Perquisites In Income Tax: Meaning, Examples, Types, Taxability & Exemption

Employees often receive perquisites in the form of cash or kind from their employer. These are some added benefits or advantages given to an employee other than his or her salary. As per the Income Tax Act, there are both taxable and non-taxable perquisites. Read along to learn about perquisites meaning, their types, benefits, taxability, and more.

Perquisites Meaning In Income Tax

When your employer provides extra benefits and other advantages along with your basic salary or wage, they are referred to as perquisites in income tax. However, perquisite do not include the reimbursements offered by your employer. It is a portion of your pay structure and the CTC (total cost to the company). Depending on the nature of benefits, perquisites can be both taxable and non-taxable. 

Perquisites are non-monetary compensation paid or borne by the employer in exchange for service.

What Are Perquisites In Salary?

Perquisites in salary are the privileges you earn from your company besides the monthly salary. Such perquisites can be taxable or non-taxable in nature. These include simple benefits like fuel reimbursement, a company-provided car or accommodation, etc. 

Perquisites may also include medical facilities, interest-free loans, credit cards, and so on. As per Section 17(2) of the Income Tax Act, perquisite in salary includes the following:

• Rent-free Accommodation provided by the employer
• Concession in the rent on accommodation provided by the employer
• Value of any accommodation provided at the concessional rate by the employer
• Value of any benefit or amenity supplied free of cost or at the concessional rate by the employer to the employee
• Any obligation paid by the employer on behalf of the employee
• Value of sweat equity shares allotted or transferred at a concessional rate or free of cost to the employee
• Employer contribution to PF, NPS or superannuation fund exceeding Rs. 7.5 lakhs
• Annual accretion by way of interest or dividend to the account of Provident fund, NPS or Superannuation fund to the extent of employer contribution
• Value of any other fringe benefit or amenity

Types Of Perquisites In Income Tax

Here’s a brief overview of perquisites and their types:

• Tax-exempted Perquisites

Some of the fringe benefits like company-provided laptops and computers, employer-provided refreshments during office hours, travel allowances, etc., are non-taxable. Besides, telephone or mobile bills, employers' contributions to provident funds, recreational and free medical facilities, etc., are also counted as tax-exempted perquisites.

• Taxable Perquisites

Employee-provided benefits like water and electricity, medical expense reimbursements, rent-free accommodation, gas supply, etc., are perquisites taxable. Moreover, the salary of the employee’s servants, other benefits like gifts above Rs 5000, free meals, gym and club facilities, etc., come under taxable perquisites.

• Perquisites Taxable only for specified Employees

Value of any benefit or perquisite provided for free or at a concessional rate which is not included in the above two kinds will be taxable in the hands of specified employees. 

Specified Employees include;

1. Director Employee, i.e. an employee who is also a director in the company.
2. Employees having substantial interest ( has more than 20% of the coting power).
3. Employees whose gross salary exceeds Rs 50,000 

Rules For Valuation Of Perquisites Under Section 17(2)

Section 17(2), read with Rule 3 of the Income Tax Rules, provides for the valuation of perquisites for computing taxable income under the head ‘Salary.’

Here are some of the perquisites and their valuation as per Rule 3

• Value of Rent-Free Accommodation
  1. For Central and state government employees, the assessment is based on the residence's license fees, adjusted by the individual's rent.
  2. For non-government employees residing in cities with a population exceeding 25 lakh, the perquisite value stands at 15%. In cities with a population between 10 lakh and 25 lakh, it is 10%, while in cities with a population below 10 lakh, it is 7.5%. This value is determined by either the rent paid by the organisation or 15% of the employee's salary, whichever is lower.
  3. The value mirrors that of furnished housing, with an additional 10% calculated on the cost of furniture. If the furniture is leased, the rates are adjusted to include the organisation's rental expenditure.
  4. The value of this perquisite equates to 24% of the employee's salary or the hotel charges, whichever is lesser.
• Value of Perqusities by way of the use of a motor car to the employee from an employer
  1. If the employer owns the car and it's used only for official duties, Value of the perquisite will be considered as zero, provided proper documentation is maintained.
  2. If the employer covers all running and maintenance costs for private use, the value varies based on cubic capacity: Rs. 1,800 plus Rs. 900 for a chauffeur for up to 1.6 litres, and Rs. 2,400 plus Rs. 900 for over 1.6 litres. If the employee covers these costs, it's Rs. 600 plus Rs. 900 for up to 1.6 litres and Rs. 900 plus Rs. 900 for over 1.6 litres.
  3. If the employee owns the car and the employer reimburses it for official use, no value is assigned with proper documentation. If reimbursement is for official and personal use, the actual employer expenditure is reduced by the amount specified above.
  4. For other vehicles owned by the employee, reimbursement for official use has no assigned value with proper documentation. If it's for mixed-use, the actual employer expenditure is considered, reduced by Rs. 900.

