TDS on business benefits and perquisites (Section 194R): when it applies

Section 194R was introduced from 1 July 2022 to bring benefits given to business associates into the tax net. Anyone providing a benefit or perquisite arising from business or profession to a resident must deduct 10% TDS on its value. Under the Income-tax Act, 2025 it is an entry in Section 393(1).

Who must deduct

All persons, except individuals and HUFs whose business turnover does not exceed ₹1 crore (or professional receipts ₹50 lakh) in the previous year.

What is a benefit or perquisite

Anything of value – in cash or kind – given in connection with the recipient's business or profession:

• Cars, gold coins, mobile phones, TVs given to dealers;
• Sponsored holidays and conference trips with family;
• Free medicines or samples given to doctors;
• Free tickets to events;
• Waiver of loan by a bank or NBFC to a business borrower (covered under CBDT guidance, subject to exceptions);
• Incentives in kind for achieving sales targets.

Not covered:

• Benefits to employees (salary);
• Trade discounts, rebates and cash discounts on sales shown in invoices;
• Benefits to government entities not carrying on business;
• Reimbursement of out-of-pocket expenses actually incurred by a professional in rendering services, where billed by the professional (CBDT guidelines).

Rates and threshold

Benefits in kind: how TDS is paid

As there is no cash payment to deduct from, the provider must ensure tax has been paid before releasing the benefit:

1. Collect the TDS amount from the recipient; or
2. Pay it from the provider's own funds. If the provider bears the tax, it may be argued to be an additional benefit (grossing up), though CBDT has indicated that tax borne by the provider is not to be added for 194R purposes in its guidance.

Worked example 1: dealer incentive

Example: A paint company gives its top dealer in Rohini (a proprietorship) a scooter worth ₹1,10,000 (including GST) for achieving targets, and gift vouchers of ₹15,000 during Diwali.

• Aggregate benefit = ₹1,25,000 > ₹20,000.
• TDS = 10% × ₹1,25,000 = ₹12,500.
• The company deposits ₹12,500 by the 7th of the next month and reports it; the dealer offers ₹1,25,000 as business income and claims TDS credit.

Worked example 2: doctors' conference

Example: A pharma company sponsors a doctor's trip to a medical conference in Singapore costing ₹1,80,000, including ₹60,000 for leisure days with family.

• The whole sponsored cost relating to the doctor (including family) is a benefit, though the doctor may argue the conference part is for the company's business. CBDT guidance treats such sponsorships as benefits, with exceptions where the professional attends to render services to the company.
• TDS = 10% of ₹1,80,000 = ₹18,000.
• Separately, the cost may be disallowed for the pharma company under the rules against freebies to doctors.

Worked example 3: small value gifts

Diwali sweets worth ₹2,500 to each of 50 dealers – each dealer's aggregate is below ₹20,000, so no TDS, unless other benefits to the same dealer cross the limit.

Recipient's side

The recipient must treat the benefit as business income (Section 28(iv) of the old Act; corresponding provision of the 2025 Act). The TDS appears in Form 26AS and is claimed as credit.

Documentation

• Maintain a register of benefits by recipient PAN, with date, nature, value and TDS.
• For schemes (target-based incentives), keep scheme circulars and achievement statements.
• For samples, record quantity and value.

Consequences of default

Interest and penalty as for other TDS defaults; the provider may be treated as an assessee in default for the tax not paid. The 30% disallowance of 40(a)(ia) may apply to the expense.

Common mistakes

• Treating gifts as outside TDS because "no payment was made".
• Ignoring family members' costs on sponsored trips.
• Not aggregating multiple small benefits to the same recipient.
• Applying 194R to employees.

Key takeaway

Benefits to business associates above ₹20,000 a year attract 10% TDS, even when given in kind. Keep a recipient-wise register and deposit tax before releasing the benefit. Our TDS and audit team reviews sales-promotion schemes for 194R compliance.