1. PERQUISITES – Perquisite may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. In essence, these are usually non-cash benefits given by an employer to employees in addition to cash salary or wages. However, they may include cases where the employer reimburses expenses or pays for obligations incurred by the employee. Perquisites are also referred to as fringe benefits.
Broadly, “perquisite” is defined in the section 17(2) of the Income-tax Act as including:
1) Value of rent-free or concessional rent accommodation provided by the employer.
2) Value of any benefit/amenity granted free or at concessional rate to specified employees etc.
3) Any sum paid by employer in respect of an obligation, which was actually payable by the assessee.
4) Any sum paid by the employer for assurance on life of the employee or to effect a contract for an annuity.
5) Value of any other fringe benefit as may be prescribed.
2. TAXATION OF PERQUISITES
2.1 Perquisites taxable in the hands of the employee as a part of salary incomeBroadly, in this system, the perquisites taxable in the hands of the employee as a part of salary income include:
1) Value of rent-free or concessional rent accommodation provided by the employer.
2) Value of any benefit/amenity granted free or at concessional rate to specified employees, etc. Specified employees are company directors, employees with substantial interest in the company and any other employee whose salary income exclusive of non-monetary benefits and amenities exceeds Rs. 50,000/-.
3) Any sum paid by employer in respect of an obligation, which was actually payable by the assessee.
4) Any sum payable by the employer, directly or through a fund for assurance on life of the employee or to effect contract for an annuity. However, sums payable to recognised provident funds or approved superannuation funds, and certain other specified funds are exempt.
5) Value of any other fringe benefit as may be prescribed (excluding fringe benefits subjected to the Fringe Benefit Tax).
Besides rent-free or concessional rent accommodation, other perquisites taxable in the hands of the employee include provision of services of a sweeper, a gardener, etc., supply of gas, electricity or water for household consumption, provision of free or concessional educational facilities for any member of the employee’s household, provision of interest free or concessional loan, and benefit resulting from the use of any movable asset.
It has been clarified that the value of any leave travel concession or assistance received by an employee normally falls within the meaning of salary. It is, therefore, taxable in the hands of the employee subject to the exemption under clause (5) of section 10 of the Income-tax Act. Other allowances falling within the meaning of salary like children education allowance and transport allowance, which are exempt subject to certain conditions are also to be considered part of salary income of the employee (Circular No. 8/2005).
Salary income for the purposes of taxation and valuation of perquisites includes the pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called, from one or more employers, as the case may be, but does not include the following, namely:
1) dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;
2) employer’s contribution to the provident fund account of the employee;
3) allowances which are exempted from the payment of tax;
4) value of the perquisites specified in the concerned provision; 5) any payment or expenditure specifically excluded.
2.2 Tax liability for value of perquisites – The value of perquisites taxable in the hands of the employee are considered a part of salary income and added to the total income of the employee (assessee). They are then subject to tax at the prevailing rates of income tax.
3. VALUATION OF PERQUISITES TAXABLE IN THE HANDS OF THE EMPLOYEE
For perquisites taxable in the hands of the employee for the purposes of taxation, the employee is the “assessee”. As a general rule, the taxable value of perquisites in the hands of the employees is its cost to the employer. However, specific rules for valuation of certain perquisites have been laid down in Rule 3 of the Income-tax Rules. These have been revised by Central Board of Direct Taxes Notification No. 68/2005 dated 28.2.2005. Furthermore, Finance Act 2007 has provided clarifications regarding the valuation of rent– free and concessional accommodation. The clarifications provide what constitutes concession in the matter of rent. The revised provisions are briefly given below:
3.1 Where accommodation is provided by the Central Government or any State Government
1) Where unfurnished accommodation is provided by the Central Government or any State Government, the value of the perquisite is the license fee determined by the Central Government or any State Government in respect of the accommodation in accordance with the rules framed by such Government, as reduced by the rent actually paid by the employee.
