TDS Section 194-R perquisites clarification: the May 2026 CBDT FAQ and the medical insurance carve-out

Central Board of Direct Taxes issued FAQ Circular No. 8/2026 dated May 27, 2026, providing long-awaited clarifications on Section 194-R of the Income-Tax Act, 1961, which requires TDS at 10 percent on perquisites in excess of ₹20,000 per recipient per financial year arising in the course of business or profession. The section, introduced in Finance Act 2022, has been a chronic source of interpretive disputes since its operative date of July 1, 2022, particularly around what constitutes a perquisite, how to value non-cash perquisites, and how to aggregate small-value perquisites against the ₹20,000 threshold.

The medical insurance premium clarification is the most commercially significant of the FAQ items. The CBDT confirms that medical insurance premium paid by the company on behalf of a dealer or distributor is NOT a Section 194-R perquisite, provided the insurance is genuinely group medical insurance covering the dealer's employees and is not a personal benefit to the dealer. The exclusion is contingent on the insurance being recorded in the company's books as a sales promotion expense, not as a director or key personnel benefit. The clarification removes a multi-year compliance grey area for FMCG and pharmaceutical companies that operate dealer support programmes including group medical cover.

The gift card and prepaid instrument aggregation rule is articulated more clearly than in the original section. All gift cards, gift vouchers, and prepaid instruments issued by the company (or by a third party at the company's instance) to the same dealer in a financial year are aggregated for the ₹20,000 threshold. Gift cards loaded by the dealer with their own funds are not included. Gift cards usable only at the company's own retail outlets (closed-loop instruments) are valued at face value; open-loop cards usable at any merchant are also valued at face value. Branded merchandise with retail price above ₹500 (apparel, electronics, accessories) gifted to dealers is valued at retail price for aggregation.

The dealer incentive aggregation rule defines what is and is not within the perquisite perimeter. Cash incentives, gift cards, sponsored trips (domestic and international), free product samples beyond promotional sample limits, and conference sponsorships are all aggregated against the ₹20,000 threshold per dealer per financial year. Discounts, rebates, and price-list adjustments are explicitly NOT perquisites and not aggregated. Hospitality at business meetings (meals, accommodation during business visits) up to ₹2,000 per occasion is excluded from the perquisite computation, providing a practical operating buffer for routine business hospitality.

The foreign perquisites valuation methodology is clarified for the first time in the May 2026 FAQ. A foreign trip sponsored by an Indian company for a dealer is valued at the actual cost incurred (airfare, accommodation, ground transport, conference fees), converted to INR at the RBI reference rate on the date the cost is booked in the company's accounts. Per diem allowances paid in foreign currency to the dealer for incidentals are converted at the same RBI reference rate. The valuation is fixed at the date of cost incurrence, not at any subsequent exchange rate.

The FAQ also addresses the operational concern of how to deduct TDS on a non-cash perquisite. The deductor (the company providing the perquisite) must compute the gross-up of the perquisite value to factor in the 10 percent TDS and the dealer's marginal tax rate (typically grossed up at 30 percent for individual dealers, 25 percent for corporate dealers), and deposit the TDS within the standard 30-day window. The gross-up methodology is illustrated in the FAQ with worked examples.

For FY 2025-26 closing in March 2026 and FY 2026-27 just beginning, the FAQ provides retrospective clarification that can be relied upon for return filing and TDS reconciliation. The clarification on medical insurance, in particular, allows companies that had been treating dealer group medical insurance as Section 194-R perquisite to revise their TDS computation and claim refunds where deductions exceeded the actual perquisite liability.

KAMRIT's Direct Tax desk handles Section 194-R perquisite classification, dealer incentive aggregation, gross-up computation, and the FY-end TDS reconciliation under the May 2026 FAQ framework.