Valuation of ‘Perquisites’ under the head ‘income from Salary’

1. Meaning of ‘Perquisites’ :

Perquisite may be defined as any casual emolument or benefit attached to an office or position in addition to salary or wages. It also denotes something that benefits a man by going into his own pocket. Perquisites may be provided in cash or in kind. However, perquisites are taxable under the head “Salaries” only if they are

  1. allowed by an employer to his employee;
  2. allowed during the continuance of employment;
  3. directly dependent upon service;
  4. resulting in the nature of personal advantage to the employee; and
  5. derived by virtue of employer’s authority.

It is not necessary that a recurring and regular receipt alone is a perquisite. Even a casual and non-recurring receipt can be perquisite if the aforesaid conditions are satisfied. The following propositions should also be kept in view:

  • Perquisites are included in salary income only if they are received by an employee from his employer (maybe former, present or prospective). Perquisites, received from a person other than employer, are taxable under the head “Profits and gains of business or profession” or “Income from other sources”.
  • A benefit or advantage would be taxable as perquisites only if it has a legal origin. As unauthorised advantage taken by an employee without his employer’s authority would create a legal obligation to restore such advantage, it would not amount to “perquisite” taxable under the Act. On the other hand, if the benefit has been conferred unilaterally without the aid of agreement between the parties, the employee can be taxed on the perquisites. It is not necessary that the benefit should have been received under an enforceable right.
Perquisites under the head Salary
Perquisites under the head Salary

2. Definition of ‘Perquisites’ as per Section 17(2) :

Under the Act, the term “perquisites” is defined by section 17(2) as including the following items:

  1. the value of rent-free accommodation provided to the assessee by his employer [sec. 17(2)(i)];
  2. the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer [sec. 17(2)(ii)];
  3. the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:
    1. by a company to an employee who is a director thereof;
    2. by a company to an employee, being a person who has substantial interest in the company;
    3. by any employer (including a company) to an employee to whom provisions of (i) and (ii) above do not apply and whose income under the head “Salaries” exclusive of the value of all benefits or amenities not provided for by way of monetary benefits, exceeds Rs. 50,000 [sec. 17(2)(iii)];
  4. any sum paid by the employer in respect of any obligation which but for such payment would have been payable by the assessee [sec. 17(2)(iv)];
  5. any sum payable by the employer, whether directly or through a fund other than a recognised provident fund or approved superannuation fund or a deposit-linked insurance fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity [sec. 17(2)(v)];
  6. the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee [sec. 17(2)(vi)];
  7. the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds Rs. 1,50,000 [sec. 17(2)(vii)]; and
  8. the value of any other fringe benefit or amenity as may be prescribed [sec. 17(2)(viii)].

3. Taxability of Perquisites :

For Income-tax purposes, perquisites may be divided into five categories:

  1. Perquisites which are taxable in the hands of all categories of employees.
  2. Perquisites which are taxable only when the employee belongs to a specified group i.e. he is a specified employee.
  3. Specified security or sweat equity shares allotted or transferred by the employer to the assessee.
  4. Contribution by the employer to the approved superannuation fund in respect of assessee to the extent it exceeds ₹. 1,50,000.
  5. Tax-free perquisites.

4. Perquisites which are Taxable in the hands of all Categories of Employees

The following perquisites are taxable in the hands of all employees:

  1. Rent free accommodation provided by the employer to the employee. Such accommodation may be furnished or unfurnished.
  2. Any concession in the matter of rent in respect of the accommodation provided or granted by the employer to the employee.
  3. Any sum paid by the employer in discharging the monetary obligation of the employee which otherwise would have been payable by the employee e.g. the school fees of the children of the employee paid by the employer or the Income-tax of the employee paid by the employer.
  4. Any sum payable by the employer whether directly or through a fund (other than recognized provident fund (RPF), Approved Superannuation Fund or Deposit Linked Insurance Fund) to effect an assurance on the life of the assessee or to effect a contract for an annuity.
  5. The value of any other fringe benefit or amenity as may be prescribed.

5. Perquisites which are Taxable only in the case of Specified Employees

All monetary obligations of the employee discharged by the employer are perquisites which are taxable in the hands of all employees. But sometimes the employer, instead of making the payment in respect of such monetary obligations or reimbursing such amount to the employee, provides the perquisite in the form of a facility to the employee. Such facility will be a perquisite only for specified employees mentioned in section 17(2)(iii).

For example :

  • if a watchman/sweeper is engaged by the employee and his wages are reimbursed/paid by the employer, it is a perquisite for all employees because it is the duty of the employee to pay the salary of his watchman/sweeper.
  • On the other hand, if the watchman/sweeper is engaged by the employer and facility of his services is provided to the employee, it will be a perquisite only for specified employees.
  • Similarly, if a motor car is provided by the employer to the employee for his personal use it shall be taxable perquisite in case of a specified employee only. Whereas if the car belongs to employee but expenses relating to personal use of such car are paid or reimbursed by the employer, it shall be a taxable perquisites in the hands of all employees, whether specified or not.
  • Any benefit/amenity in the form of a facility (other than rent free accommodation, concession in the matter of rent or fringe benefits or amenities as may be prescribed) provided by the employer, which is not tax-free, shall be taxable only in the hands of specified employees. Some of these are:
    1. services of a sweeper, gardener, watchman or personal attendant,
    2. free or concessional use of gas, electric energy and water for household consumption,
    3. free or concessional educational facilities,
    4. use of motor car,
    5. personal or private journey provided free of cost or at concessional rate to an employee or member of his household,
    6. the value of any other benefit or amenity, service, right or privilege provided by the employer.
  • If the above perquisites are provided in ‘Money’ (monetary terms) whether by way of reimbursement of expenses incurred by the employee for such facilities or by way of payment on behalf of employee, these perquisite shall be taxable in case of all employees e.g. if the school fees of the children of the employee is reimbursed to him or paid on his behalf to the school, such amount shall be perquisite in case of all employees. On the other hand if the children of the employee are studying in a school maintained by the employer, the education facility provided is not in money but in kind and it shall be perquisite only for specified employees.
  • Similarly, if the personal gas bills of the employee are in the name of employee and the employer reimburses the amount of such gas bills to him or pays on his behalf to the gas agency, it is in monetary terms and taxable in case of all employees; on the other hand, if such bills are in the name of employer, it will be perquisite in case of specified employee only.

Specified Employee [Section 17(2)(iii)]:

An employee shall be a specified employee, if he falls under any of the following three categories:

  1. he is a Director of a company; or

  2. he, i.e. the employee, has a substantial interest in the company. As per section 2(32), person who has a substantial interest in the company, in relation to a company means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits, carrying not less than 20% of the voting power; Here the word beneficial owner is significant. It means that even if a person is not a registered holder of shares in a company but has beneficial interest in such shares, he shall be covered by this definition and conversely, even if a person is a registered holders of shares but has no beneficial interest in such shares, he shall not be covered by this definition. Thus, the beneficial ownership is the criterion under this definition.

  3. his income under the head ‘Salaries’ (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds ₹. 50,000. Income, for this purpose, shall include all taxable monetary payments like basic salary, dearness allowance, bonus, commission, taxable allowances/perquisites but shall not include the value of any non-monetary benefits/perquisites. The following are to be deducted from salary for this purpose:

    1. entertainment allowance (to the extent deductible under section 16(ii);

    2. tax on employment [Section 16(iii)].