2) Where furnished accommodation is provided by the Central Government or any State Government, concession in the matter of rent is deemed to have been provided, with effect from 1st April, 2002. Therefore, the provisions apply in relation to the assessment year 2002-2003 (previous year 2001-2002) and subsequent years. In this case, the concession is deemed to have been provided if the license fee determined by the Central Government or any State Government in respect of the accommodation in accordance with the rules framed by such Government, as increased by the value of furniture and fixtures in respect of the period during which the said accommodation was occupied by the employee (assessee) as reduced by the rent actually paid by the employee, exceeds the aggregate of rent recoverable from or payable by the employee and any charges paid or payable for the furniture and fixtures by the employee.
In the case of furnished accommodation provided by the Central Government or any State Government, the value of the perquisite of the accommodation alone is the same as that of theunfurnished accommodation provided by the Central Government or any State Government as given above. In addition, the value of furniture and fixture is taken to be 10% per annum of the cost of furniture (including television sets, radio sets, refrigerators, other household appliances, airconditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, the actual hire charges payable for the same as reduced by any charges paid or payable by the employee.
3.2 Where unfurnished accommodation is provided by any employer other than the Central Government or any State Government, with effect from 1st April, 2002 to 31st March 2006
1) In a case where the accommodation is owned by the employer, value of the perquisite of the concessional accommodation in such a case is determined at the rate of 10% of salary in cities having population exceeding four lakhs as per 1991 census and 7.5% of salary in other cities, in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, payable by the employee.
However, w.e.f. 1-4-2005, the value of the perquisite of the concessional accommodation in such a case would be determined at the rate of 20% of salary in cities having population exceeding 4 lakhs as per 2001 census and 15% of salary in other cities, in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, payable by the employee.
2) In a case where the accommodation is taken on lease or rent by the employer, the value of the perquisite of the concessional accommodation in such a case is the actual amount of lease rental paid or payable by the employer or 10% of salary, whichever is lower, in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, payable by the employee.
The provisions apply in relation to the assessment year 2002- 2003 (previous year 2001 -2002) and subsequent years till the amendments given below.
3.3 Where unfurnished accommodation is provided by any employer other than the Central Government or any State Government, with effect from 1st April, 2006
1) In a case where the accommodation is owned by the employer, with effect from 1st April, 2006, concession in the matter of rent is deemed to have been provided if the value of the accommodation determined at the specified rate in respect of the period during which the said accommodation was occupied by the employee, exceeds the rent recoverable from, or payable by the employee. The provisions apply in relation to the assessment year 2006-2007 (previous year 2005-2006) and subsequent years.
The specified rate and value of the perquisite of the concessional accommodation in such a case is determined at the rate of 15% of salary in cities having population exceeding 25 lakhs as per 2001 census, 10% of salary in cities having population exceeding 10 lakhs but not exceeding 25 lakhs as per 2001 census, and 7.5% of salary in other areas in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, actually paid by the employee.
2) In a case where the accommodation is taken on lease or rent by the employer, with effect from 1st April, 2006, concession in the matter of rent is deemed to have been provided if the value of the accommodation being the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower, in respect of the period during which the said accommodation was occupied by the employee, exceeds the rent recoverable from, or payable by the employee.
The value of the perquisite of the concessional accommodation in such a case is the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower, in respect of the period during which the said accommodation was occupied by the employee, as reduced by the rent, if any, actually paid by the employee.
3.4 Where furnished accommodation is provided by any employer other than the Central Government or any State Government, with effect from 1st April, 2002
In a case where the accommodation is owned by the employer, the concession is deemed to have been provided if the valuation of the employer-owned accommodation alone as determined above, as increased by the value of furniture and fixtures in respect of the period during which the said accommodation was occupied by the employee (assessee), exceeds the aggregate of rent actually paid by the employee and any charges payable for the furniture and fixtures by the employee.
In a case where the accommodation is taken on lease or rent by the employer, the concession is deemed to have been provided if the valuation of the leased or rented accommodation alone as determined above, as increased by the value of furniture and fixtures in respect of the period during which the said accommodation was occupied by the employee (assessee), exceeds the aggregate of rent actually paid by the employee and any charges payable for the furniture and fixtures by the employee.
