Perquisites u/s 17(2) of the Income Tax Act for Salaried Employees

What Are Perquisites?

Perquisites, also called perks, are casual benefits granted to employees as a privilege beyond their regular pay. These perks can support employees’ financial needs and improve their lifestyle. Depending on the benefit type and value, perquisites can be fully taxable, partially taxable, or entirely tax-exempt.

Types of Perquisites Under Section 17(2)

Section 17(2) of the Income Tax Act classifies perquisites into several types, including:

1. Accommodation: This includes rent-free or concessional housing provided by the employer.
2. Concessional Rent: Any rent discount offered to an employee by their employer.
3. Employee’s Obligations: If the employer settles any financial obligations on the employee’s behalf, it’s treated as a perquisite.
4. Travel Expenditures: Travel costs covered by the employer.
5. Free or Concessional Benefits/Amenities: Free or discounted benefits given to specified employees.
6. Specified Security or Sweat Equity Shares: Shares allotted or transferred at a concessional rate.
7. Life Insurance and Annuity Contributions: Employer contributions towards life assurance or annuities outside of recognized funds.
8. Superannuation Fund Contributions: Employer contributions to a recognized superannuation fund.
9. Other Fringe Benefits: Additional fringe benefits or amenities provided by the employer.

Rules for Valuation of Perquisites Under Section 17(2)

The valuation of perquisites depends on the actual cost incurred by the employer and the nature of the perquisite. Here’s how common perquisites are valued:

1. Accommodation (Rent-Free or Concessional)

• Government Employees: Based on license fees, reduced by any rent paid by the employee.
• Non-Government Employees:
  • For cities with a population over 25 lakh, 15% of salary.
  • For cities with a population between 10 and 25 lakh, 10%.
  • For cities with a population under 10 lakh, 7.5%.
• Furnished Accommodation: Basic valuation plus 10% of furniture cost or rental value.
• Hotel Accommodation: Lesser of 24% of salary or actual hotel charges.

2. Company Car or Vehicle

• Valuation includes all expenses like maintenance, fuel, insurance, and depreciation.
• For mixed-use (personal and official): Based on personal distance and employer costs.
  • Up to 1.6 liters: ₹1,800 + ₹900 (driver).
  • Above 1.6 liters: ₹2,400 + ₹900 (driver).

3. Health Insurance and Medical Benefits

• Taxed based on the employer’s incurred costs.

4. Interest-Free or Concessional Loans

• The difference between the prescribed interest rate and employer rate is taxable.

5. Club Memberships

• Valued at the total cost incurred by the employer for employee memberships.

Note: If employees contribute towards perquisites, such as paying maintenance charges, this amount is deducted from the taxable value.

Taxability of Perquisites

For perquisites to be taxed as “Income from Salary,” they must meet specific criteria:

• Must be provided during employment.
• Should benefit the employee personally.
• Must be related to the job.
• Must be received from a legal source.

Perquisites fall into two main categories:

• Monetary: Taxable for all employees.
• Non-Monetary: Taxable only for specified employees.

Categories of Perquisites Under Section 17(2)

1. Perquisites Taxable for All Employees

• Dearness Allowance (DA): Provided to offset inflation, fully taxable.
• Interim Allowance: Fully taxable if given temporarily.
• Project Allowance: Taxable.
• Entertainment Allowance: Exempt up to ₹5,000 for government employees; fully taxable for others.
• Overtime Allowance: Fully taxable.
• City Compensatory Allowance (CCA): Provided for high-cost urban areas, fully taxable.
• Meals/Tiffin Allowance: Fully taxable if offered for meals at work.
• Fixed Medical Allowance: Fully taxable.
• Employer-Provided Accommodation: Taxable based on property ownership and location.

2. Exempted Perquisites

• House Rent Allowance (HRA): Exemption based on the lowest of the following:
  • Total HRA received.
  • 50% of salary in metros, 40% in non-metros.
  • Rent paid over 10% of annual salary.
• Special Allowance: Exempt if for official purposes (Section 10(14)(i)).
• Children’s Education Allowance: Exempt up to ₹100/month for two children, or ₹300/month for hostel stay.
• Transport Allowance: Exempt up to ₹3,200 per month for handicapped employees.

3. Exempt Perquisites for Specified Employees

• Judges, government employees, and UNO employees receive tax-free perquisites.

4. Common Tax-Free Perquisites

• Medical Reimbursement: Exempt up to ₹15,000 annually.
• Conveyance Allowance: Exempt up to ₹1,600/month.
• Telephone/Mobile Reimbursement: Exempt.
• Leave Travel Allowance (LTA): Exempt for domestic travel.
• Gratuity: Exempt for government employees.
• Employer Contribution to Provident Fund: Exempt within limits.
• Employer Contribution to NPS: Exempt up to 10% of salary (Basic + DA).

Section 17(2) of the Income Tax Act comprehensively governs the valuation and treatment of perquisites. For employees and employers, understanding perquisite tax implications enables better compliance and the opportunity to optimize tax savings. Familiarity with these tax guidelines helps employees plan their liabilities and use exemptions to their advantage, creating a more favorable financial landscape