an employee, Section 194R is applicable.

Example:

• A doctor working full-time in a hospital receives a free sample from a pharma company ➝ Not covered under 194R (TDS applies under Section 192 by employer).
• A freelance consultant doctor receives free travel/accommodation from a pharma company ➝ Covered under 194R.

Types of Benefits or Perquisites Covered

Section 194R applies broadly to any benefit or perquisite arising out of business or profession. Some common examples include:

Examples Where 194R Applies:

• Free samples to professionals (e.g., medicines to doctors)
• Incentives like gold coins, phones, TVs, cars
• Sponsored foreign/domestic travel
• Free tickets for events
• Gifts on achieving sales targets
• Loan waivers or write-offs
• Use of assets (e.g., luxury hotel stay, company-owned cars) without charge

Exemptions & Non-applicability

No TDS under 194R in the following cases:

• Benefits provided to employees (covered under Section 192)
• If the total value does not exceed ₹20,000 in a financial year
• When provided by individuals/HUFs with turnover below the specified threshold
• Sales discounts, cash discounts, and rebates (CBDT has specifically excluded them)
• If payment is made on behalf of the client, and the client is ultimately liable for such payment, and the person is only acting as an agent or intermediary and gets reimbursed without markup or benefit.

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Let us understand Section 194R with an example

Situation:

A pharmaceutical company (ABC Pharma Ltd.) gives a doctor a free international conference trip (worth ₹1,50,000) as a reward for prescribing their products.

Doctor’s Profile:

• A consultant doctor, not an employee (i.e., self-employed professional).
• The trip is not in exchange for services directly billed, but a business promotion gift.

Application of Section 194R

How is TDS deducted if the benefit is in kind?

Since the doctor is not paying for the trip, cash is not involved.

Two options:

1. Doctor pays advance tax of ₹15,000 (10% of ₹1,50,000) and gives proof to ABC Pharma.
2. ABC Pharma bears the TDS and “grosses up” the value:

Not Covered Under 194R:

If instead of a trip, ABC Pharma had simply given the doctor a 10% discount on medicine purchase, it would not be covered, as sales discounts are exempt per CBDT clarification.

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CBDT Clarification:

Sales discounts, bulk offers like “Buy 10 get 2 free”, and similar trade promotions are not covered under Section 194R to avoid unnecessary litigation and operational difficulty.

Valuation of Benefit/Perquisite

The valuation is based on:

1. Fair Market Value (FMV), unless:
2. If the benefit is purchased ➝ Purchase price
3. If manufactured ➝ Price at which it is sold to customers

Note: GST is excluded from valuation for TDS purposes.

Cash vs Kind: What If the Benefit Is Not Monetizable?

If the benefit/perquisite is:

• Wholly in kind, or
• Partly in kind and partly in cash, and the cash is not sufficient to pay TDS,

Then:

• The recipient must deposit advance tax equivalent to the TDS,
• OR the provider must bear the tax and gross it up.

Reporting & Compliance

• TDS is to be deposited to the government within 7 days from the end of the month in which deduction is made.
• Reported through Form 26Q.
• Reflected in Form 26AS and AIS of the recipient.
• PAN of recipient is mandatory. If not available, higher TDS under Section 206AA applies.

Case Law Highlights

Several judgments clarify that even capital assets when given as benefits (e.g., land, car) may be taxable as income if received in course of business/profession:

1. Ramesh Babulal Shah v. CIT – Compensation on cancelled land deal was held taxable under Section 28(iv).
2. Ramaniyam Homes Pvt Ltd v. CIT – Loan waiver taxed as benefit under Section 28(iv).
3. CIT v. Subrata Roy – Rent-free accommodation and gifts taxed as perquisites.

Controversial Issues

Some professionals argue:

• CBDT’s circular has widened the scope of Section 194R beyond legislative intent.
• Inclusion of cash benefits in the circular, though not clearly stated in the section, is seen as an overreach.
• Legal challenges may arise on this front.

Final Thoughts

Section 194R brings a significant change to the way businesses manage tax on promotional expenses and benefits. The section:

• Promotes transparency
• Widens the tax net
• Ensures reporting and deduction of tax before giving benefits

However, it also creates compliance burdens and grey areas, especially around valuation and classification of transactions.

Pro Tips for Businesses

1. Keep a register of all non-cash benefits provided to third parties.
2. Evaluate each gift or incentive in light of 194R before giving.
3. Obtain PAN and proper declaration from recipients.
4. Where possible, structure benefits as discounts/rebates to avoid TDS

Conclusion

Section 194R is a robust anti-avoidance provision aimed at curbing unreported benefits in business and profession. As it matures, we expect more clarity through judicial interpretations and future circulars. Businesses must adapt their systems and educate their teams to ensure timely and correct compliance. Consult with our CA firm in noida for more details about this section. You can also contact Chartered Accountant in Noida for more complete details

Source: This article written by our partner CA. Akhil Goyal and you can follow him for such update on LinkedIn