In the case of furnished accommodation provided by any employer other than the Central Government or any State Government the value of the perquisite of the accommodation alone is the same as that of the unfurnished accommodation provided by any employer other than the Central Government or any State Government as given above for the two cases of employer owned and leased or rented accommodations, respectively. In addition, the value of furniture and fixture is taken to be 10% per annum of the cost of furniture (including television sets, radio sets, refrigerators, other household appliances, airconditioning plant or equipment or other similar appliances or gadgets) or if such furniture is hired from a third party, the actual hire charges payable for the same as reduced by any charges paid or payable by the employee. The provisions apply in relation to the assessment year 2002-2003 (previous year 2001-2002) and subsequent years.
3.5 Where accommodation is provided by the employer in a hotel, with effect from 1st April, 2002
The concession is deemed to have been provided if the value of the accommodation determined at the rate of 24% of salary paid or payable or actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided, exceeds the rent recoverable from or payable by the employee.
The value of the accommodation is determined at the rate of 24% of salary paid or payable or actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided, as reduced by the rent, if any, actually paid or payable by the employee. An exception is made where the employee is provided such accommodation for a period not exceeding 15 days on his transfer from one place to another.
3.6 Exception for accommodation in mining site, onshore oil exploration site, etc.
An exception is provided for any accommodation provided to an employee working at a mining site or an on-shore oil exploration site or a project execution site, or a dam site or a power generation site or an off-shore site which:
1) is of a temporary nature and having plinth area not exceeding 800 square feet, is located not less than eight kilometers away from the local limits of any municipality or a cantonment board; or
2) is located in a remote area. Remote area means an area that is located at least 40 kilometers away from a town having a population not exceeding 20,000 based on latest published all-India census.
3.7 Exception for accommodation on account of transfer
Where on account of his transfer from one place to another, the employee is provided with accommodation at the new place of posting while retaining the accommodation at the other place, the value of perquisite is determined with reference to only one such accommodation which has the lower value for a period not exceeding 90 days and thereafter the value of perquisite shall be charged for both such accommodations.
3.8 Value of benefit from the provision of the services of a sweeper, a gardener, a watchman or a personal attendant
The value of the benefit to the employee or any member of his household resulting from the provision by the employer of the services of a sweeper, a gardener, a watchman or a personal attendant is the actual cost to the employer. The actual cost is the total amount of salary paid or payable by the employer, or any other person on his behalf for such services, as reduced by any amount paid by the employee for such services.
3.9 Value of benefit resulting from the supply of gas, electric energy or water
The value of the benefit to the employee resulting from the supply of gas, electric energy or water for his household consumption is the sum equal to the amount paid on that account by the employer to the supplying agency. Where the supply is made from the resources owned by the employer, without purchasing them from any other outside agency, the value of the perquisite is the manufacturing cost per unit incurred by the employer. Where the employee is paying any amount in respect of such services, the amount so paid is deducted from the value of the perquisite arrived at.
3.10 Value of benefit resulting from the provision of free or concessional educational facilities
The value of the benefit to the employee resulting from the provision of free or concessional educational facilities for any member of his household is the sum equal to the amount of expenditure incurred by the employer in that behalf. In the case where the educational institution is itself maintained or owned by the employer, or where free educational facilities for such member of employees’ household are allowed in any other educational institution by reason of his being in employment of that employer, the value of the perquisite is determined with reference to the cost of such education in a similar institution in or near the locality (however, in this case this sub-rule does not apply if the cost of such education or the value of such benefit per child does not exceed Rs. 1,000 per month). Where any amount is paid or recovered from the employee on that account, the value of benefit is reduced by the amount so paid or recovered.
3.11 Value of the benefit resulting from the provision of interest-free or concessional loan
The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household by the employer or any person on his behalf is determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it, on the maximum outstanding monthly balance as reduced by the interest, if any, actually paid by the employee or any such member of his household.
