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 more about the taxability of perquisites. Individuals should try to become familiar with the underlying concept.
What are Perquisites?
These can be defined as benefits that an individual receives courtesy of his/her official designation. It is received in addition to one’s salary or wages.
As per the definition mentioned in Section 17(2) of the Income Tax Act, perquisites include –
- Value of concessional or rent-free accommodation that is provided by the employer.
- Value of any benefit or amenity that is granted for free or at a concessional rate to certain employees.
- An amount paid by the employer for an obligation that was supposed to be paid by the assessee in question.
- Contributions made by employers to a superannuation fund concerning the assessee in question.
- Value of specified shares or securities that are transferred/allotted either directly or indirectly to employees by the former or current employer. Such shares or securities are extended either at a concessional rate or for free of cost.
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.
How are Perquisites Classified?
Based on the taxability of perquisites, they are classified into these following –
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 –
|Type of accommodation||City population||Rate of tax|
|Leased by employers||15% or actual rent paid (whichever is lower)||Not applicable|
|Accommodation in a guest house or hotel for more than 2 weeks.||24%|
|Owned by employers||More than 25 lakhs||15%|
|10 lakhs – 25 lakhs||10%|
|Less than 10 lakhs||7%|
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 –
|Type of Car||Taxation rate|
|Big cars above 1.6 litres||Rs. 2400/month|
|Small cars below 1.6 litres||Rs. 1800/month|
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 ITA, 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.
Gaining a fair idea of the popular perquisites and how their values are taxed comes handy for salaried employees and helps them account for resulting taxation much better. A firm knowledge of the taxability of perquisites further eliminates lingering doubts related to TDS on their salaries and allows individuals to cooperate with their employers better.