Section 17(2) of the Income Tax Act of 1961 covers the salary section, which is a payment that employer gives to their employees. Salary is a composition of basic salary and allowances. Section 17(2) of the Income Tax Act in India pertains to the computation of an employee’s income. It deals with the inclusion of certain perquisites or benefits provided to employees by their employers in their taxable income.
What are perquisites in Income Tax?
A fringe benefit is a perquisite for which tax needs to be separately paid, these are the benefits that are covered under the Act:
- Value of any other benefit provided by the employer.
- Value of the benefiting coming from the transfer of a movable asset that belongs to the employer, to the employee or any other.
- Value of the utilization of any movable asset that is used by the employee or member of the household.
- The amount of annual fee in a club incurred by the employee is borne by the employer.
- The amount of the membership fee and annual fee that is incurred by the employee.
- Value of gift or voucher in lieu, and such gift can be received by the employee, where such value in the aggregate exceeds rupees five thousand in the previous year.
- The value of the accommodation that is given to the employee.
- The value of the use of a motor car that is provided by the employee.
- The value of the services of a sweeper, gardener and more.
- Value of travelling borne by the employer.
- Value of the free food and beverages provided by the employer.
- Value of concessional fare by an employer engaged in the business.
Types of Perquisites in Income Tax
- 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;
- Director Employee, i.e. an employee who is also a director in the company.
- Employees having substantial interest ( has more than 20% of the coting power).
- Employees whose gross salary exceeds Rs 50,000
Benefits not Treated as Perquisites
The specific benefits that are received by an employee should not be treated as perquisites are mentioned here below:
- The value of medical treatment that is provided to an employee.
- The sum that is paid by the employer in respect of an expenditure that has actually incurred by the employee on medical treatment.
- The premium that has been borne by an employer in relation to an employee, to effect or to keep in force an insurance on the health of the employee.
- The expenditure that is incurred by the employee for medical treatment.
How are Taxes on Perquisites Calculated?
Generally, taxability of perquisite is determined as an average of income tax that is calculated based on these following –
- Rate of tax for the given fiscal year.
- Income charged under ‘salaries’.
- Value of perquisites for the amount of tax paid by the employer.
Example of Perquisite Tax Calculation: Suppose the income charged under ‘Salaries’ of a regular employee is Rs. 800000 inclusive of Rs. 90000 that is paid by the employer as non-monetary perquisites. As per the Income Tax Act, the perquisite tax will be –
Income that is charged under ‘Salaries’ – Rs. 800000
Tax on salary inclusive of education and health cess @4% – Rs. 75400
Average tax rate – 75400/800000 x 100 = 9.4%
Tax paid on Rs. 90000 = 9.24% x 90000 i.e. Rs. 8316
The amount to be deposited every month – Rs. 8316/12, i.e. Rs. 693
Hence, Rs. 693 will be paid by the employers as TDS on employee’s salary.
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
- For Central and state government employees, the assessment is based on the residence’s license fees, adjusted by the individual’s rent.
- 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.
- 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.
- 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
- 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.
- 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.
- 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.
- 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
- 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).
FAQs
Who Pays Perquisite Taxes?
The Finance Act, 2005 states – Perquisites will be taxed by the government when such benefits have been provided or are considered to have been provided to employees by employers.
Ideally, perquisites are taxed at the rate of 30% of the entire value of the availed fringe benefits. Notably, the perquisite tax is paid by the employers who provide these above-mentioned benefits to their employees. They can be either a firm, a company, a body of individuals or an association of individuals.
Difference Between Allowance And Perquisites?
Parameters | Perquisites | Allowances |
Definition | Employer-provided benefits on account of the professional services provided by them. | Employer-provided fixed amount to meet specific expenses of the employee. |
Tax liability | It can be taxable or non-taxable depending on its type and may not increase your tax liability. | When paid along with salary, allowances are taxed. Thus, it increases your tax liability. |
Mode of payment | Employers pay perquisites in consideration mainly. However, they pay reimbursements in cash. | Employers generally pay allowances in cash. |
Influence on in-hand salary | In-hand salary is not affected in any way by perquisites. | When allowances are added to your salary, it increases your take-home pay. |
Examples | Rent-free accommodation, transportation facilities provided by the company, etc. | Medical allowances, house rent allowance, etc. |