However, an exception is made if such loans are made available for medical treatment in respect of diseases specified in Rule 3A of the Income Tax Rules or where the amount of loans are petty not exceeding in the aggregate Rs. 20,000. Where the benefit relates to the loans made available for medical treatment referred to above, the exemption so provided is reduced by any amount that has been reimbursed to the employee under any medical insurance scheme.
3.12 Value of benefit resulting from the use of any movable asset
The value of benefit to the employee resulting from the use by the employee or any member of his household of any movable asset (other than assets like furniture, televisions, etc., in furnished accommodation already specified in Rule 3 and other than laptops and computers) belonging to the employer or hired by him is determined at 10% per annum of the actual cost of such asset or the amount of rent or charge paid or payable by the employer, as the case may be, as reduced by the amount, if any, paid or recovered from the employee for such use.
3.13 Value of benefit to the employee arising from the transfer of any movable asset
The value of benefit to the employee arising from the transfer of any movable asset belonging to the employer directly or indirectly to the employee or any member of his household is the amount representing the actual cost of such asset to the employer as reduced by the cost of normal wear and tear and as further reduced by the amount, if any, paid or recovered from the employee as consideration for such transfer. The cost of normal wear and tear is calculated at the rate of 10% of such cost for each completed year during which such asset was put to use by the employer (normal wear and tear is calculated at the rate of 50% in the case of computers and electronic items, and 20% in the case of motor cars by the reducing balance method).
To summarize in a simple manner, the valuation of some important perquisites taxable in the hands of the employee as part of salary income is given below:-
| Nature of perquisite |
Valuation of perquisite |
| Unfurnished rent-free or concessional accommodation to Central or State Government Employees | License fee as determined by the government as reduced by the rent paid by the employee.
|
| Unfurnished rent-free or concessional accommodation to non-Government Employees
|
w.e.f. 1/4/2002 to 31/3/2006- 10% of the salary in cities where population as per 1991 census is above 4 lakhs and 7.5% of salary in other cases.
(w.e.f. 1-4-2005 to 31-3-2006 – 20% of salary in cities having population exceeding 4 lakhs as per 2001 census and 15% of salary in other cities) In case accommodation provided is not owned by the employer, but is taken on lease or rent, then actual amount of lease rent paid/payable by the employer or 10% of the salary, whichever is lower. w.e.f. 1/4/2006- 15% of the salary in cities where population as per 2001 census exceeds 25 lakhs, 10% of the salary in cities where population as per 2001 census exceeds 10 lakhs but does not exceed 25 lakhs and 7.5% of salary in other cases. In case accommodation provided is not owned by the employer, but is taken on lease or rent, then actual amount of lease rent paid/payable by the employer or 15% of the salary, whichever is lower. In both of above cases, the value of the perquisite would be reduced by the rent, if any, paid by the employee. |
| Furnished Accommodation | Value of unfurnished accommodation as computed above, increased by 10% per annum of the cost of furniture (including TV/radio/refrigerator/AC/ other gadgets). In case furniture is hired from a third party, the value of unfurnished accommodation increased by hire charges paid/ payable by the employer. Any payment recovered from the employee towards the above would be reduced from this amount. |
| Hotel accommodation | 24% of salary or the actual charges paid/payable to the hotel, whichever is lower. The above would be reduced by any rent actually paid by the employee. It may be noted that no perquisite would arise, if the employee is provided such accommodation on transfer from one place to another for a period of 15 days or less. |
| Motor car provided by the employer | W.e.f. 1-4-2008, if an employer providing such facility to his employee is not liable to pay fringe benefit tax, the value of such perquisite shall be :
a) Nil, if the motor car is used by the employee wholly and exclusively in the performance of his official duties. b) Actual expenditure incurred by the employer on the running and maintenance of motor car including remuneration to chauffeur as increased by the amount representing normal wear and tear of the motor car and as reduced by any amount charged from the employee for such use (in case the motor car is exclusively for private or personal purposes of the employee or any member of his household).
