Perquisites are an important concept under the Income Tax Act, 1961 in the context of taxation of salary income. Perquisites are essentially benefits or amenities provided by an employer to an employee in addition to his regular salary or wages. They represent a non-cash component of the employee's remuneration and are taxable in the hands of the employee as part of his salary income under Section 17(2) of the Income Tax Act, 1961.
The concept of perquisites is important because employees today receive a significant portion of their remuneration in the form of non-cash benefits — company-provided accommodation, car, medical facilities, club memberships, etc. — and the tax treatment of these benefits has important implications for both employees and employers.
Definition of Perquisites — Section 17(2)
Under Section 17(2) of the Income Tax Act, 1961, "perquisite" includes:
1. Value of rent-free accommodation provided by the employer to the employee.
2. Value of concession in rent — Where accommodation is provided at a concessional rent, the difference between the actual rent charged and the fair market rent of such accommodation.
3. Value of benefit or amenity — Any benefit or amenity granted free of cost or at a concessional rate to a specified employee (an employee whose income under the head "Salaries" exceeds ₹50,000).
4. Value of any obligation of the employee met by the employer — For example, if the employer pays the employee's personal electricity bill or personal loan installment.
5. Value of any specified security or sweat equity shares allotted or transferred directly or indirectly by the employer to the employee.
6. Amount of contribution to approved superannuation fund by the employer to the extent it exceeds ₹1,50,000 per year.
7. Value of any other fringe benefit or amenity as may be prescribed.
Types of Perquisites
Perquisites under the Income Tax Act are classified into three categories:
A. Taxable Perquisites (for All Employees)
The following perquisites are taxable in the hands of all employees (whether government or private):
1. Rent-Free Accommodation The value of rent-free accommodation provided by the employer is a taxable perquisite. The valuation depends on:
- Whether the employer is the Central/State Government (valued at license fee determined by the government)
- Whether the employer is any other employer (valued at 15% of salary if the city has population exceeding 25 lakhs; 10% for cities with population between 10-25 lakhs; 7.5% for other cities)
2. Concessional Rent Accommodation If accommodation is provided at rent below the market value, the difference is taxable.
3. Obligation of Employee Discharged by Employer If the employer pays an employee's personal expenses (gas bill, electricity bill, personal loan, etc.), the amount so paid is a taxable perquisite.
4. Value of Specified Securities and Sweat Equity Shares When an employer gives shares or securities to an employee at a concessional price or free of cost, the difference between the market price and the price paid is a taxable perquisite.
5. Employer's Contribution to Superannuation Fund Employer's contribution to an approved superannuation fund exceeding ₹1,50,000 per year is a taxable perquisite.
B. Perquisites Taxable Only for Specified Employees
The following perquisites are taxable only for specified employees — i.e., employees who are directors of the company or employees whose salary (excluding non-monetary perquisites) exceeds ₹50,000 per year:
1. Value of motor car provided for personal use If an employer provides a motor car for both personal and official use, the value of personal use is a taxable perquisite for specified employees.
2. Value of domestic servants The cost of domestic servants (cook, gardener, sweeper, etc.) provided free of cost or at concessional rates.
3. Value of gas, electricity, water The value of gas, electricity, or water supplied for the employee's household use (other than for office use).
4. Value of education Value of free or concessional education for the employee's children in a school maintained by the employer.
C. Exempt Perquisites (Not Taxable)
The following perquisites are specifically exempt from tax:
1. Medical facilities — Medical treatment provided in hospitals maintained by the employer; medical reimbursement up to ₹15,000 per year (note: this exemption has been largely replaced by the standard deduction of ₹50,000 introduced by Finance Act, 2018).
2. Recreational facilities — Facilities provided for training, sport, or recreation of employees.
3. Telephone — Use of telephone (including mobile phone) provided by the employer for official purposes.
4. Laptop and computer — Use of laptop or computer provided by the employer.
5. Uniform — Uniform provided for use during the performance of duties.
6. Food and beverages — Free food and beverages provided during working hours in the office or through paid vouchers worth up to ₹50 per meal.
Valuation of Perquisites — Rule 3
The Income Tax Rules, 1962 (Rule 3) provide detailed rules for valuing perquisites. The valuation rules are particularly important for:
Motor car provided by employer:
- If car is used exclusively for official purposes — Not taxable
- If car is used exclusively for personal purposes — Actual cost of maintenance + 10% of cost of car (or lease amount) is taxable
- If car is used for both official and personal purposes:
- Car up to 1600 cc engine — ₹1,800 per month + ₹900 per month for driver
- Car above 1600 cc engine — ₹2,400 per month + ₹900 per month for driver
Important Case Laws
1. CIT v. L.W. Russel (1964) The Supreme Court held that a perquisite must have a monetary value and must be something that benefits the employee personally. A benefit that is primarily for the convenience of the employer is not a perquisite.
2. Gestetner Duplicators v. CIT (1979) The Supreme Court held that the value of a perquisite must be determined on the basis of what it actually costs the employer to provide it or what the employee would have to pay to obtain it from the open market.
3. CIT v. Voltas Ltd. (1971) The Bombay High Court held that free accommodation provided to employees is a perquisite and its value must be included in the employee's taxable salary.
Conclusion
Perquisites form an increasingly important component of employee remuneration in modern India, particularly in the corporate sector. The Income Tax Act, 1961 provides a comprehensive framework for the identification, valuation, and taxation of perquisites, ensuring that non-cash benefits received by employees are properly brought to tax. The distinction between taxable and exempt perquisites, and between perquisites taxable for all employees and those taxable only for specified employees, reflects the law's attempt to balance the taxation of employee benefits with the practical needs of employment relationships. A clear understanding of perquisites is essential for both employers (for proper tax deduction at source) and employees (for correct computation of taxable income).
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