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

Tax compliance is a cornerstone of any financial system, providing fairness and transparency.

Section 194R, a new TDS (Tax Deducted at Source) provision, was introduced to address the underreporting of benefits and perquisites by employees.

This guide will explore its background, purpose, scope, valuation, compliance requirements, and more to help employers and employees stay informed.

What is Section 194R?

Section 194R was introduced in 2020 to widen the tax base and curb tax evasion. It mandates TDS on benefits or perquisites provided by employers to employees, whether monetary or non-monetary. Before its implementation, such benefits were often underreported or not reported at all, creating a gap in the tax collection mechanism.

This provision applies to both direct and indirect benefits and perquisites, ensuring comprehensive tax coverage. It supplements Section 192, which only covers salary income, thus closing existing loopholes.

Purpose and Scope of Section 194R

The primary objectives of Section 194R are:

• Preventing Tax Evasion: Ensures tax is deducted at the source for benefits and perquisites.
• Enhancing Transparency: Improves tax compliance by capturing all taxable income sources.
• Expanding Tax Base: Includes monetary and non-monetary benefits that were previously untaxed.

Scope of Section 194R:

• Covers any benefit or perquisite, monetary or otherwise, provided directly or indirectly by an employer or any person on their behalf.
• Applies to all employers, whether individuals, companies, or organizations.
• Applies to all employees receiving such benefits or perquisites.

Examples include:

• Free or concessional accommodation, travel, education, or insurance.
• Club memberships, gym memberships, or health center access.
• Use of property or assets.
• Stock options, sweat equity, or share appreciation rights.
• Gifts, vouchers, or cash equivalents.

Key Points of Section 194R

1. TDS Deduction: Employers must deduct tax on benefits or perquisites provided to employees.
2. TDS Rate: The applicable rate is 10%, or 20% if the employee does not provide PAN or Aadhaar.
3. Valuation: The value is determined based on Section 17(2) rules or fair market value.
4. Threshold: TDS applies only if the total value of benefits exceeds Rs. 50,000 in a financial year.
5. Reporting: Employers issue Form 16B to employees and file quarterly TDS statements (Form 26Q).
6. Tax Reporting: Employees report these benefits as "Income from Other Sources" in their tax returns.

Valuation and Threshold of Benefits

Valuation Rules:

• Accommodation: Lesser of actual rent paid or 15% of the employee’s salary, with additional charges for furnished accommodations.
• Travel: Cost incurred or amount chargeable under the Income Tax Act, whichever is lower.
• Education: Cost incurred or Rs. 1,000 per month per child (lower of the two).
• Medical Treatment/Insurance: Cost incurred or reimbursed amount, whichever is lower.
• Club Memberships: Actual cost incurred or chargeable amount (lower of the two).
• Gifts and Vouchers: Actual cost or received amount, whichever is lower.
• Stock Options/Sweat Equity: Difference between fair market value and the price paid by the employee.

Threshold:

• Benefits exceeding Rs. 50,000 annually are subject to TDS.
• If the threshold is crossed, tax is deducted on the entire amount.

Applicability and Rate of TDS

1. Applicability:

• Applies to benefits provided in cash, non-cash, or a mix of both.
• Excludes benefits exempt under Section 10 and those covered by Section 192.
• Not applicable to individuals below the basic exemption limit, non-residents, or non-ordinary residents.

2. TDS Rate:

• 10% of the benefit value or the prevailing rate, whichever is higher.
• 20% if PAN or Aadhaar is not provided.

Exceptions and Exemptions

1. Benefits exempt under Section 10, such as:

• Leave travel concession.
• House rent allowance.

2. Benefits covered by Section 192 (e.g., salary and bonuses).
3. Employees earning below Rs. 2,50,000 annually.
4. Non-residents or resident but not ordinarily resident employees governed by the DTAA or Section 6 of the Income Tax Act.

Compliance and Reporting Requirements

1. Employer Responsibilities:

• Deduct tax at source and deposit it with the government by the 7th of the following month.
• File quarterly TDS statements (Form 26Q) by the prescribed deadlines.
• Issue Form 16B to employees within 15 days of filing the TDS statement.

2. Employee Responsibilities:

Report benefits in their income tax returns under "Income from Other Sources." Claim credit for TDS deducted by the employer.

Implications of Section 194R

For Employers:

• Enhances accountability and reduces the risk of penalties for non-compliance.
• Requires meticulous record-keeping to track benefits and ensure accurate TDS deductions.

For Employees:

• Ensures transparency in tax reporting.
• May increase the tax burden if the threshold is crossed.

Also Read: Section 206CQ: A Clear Guide to LRS Tax Collected at Source

Section 194R is a significant step toward improving tax compliance and broadening India’s tax base.

By addressing gaps in the taxation of benefits and perquisites, it fosters a more transparent and accountable financial ecosystem.

Understanding its differences is important for both employers and employees to ensure compliance and avoid penalties.