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Feb 8, 2024

Section 194R of the Income Tax Act: What You Need to Know

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Ankit Virani

CEO

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Section 194R is a new TDS provision on benefits or perquisites given by employers to employees. It was introduced in 2020 to widen the tax base and prevent tax evasion. This blog post will explain its background, purpose, scope, main points, and implications.

What is the background and context of Section 194R?

Section 194R is a new TDS provision on benefits or perquisites given by employers to employees. It was introduced in 2020 to prevent tax evasion by employees who did not report or under-reported such benefits or perquisites in their income tax returns.

It covers both monetary and non-monetary benefits or perquisites, whether given directly or indirectly by the employer or by any person on behalf of the employer. It fills the gap in the tax collection mechanism that existed before Section 194R when only salary income was subject to TDS under Section 192.

What is the purpose and scope of Section 194R?

Section 194R aims to prevent tax evasion by deducting tax at source on benefits or perquisites given by employers to employees, and depositing it with the government. It enhances tax compliance and transparency.

Section 194R covers any benefit or perquisite, monetary or non-monetary, direct or indirect, given by the employer or by any person on behalf of the employer. The employer can be any person who employs one or more persons, and the employee can be any person who is employed by the employer.

Some examples of benefits or perquisites under Section 194R are:

  • Free or concessional accommodation, travel, education, medical treatment, or insurance
  • Free or concessional membership of any club, health center, or gymnasium
  • Free or concessional use of any property or asset
  • Free or concessional grant of any stock option, sweat equity, or share appreciation right
  • Free or concessional gift, voucher, coupon, token, or cash equivalent
  • Any other benefit or perquisite that is taxable as income from other sources

What are the main points of Section 194R?

  • Employers must deduct tax at source on benefits given to employees, at the time of payment or credit.
  • TDS rate is 10% or the prevailing rate, whichever is higher; 20% if PAN/Aadhaar isn't provided.
  • Benefit/perquisite value is determined by rules in Section 17(2) or fair market value.
  • TDS applies if benefits exceed Rs. 50,000 annually; the entire amount is taxed if above the threshold.
  • Employers issue Form 16B to employees within 15 days of filing the TDS statement (Form 26Q).
  • Employees report benefits in income tax return under "Income from other sources" and can claim TDS credit.

What are the applicability and rate of TDS under Section 194R?

  • Section 194R applies to benefits or perquisites provided by employers to employees, encompassing cash or non-cash benefits, directly or indirectly.
  • Exceptions to applicability include benefits exempt under Section 10, those covered by Section 192 (e.g., salary), and cases involving individuals below the basic exemption limit, non-residents, or non-ordinary residents.
  • The TDS rate under Section 194R is 10% of the benefit/perquisite value or the prevailing rate, whichever is higher.
  • If the employee fails to provide PAN or Aadhaar, the TDS rate increases to 20% or the prevailing rate, whichever is higher.

What are the valuation and threshold of benefit or perquisite under Section 194R?

  • Valuation of benefits or perquisites under Section 194R:

    • Accommodation: Value determined by actual rent paid or 15% of the employee's salary (lower of the two), with additional charges for furnished accommodation.

    • Travel: Actual cost incurred or amount chargeable under the Income Tax Act, whichever is lower, for personal travel; Nil for official travel.

    • Education: Actual cost or Rs. 1,000 per month per child (lower of the two) for children's education; actual cost or amount chargeable under Income Tax Act for employee's education.

    • Medical Treatment/Insurance: Actual cost incurred or amount reimbursed (lower of the two); Nil if treatment in certain hospitals or under approved schemes.

    • Club/Membership: Actual cost or amount chargeable under the Income Tax Act (lower of the two) for personal use; Nil for official use.

    • Property Use: Actual rent paid or 10% of property cost or amount chargeable under the Income Tax Act (lower of the three) for employer-owned/leased property; Nil for employee-owned property.

    • Stock Option/Sweat Equity: Difference between the fair market value of shares on exercise/vesting/transfer date and the amount paid by the employee.

    • Gift/Voucher/Coupon: Actual cost incurred by employer or amount received by an employee (lower of the two) for personal use; Nil for official use.

    • Other Benefits/Perquisites: Actual cost incurred by the employer or fair market value, whichever is higher, for personal use; Nil for official use.

  • The threshold for tax deduction:

    • Tax deduction applies if total benefits/perquisites exceed Rs. 50,000 in aggregate in a financial year.
    • No tax deduction if the total value doesn't exceed Rs. 50,000; tax applies on the entire amount exceeding the threshold.

What are the exceptions and exemptions under Section 194R?

  • Benefits exempt under Section 10 of the Income Tax Act, such as leave travel concession and house rent allowance, are not subject to TDS.
  • Benefits covered by Section 192, like salary and bonus, are already subject to TDS under that section and hence exempt from Section 194R.
  • Individual employees earning below the basic exemption limit of Rs. 2,50,000 annually are exempt from TDS under Section 194R.
  • Non-resident employees whose income isn't taxable in India, governed by the Double Taxation Avoidance Agreement (DTAA), are exempt from TDS.
  • Resident but not ordinarily resident employees whose income doesn't accrue or arise in India, as per Section 6 of the Income Tax Act, are also exempt from TDS under Section 194R.

What are the compliance and reporting requirements under Section 194R?

  • Employers must deduct tax at source on benefits provided to employees, at a rate of 10% or higher, based on prevailing rates, with a higher rate of 20% for employees without PAN/Aadhaar.
  • Tax deducted must be deposited with the government by the 7th day of the following month (April 30th for March).
  • Employers issue Form 16B to employees within 15 days of filing quarterly TDS statements (Form 26Q).
  • Quarterly TDS statements (Form 26Q) must be filed by the employer by the 31st day of the following month (May 31st for the last quarter).
  • Employees report benefits in their income tax return under "Income from other sources" and can claim TDS credit.

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