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Section 194R of Income Tax Act: Applicability and Primary Considerations

Updated: Dec 13, 2023


Section 194R of Income Tax Act: Applicability and Primary Considerations
Section 194R of Income Tax Act: Applicability and Primary Considerations

 

Table of Content

 

In the light of section 194R, a new Section for TDS was introduced in the Union Budget 2022. TDS under Section 194R relates to the deduction of tax on benefits or perquisites in respect of business and profession.


Understanding the applicability of 194R TDS for Monetary and Non-Monetary Benefits


In the domain of taxation, there exists a provision that pertains to the receipt of gifts, perks, incentives, and various other monetary or non-monetary advantages by resident individuals from a business or profession.


If the cumulative value of such benefits, expressed in monetary terms, surpasses INR 20,000 during the financial year for a single beneficiary, then this particular section comes into effect. It encompasses a wide range of scenarios where these benefits are received in cash, kind, or a combination thereof, ensuring their inclusion in tax considerations.


Understanding the liability for TDS deduction under Section 194R


One of the tax regulations states a provision known as Section 194R which outlines the responsibility for deducting Tax Deducted at Source (TDS). This provision applies to businesses or professions that provide benefits or perquisites to agents, channel partners, dealers, distributors, or any other individuals, surpassing a specified amount during the financial year for a single recipient.


However, it is important to note that individuals or Hindu Undivided Families (HUFs) are not obligated to deduct TDS if their total sales do not exceed INR 1 crore for businesses or INR 50 lakh for professions in the immediately preceding financial year. This provision aims to ensure proper TDS compliance and accountability within the specified parameters.


Primary significance of Section 194R in preventing tax evasion


Section 194R aims to tackle the issue of tax evasion. In the past, businesses would provide various perks, benefits, and non-monetary advantages to their dealers, partners, and other individuals. However, these businesses would often claim such expenses as legitimate business costs while the recipients of these benefits would not disclose them as part of their income.


To curb this practice and ensure fair taxation, Section 194R was introduced. This section holds significance in fostering transparency and accountability by ensuring that such benefits are appropriately accounted for and taxed. Its implementation serves as a deterrent against tax evasion practices, promoting a fair and equitable tax system.


A simplified and thorough guide to TDS deduction on benefits or perquisites


With regard to deducting TDS on benefits or perquisites, the responsibility lies with the entity providing these benefits to ensure that the necessary tax is deducted and paid before releasing them to the recipient. To fulfill this obligation, the payer has several options to discharge their TDS liability.


One approach is for the payer to either gross up the net amount by adding the applicable tax or to directly pay the tax from their own funds. Alternatively, if the payee provides cash to the payer specifically for meeting the TDS liability, the payer can use those funds to make the required tax deposit. Another option is to deduct the TDS from any credit balance the payee may have, and subsequently pay the net amount after deducting the TDS.


By following these procedures, the deductor can fulfill their TDS obligations while ensuring that the benefits or perquisites are appropriately accounted for in terms of tax liabilities. This systematic approach promotes compliance and transparency in the deduction of TDS on benefits or perquisites.


Simplifying TDS certificates


As per tax regulations, it is the responsibility of the deductor to issue a TDS certificate to the deductee on a quarterly basis. This certificate, known as Form 16A, serves as proof of the tax deducted at the source. Both the deductor and deductee have access to this certificate for reference and verification.


The deductor can conveniently download Form 16A from their Traces Account, ensuring an efficient and streamlined process. On the other hand, the deductee can easily view the same certificate in their 26AS, which is an annual consolidated statement of their tax-related transactions.