c) Rs. 1200-(plus Rs. 600-, if chauffeur is also provided) per month (in case the motor car is used partly in performance of duties and partly for private or personal purposes of the employee or any member of his household if the expenses on maintenance and running of motor car are met or reimbursed by the employer). However, the value of perquisite will be Rs. 1600-(plus Rs. 600-, if chauffeur is also provided) per month if the cubic capacity of engine of the motor car exceeds 1.6 litres. d) Rs. 400- (plus Rs. 600-, if chauffeur is also provided) per month (In case the motor car is used partly in performance of duties and partly for private or personal purposes of the employee or any member of his household if the expenses on maintenance and running of motor car for such private or personal use are fully met by the employee). However, the value of perquisite will be Rs. 600- (plus Rs. 600-, if chauffeur is also provided) per month if the cubic capacity of engine of the motor car exceeds 1.6 litres. If the motor car or any other automotive conveyance is owned by the employee but the actual running and maintenance charges are met or reimbursed by the employer, the method of valuation of perquisite value is different. (See Rule 3(2)). |
| Provision of sweeper, gardener, watchman or | Actual cost that is total amount of salary paid/payable by the employer or any other person on by the employee. |
| Supply of gas, electric energy or water | Amount paid by the employer to the supplying agency or where supplied from resources owned by the employer, the manufacturing cost per unit incurred by the employer, less any amount paid by the employee. |
| Free or concessional educational facilities | Amount of expenditure incurred by the employer. In the case where the educational institution is maintained or owned by the employer, or where provision is made in any other educational institution by reason of employee being in employment of that employer, the cost of such education in a similar institution in or near the locality (however, in this case this sub-rule does not apply if the cost of education or the value of benefit per child does not exceed Rs. 1,000 per month). Any amount paid by or recovered from the employee is reduced from the value of the benefit. |
| Interest-free or concessional loan | Interest computed at rate charged per annum by the State Bank of India, in respect of loans for the same purpose, on the maximum outstanding monthly balance as reduced by the interest, if any, actually paid by the employee or any such member of his household. Exception is made for loans for specified medical treatment (amount of such exception is reduced by reimbursement from medical insurance) or where the amount of loans in aggregate is less than Rs. 20,000/-. |
| Free meals | The perqusite value in respect of free food and non-alcoholic beverages provided by the employer, not liable to pay fringe benefit tax, to an employee shall be the expenditure incurred by the employer as reduced by the amount paid or recovered from the employee for such benefit or amenity. However, no perquisite value will be taken if food and non-alcoholic beverages are provided during working hours and certain conditions specified under Rule 3(7)(iii) are satisfied. |
| Value of gift or voucher or token | The perquisite value in respect of any gift, or voucher, or token in lieu of which such gift may be received by the employee or member of his household from the employer, not liable to pay fringe benefit tax, shall be the sum equal to the amount of such gift, voucher or token. However, no perquisite value will be taken if the value of such gift, voucher or token is below Rs. 5000- in the aggregate during the previous year. |
| Credit Card provided by the employer | The perquisite value in respect of expenses incurred by the employee or any of his household members, which are charged to a credit card provided by the employer, not liable to pay fringe benefit tax, which are paid or reimbursed to an employee shall be taken to be such amount paid or reimbursed by such employer. However, no perquisite value will be taken if the expenses are incurred wholly and exclusively for official purposes and certain conditions mentioned in Rule 3(7)(v) are satisfied. |
| Club membership provided by the employer | The perquisite value in respect of amount paid or reimbursed to an employee by an employer, not liable to pay fringe benefit tax, against the expenses incurred in a club by such employee or any of his household members shall be taken to be such amount incurred or reimbursed by the employer as reduced by any amount paid or recovered from the employee on such account.
