Taxability of Perquisites

Perquisites, in essence, can be described as privileged gains or profits that are incidental to regular salary. In fact, they serve as benefits availed over and above one’s salary. One must note that there are both taxable and exempted perquisites. To account for the accompanying taxes and make the most of available exemptions, salaried individuals must find out more about the taxability of perquisites. Individuals should try to become familiar with the underlying concept.

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.

One must note that perquisites can be tax-free or taxable based on their nature. On the basis of taxability of perquisites, it is categorised under three heads. 

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 Perquisites Classified?

Based on the taxability of perquisites, they are classified into these following –

Perquisites in Income Tax

The taxable category of perquisites includes – supply of water, electricity and gas, rent-free accommodation, professional tax, the salary of domestic help hired by the employee, medical expense reimbursements, etc.

Further, other fringe benefits like free meals, club and gym facilities and gifts worth more than Rs. 5000 are subject to tax.

This table helps gain an idea about the tax imposed on the type of accommodation provided to the employee –

Tax-free perquisites

These are the perquisites that are exempted from taxes. The most common tax-free perquisites include – travel allowance, medical and recreational facilities, laptop or desktop provided by the company, refreshments provided during office hours and interest-free salary loans. Other than these, the use of facilities like a sports club, health club and telephone lines are also included in this tax-free category.

Perquisites taxed by employees

Generally, this category of perquisites includes cars (owned by employers but is necessarily used by employees), service of domestic help and education opportunities for children, among others.

This table below helps gain an insight into the rate of tax on cars provided by the employers –

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.

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.

Tax Exempt Perquisites 

These following perquisites are exempted from taxes –

• Perquisites permitted out of India for rendering services outside the country. These perquisites come under Section 10(7) and are allowed by the Government of India to Indian citizens.
• Rent-free residence for officials. For instance, residence provided to a judge of the Supreme Court, High Court, an official of Parliament, the Union Minister, etc.
• There are no perquisites on expenses incurred by way of telephone or mobile phone bills by the employer on behalf of their employees.
• Perquisites are exempted from tax in case interest-free loans or concessional loans were made available for the treatment of diseases mentioned in Rule 3A. Alternatively, the same is not taxed in case it was a petty loan that does not exceed Rs. 200000.