Introduction

In business, it is common to receive non-monetary benefits or perquisites as part of commercial transactions or arrangements. These could include free goods, discounts, or the use of assets. The Income Tax Act, 1961, ensures that such benefits are taxed under Section 28(iv), which covers the value of any benefit or perquisite arising from business or professional activities.

This blog explains how Section 28(iv) operates, the scope of its application, and practical examples to help taxpayers understand the tax implications of benefits or perquisites.

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What Does Section 28(iv) Cover?

Section 28(iv) provides that the value of any benefit or perquisite, whether convertible into money or not, arising from a business or profession, is taxable under the head “Profits and Gains of Business or Profession.”

Key Features:

1. Covers non-monetary benefits or perquisites.
2. Arises during the course of business or profession.
3. Taxed as part of business income.

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Scope of Section 28(iv)

1. Benefits or Perquisites Must Be Non-Monetary

Section 28(iv) applies only to non-monetary benefits. Direct monetary receipts, such as cash payments, are excluded and taxed under other provisions.

Example:

• Free accommodation provided by a supplier to a distributor is taxable under Section 28(iv).
• A cash payment of ₹10,000 is not covered under Section 28(iv) but taxed as income directly.

2. Arising From Business or Profession

The benefit or perquisite must arise due to business dealings or professional activities.

Example:

• A manufacturer providing free samples to a retailer.
• A consultancy firm receiving a company car for free use.

3. Benefit May or May Not Be Convertible to Money

The value of the benefit or perquisite is taxable whether it can be converted into money or not.

Example:

• A business receiving a holiday package as an incentive is taxable, even if it cannot be monetized.

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How is the Value of Benefits or Perquisites Determined?

The value of the benefit or perquisite is determined based on its fair market value.

1. Fair Market Value (FMV)

FMV is the price at which the benefit or perquisite would typically be sold in the market.

2. Adjustments

If the recipient incurs any expenses for availing the benefit, the FMV is reduced by the amount of expenses.

Example:

• A distributor receives a laptop worth ₹50,000 for free but pays ₹10,000 as taxes.
  • Taxable value: ₹50,000 – ₹10,000 = ₹40,000.

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Examples of Taxable Benefits Under Section 28(iv)

1. Free Use of Assets:
   • A company provides free office space to a business partner. The fair rental value is taxable as a benefit.
2. Discounted Goods:
   • A wholesaler sells goods to a retailer at heavily discounted prices as a business incentive. The difference between FMV and the sale price is taxable.
3. Gifts or Rewards:
   • A supplier gives a luxury watch worth ₹1,00,000 to a distributor as a performance reward. This is taxable under Section 28(iv).
4. Corporate Perks:
   • A company allows its clients to use a vacation home for free. The market rental value of the home is taxable as a perquisite.

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Exclusions Under Section 28(iv)

1. Monetary Payments:
   Cash or monetary payments are not covered under Section 28(iv).
2. Personal Gifts:
   Benefits received in a personal capacity, not related to business or profession, are excluded.
3. Capital Receipts:
   Benefits that constitute capital receipts, such as compensation for loss of business, are taxed under other sections.

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Documentation and Compliance

1. Fair Market Value Records:
   Maintain proper documentation to substantiate the FMV of the benefit or perquisite.
2. Invoice and Agreements:
   Retain copies of invoices, agreements, or emails evidencing the receipt of benefits.
3. ITR Reporting:
   Report the taxable value of benefits or perquisites under “Profits and Gains of Business or Profession” in the Income Tax Return.

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FAQs

1. Are cash rewards taxable under Section 28(iv)?
No, cash rewards are not taxable under Section 28(iv). They are taxed as direct income.

2. How is the value of a non-monetary benefit determined?
The value is based on the fair market value of the benefit at the time of receipt.

3. Are free samples received by a business taxable?
Yes, free samples provided to a business are taxable under Section 28(iv).

4. Can personal gifts received during business dealings be taxed under Section 28(iv)?
No, personal gifts unrelated to the business or profession are not taxable under Section 28(iv).

5. Is free accommodation provided by a client taxable?
Yes, free accommodation provided during business dealings is taxable under Section 28(iv).

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Conclusion

Section 28(iv) ensures that non-monetary benefits or perquisites received during business or professional activities are taxed as income. Understanding the scope of this section and maintaining proper documentation helps businesses comply with tax regulations while accurately reporting their income.

Additional Resources

Learn more about Tax Provisions on the official Income Tax India website.

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