Section 194R of Income Tax Act 1961: Learn now

Deduction of tax on benefit or perquisite in respect of business or profession

Section Overview
(1) Requirement for Tax Deduction	Any person providing a benefit or perquisite to a resident must deduct tax at 10% of its value.
(1) Provisions for In-Kind Benefits	If the benefit is wholly or partly in kind and the cash part is insufficient for tax deduction, ensure tax payment before releasing the benefit.
(1) Exemption for Low-Value Benefits	No tax deduction required if the total value of benefits provided to a resident does not exceed INR 20,000 during the financial year.
(1) Exemption for Small Businesses/Professionals	Small businesses or professionals with sales/turnover below INR 1 crore (business) or 50 lakh (profession) are exempt from this provision.
(2) Authority to Address Difficulties	The Board, with Central Government approval, can issue guidelines to resolve difficulties in implementing this section.
(3) Binding Nature of Guidelines	Guidelines issued by the Board are binding on income-tax authorities and those providing benefits. They must be laid before Parliament.
Explanation 1 – Definition of “Person Responsible”	“Person responsible for providing” means the entity or individual providing the benefit, or for companies, the company itself.
Explanation 2 – Clarification on Applicability	Sub-section (1) applies to any benefit, whether in cash, in kind, or a combination of both.

Understanding the provisions of section 194R

Section 194R of the Income Tax Act, 1961, outlines the rules regarding the deduction of tax by a person providing benefits or perks to a resident, arising from business or professional activities. Here’s a simplified explanation:

(1) If someone is giving a benefit or perk to a resident, whether it’s in the form of money or not, related to their business or profession, they must make sure that 10% of the value of that benefit is deducted as tax before handing it over.

Example: If a company provides a non-monetary benefit like a gift or service to an employee, they need to deduct 10% of the value of that benefit as tax before giving it to the employee.
Special Case: If the benefit is entirely in kind or partially in cash and partially in kind, and the cash part is insufficient to cover the tax, the person providing the benefit must ensure the tax is paid before releasing it.
Exemption: This rule doesn’t apply if the total value of benefits provided to a resident during the financial year is less than twenty thousand rupees.
Additional Exemption: Individuals or Hindu undivided families with total sales, gross receipts, or turnover below one crore rupees for business or fifty lakh rupees for a profession in the previous financial year are also exempt.

(2) If there’s any difficulty in implementing these rules, the Income Tax Board can issue guidelines, with the approval of the Central Government, to address the issues.

(3) These guidelines, once issued, must be presented to the Parliament and are binding on both income-tax authorities and those providing the benefits.

Explanation: The term “person responsible for providing” refers to the entity or individual offering the benefit, and for a company, it includes the principal officer.

Explanation 2: To remove any doubts, the tax deduction provisions in subsection (1) apply to any benefit, whether in cash or kind, or a combination of both.

Example: ABC Ltd, a company with a turnover of 80 lakh rupees in the previous financial year, decides to give a non-monetary benefit to its employee worth 15,000 rupees. Before handing over the benefit, ABC Ltd must deduct 10% (1,500 rupees) as tax and ensure it is paid to the government. If the turnover had been 1.5 crore rupees, this rule would not apply to ABC Ltd.

FAQ on Section 194R

Q1: What is Section 194R of the Income Tax Act, 1961?

A1: Section 194R outlines the rules related to the deduction of tax by a person providing benefits or perks to a resident, arising from business or professional activities.

Q2: Who is responsible for deducting tax under Section 194R?

A2: The person providing the benefit or perk is responsible for deducting tax. In the case of a company, it includes the principal officer.

Q3: What types of benefits are covered under Section 194R?

A3: The section covers any benefit or perk, whether in cash, kind, or a combination of both.

Q4: How much tax needs to be deducted?

A4: 10% of the value or aggregate value of the benefit or perk should be deducted as tax.

Q5: Are there any exemptions under Section 194R?

A5: Yes, there are exemptions. If the total value of benefits provided in a financial year is less than twenty thousand rupees, or if an individual or Hindu undivided family’s turnover is below one crore rupees for business or fifty lakh rupees for a profession, the section does not apply.

Q6: What happens if the benefit is partly in cash and partly in kind?

A6: If the cash part is insufficient to cover the tax, the person providing the benefit must ensure that the tax is paid before releasing the benefit.

Q7: Can the Income Tax Board issue guidelines?

A7: Yes, the Income Tax Board, with the approval of the Central Government, can issue guidelines to address any difficulties in implementing the provisions.

Q8: Are the guidelines issued by the Income Tax Board binding?

A8: Yes, the guidelines issued by the Income Tax Board are binding on both income-tax authorities and those providing the benefits.

Q9: How can individuals and businesses ensure compliance with Section 194R?

A9: Individuals and businesses should carefully assess the value of benefits provided, ensure timely deduction of 10% tax, and be aware of the exemptions based on turnover.

Q10: Are there any specific examples to understand the application of Section 194R?

A10: Yes, for instance, if a company with a turnover below one crore rupees provides a non-monetary benefit of 25,000 rupees to an employee, they should deduct 10% (2,500 rupees) as tax before handing over the benefit. If the turnover exceeds one crore rupees, the exemption applies, and the tax deduction is not required.

For more information the following government website can be referred:
1) Government Income Tax E-filing Wesbite
2) Government Income Tax Website

Disclaimer: This information is intended to provide general guidance and should not be considered as a substitute for professional tax advice. Please consult a qualified tax advisor for specific guidance relevant to your individual circumstances.

Complete legal text of Section 194R of Income Tax Act 1961

(1) Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite:

Provided that in a case where the benefit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite:

Provided further that the provisions of this section shall not apply in case of a resident where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to such resident during the financial year does not exceed twenty thousand rupees:

Provided also that the provisions of this section shall not apply to a person being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person.

(2) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

(3) Every guideline issued by the Board under sub-section (2) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person providing any such benefit or perquisite.

Explanation ⁴⁹[1].—For the purposes of this section, the expression “person responsible for providing” means the person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer thereof.]

⁴⁹[Explanation 2. — For the removal of doubts, it is clarified that the provisions of sub-section (1) shall apply to any benefit or perquisite, whether in cash or in kind or partly in cash and partly in kind.]