• Health insurance or medical benefits: The employer's provision of health insurance or medical benefits is valued at the actual cost borne by the employer.
• Interest-free or concessional loans: The value of interest-free or concessional loans extended by an employer is determined by the discrepancy between the prescribed interest rate and the interest rate charged by the employer.
• Club membership: The employer's offering of club membership is appraised at the expense undertaken by the employer.

Tax Exempt Perquisites

Check out the following perquisites that are available for tax exemptions:

• Officials like the Union Minister, judges of the High Court or Supreme Court, Parliament officials, etc., receive rent-free accommodation from the government. These are examples of tax-exempt perquisites.
• If you take out interest-free or concessional loans to treat diseases included in Rule 3A, it is a tax-exempt perquisite. Moreover, if you get a loan of less than Rs 2,00,000, tax will not be calculated on it.
• The Indian government provides its citizens with certain perquisites included in Section 10(7) of the Income Tax Act, which are also tax-exempt perquisites.
• Meals in office: The value of free food and non-alcoholic beverages provided by the employer is the employer's expenditure minus any amount paid or recovered from the employee for such benefit. This excludes food provided during working hours on premises, with a limit of fifty rupees per meal, as well as tea, snacks, or provisions in remote areas or offshore installations. However, this exemption is not applicable in the new tax regime and will be applicable only in the old tax regime.
• Employer contributions to the employee's recognized Provident Fund (PF), Employee Provident Fund (EPF), National Pension System (NPS), and superannuation fund up to Rs 7,50,000 are exempt from tax, subject to specific limits. Any surplus amount will be taxable under section 17(2).

Tax Calculation On Perquisites

The average of your payable income tax determines the taxability of perquisites. The following factors impact the calculation procedure:

• The tax slab rate for a specific fiscal year.
• Income is mentioned under "salaries”.
• Cost of perquisites for the tax amount paid by the employer.

Here is an example for better illustration:

Let’s assume that the income mentioned under your ‘Salaries’ is Rs 10,00,000 inclusive of employer-provided non-monetary perquisites of Rs 1,00,000. According to the Income Tax Act, the perquisite tax will be –

Income that is charged under ‘Salaries’: Rs 10 lakh

Tax on salary inclusive of education and health cess @4%: Rs 54,600 (if you opt for the new tax regime FY 2023 -24)

Thus, the average tax rate will be: (54600/10,00,000 x 100) = 5.46%

Tax paid on Rs 1,00,000 = Rs (5.46% x 1,00,000) = Rs 5,460 

The amount to be deposited every month: Rs 455 (Rs 5,460/12)

Hence, your employer will pay Rs 455 as TDS on your salary.

Examples Of Perquisites 

Transportation, accommodation, etc., constitute the most common perquisites that most companies offer to their employees. Here is a detailed overview of perquisite examples for a better explanation: 

• Accommodation provided by your company

Leased accommodation is a common form of perquisite that you can obtain from your employer. Although it is a benefit or perks your company offers, this perquisite is taxable. The tax would depend on the ownership and valuation of the accommodation. 

If the property is owned by your company and is priced below Rs 10,00,000, you need to pay a 7% tax. For properties valued between Rs 10,00,000 to Rs 25,00,000, the rate of tax is 10% and for properties valued above Rs 25,00,000, the tax rate is 15%. However, if accommodation is leased by the employer, taxation is not applicable if you are paying the entire rent amount or 15% of it. On the other hand, you need to pay 24% tax if the accommodation is provided in a hotel for above 15 days.

• Employer-provided transportation

The tax calculation process for this perquisite depends on the ownership and purpose of using the car. Your employer may own the car or lease it to you. On the other hand, you may use it for official or personal purposes or both. The procedure of tax calculation will depend on these mentioned factors. 

The monthly tax rate for small cars with petrol consumption below 1.6 litres is Rs 1,800, and for large cars with petrol consumption above 1.6 litres, it is Rs 2,400.

• Stock Options Rewarded to Employees by Employer

Most companies reward their employees with stocks and shares. Net capital gains that you receive in hand as an employee are taxable. It is the difference between the selling price of the share and its fair market value. The applicable tax amount on shares in the form of perquisites is equal to the FMV reduced from the amount that has been recovered from the employee. 

Benefits Of Perquisites

Take a look at the benefits of perquisites for an employee:

• Helps increase an employee's loyalty towards the company.
• Attracts eligible and talented employees to an organisation.
• Helps improve the productivity of an employee and increase the employee retention rate.

Difference Between Allowance And Perquisites

Perquisites and allowances seem similar, so you may get confused between the two. Thus, knowing the basic differences between perquisites and allowances is essential.

Final Word

Perquisites benefit an employee in many ways. For instance, an employee who is appointed for fieldwork has to travel a lot for his work. In such a case, if his or her employer bears the food and travel-related expenses, it releases the employee's burden to some extent.