However, no perquisite value will be taken if the expenditure is incurred wholly and exclusively for business purposes and certain conditions mentioned in Rule 3(7)(vi) are satisfied. |
| Use of any other movable asset | 10% per annum of the actual cost of asset or the amount of rent or charge paid/payable by the employer as reduced by the amount, if any, paid or recovered from the employee. Laptops and computers are exempt. |
| Transfer of any movable asset | Actual cost of asset to the employer less the cost of normal wear and tear and as further reduced by the amount, if any, paid or recovered from the employee. The cost of normal wear and tear is calculated at 10% of cost for each completed year during which asset was put to use by the employer (normal wear and tear is calculated at 50% in the case of computers and electronic items and 20% in the case of motor cars by the reducing balance method). |
4. CERTAIN PERQUISITES AND ALLOWANCES EXEMPT FROM INCOME TAX
Some instances of perquisites exempt from tax are given below:
4.1 Provision of medical facilities, etc. (Proviso to Sec. 17(2))
1) Value of any medical treatment provided to the employee or his family in a hospital maintained by the employer.
2) Value of medical treatment in any hospital maintained by the Government or any local authority or approved by the Government.
3) Value of medical treatment for prescribed diseases or ailments in any hospital approved by the Chief Commissioner of Income-tax. For claiming this benefit the employee needs to attach with his income-tax return a certificate from the hospital specifying the disease or ailment and receipt for the amount paid.
4) Besides, any sum paid by the employer towards medical reimbursement other than as discussed above is exempt up to Rs.15,000/-.
5) Any portion of premiums paid by the employer for health insurance of the employee under schemes approved by the Government or the Insurance Regulatory and Development Authority.
6) Any sum paid by the employer in respect of premium paid by the employee, under schemes approved by the Government or the Insurance Regulatory and Development Authority that qualifies for deduction under section 80D of the Income-tax Act.
7) Expenditure incurred by the employer on medical treatment of the employee or his family member for medical treatment outside India. This includes travel and stay abroad of the employee or the family member plus one attendant who accompanies the patient in connection with the medical treatment. This exemption is subject to the condition that:
a) the expenditure excluded from the perquisite value shall be to the extent permitted by the Reserve Bank of India; and
b) the travel expenditure is excluded only if the gross total income of the employee before including such travel expenditure does not exceed Rs. 2 lakhs.
It is clarified that if any sum is paid by the employer for expenditure actually incurred by the employee for medical treatment in an unapproved hospital and it exceeds Rs. 15,000/- during the year, such sum is ‘salary’ and liable to income-tax in the hands of the employee. Such sum is not liable to Fringe Benefit Tax in the hands of the employer.
However, if any sum is paid by the employer for expenditure actually incurred by the employee for medical treatment in an unapproved hospital and it does not exceed Rs. 15,000/- during the year, such sum does not fall within the meaning of ‘salary’ and is not liable to income tax in the hands of the employee. Since such sum is not taxable in the hands of the employee, it is liable to Fringe Benefit Tax in the hands of the employer.
It is also clarified that if medical expenditure is incurred for treatment of injuries suffered in the performance of duties but the treatment is at a hospital/dispensary not maintained by the employer, such expenditure is liable to Fringe Benefit Tax in the hands of the employer, unless the expenditure is pursuant to a statutory obligation (i.e. any law, rules, etc.).
4.2 Exemption for employees with salary not exceeding Rs. 1 lakh
For the assessment year 2001-02, the value of perquisite is exempt if the salary income for the assessment year 2001 -02, of the employee exclusive of the value of all perquisites not provided as monetary payment does not exceed Rs. 1 lakh.
4.3 Exemption of leave travel concession for travel in India
The value of any leave travel concession or assistance received by an employee for himself and his family for proceeding on leave to any place in India is exempt under clause (5) of section 10 of the Income-tax Act subject to conditions in Rule 2B of the Income-tax Rules.
4.4 Exemption of perquisites allowed outside India by the Government to a citizen of India
Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India are exempt under clause (7) of section 10 of the Income-tax Act.
4.5 Exemption of children’s education allowance and transport allowance subject to limits
Children’s education allowance up to Rs. 100 per month per child for a maximum of two children is exempt. Hostel expenditure allowance of Rs. 300 per month per child for a maximum of two children is exempt.
Transport allowance for the purpose of commuting between residence and place of duty is exempt up to Rs. 800 per month. A higher exemption of Rs. 1600 per month is available for employees who are blind or orthopaedically handicapped with disability of lower extremities.
