Perquisites [(Section 17(2)]- Income under the head Salaries

Perquisites [(Section 17(2)] for calculating Salary Income

1.  Perquisites [(Section 17(2)]-Definition

Section 17(2) of the Income-tax Act, 1961 gives an inclusive definition of ‘perquisite’. As per this section ‘perquisite’ includes:

(i)      the value of rent-free accommodation provided to the assessee by his employer;

(ii)     the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;

(iii)    the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:

(a)      by a company to an employee, who is a director thereof;

(b)     by a company to an employee being a person who has a substantial interest in the company;

(c)     by any employer (including a company) to an employee to whom the provisions of clauses (a) and (b) do not apply and whose 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 Rs. 50,000.

These employees are also known as “specified employees”

(iv)    any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee;

(v)     any sum payable by the employer whether directly or through a fund, other than a recognised provident fund or an 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;

(vi)    The value of any specified security or sweat equity shares allowed or transferred directly or indirectly by the employer or former employer free of cost or at concessional rate to the assessee;

(vii)   The amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer—

(a)      in a recognised provident fund;

(b)     in the scheme referred to in section 80CCD(1); and

(c)     in an approved superannuation fund,

to the extent it exceeds Rs. 7,50,000 in a previous year;

Thus, a combined upper limit of exemption of Rs. 7,50,000 in respect of employer’s contribution in a year to NPS, superannuation fund and recognised provident fund has been provided and any excess contribution shall be taxable as perquisite.

(viia) The annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme referred to in section 1 7(2)(vii) above to the extent the above contribution by the employer was included as perquisite in the hands of the employee.

Thus, any annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme may be treated as perquisite to the extent it relates to the employer’s contribution which is included in total income.

(viii)   The value of any other Fringe Benefit or Amenity as may be prescribed.

2.  Perquisites which are Taxable in the hands of all categories of employees

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

(i)      Rent free accommodation provided by the employer to the employee. Such accommodation may be furnished or unfurnished.

(ii)     Any concession in the matter of rent in respect of the accommodation provided or granted by the employer to the employee.

(iii)    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.

(iv)    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.

(v)     The value of specific security or sweat equity share allotted or transferred by the employer or former employer free of cost or at concessional rate to the assessee.

(vi)    The amount or the aggregate of amounts of any contribution made to the account of the assessee by the employer—

(a)      in a recognised provident fund;

(b)     in the scheme referred to in section 80CCD(1) ; and

(c)     in an approved superannuation fund,

to the extent it exceeds Rs. 7,50,000 in a previous year;

(vii)    The annual accretion by way of interest, dividend or any other amount of similar nature during the previous year to the balance at the credit of the fund or scheme referred to in section 1 7(2)(vii) above to the extent the above contribution by the employer was included as perquisite in the hands of the employee.

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(viii) The value of any other fringe benefit or amenity as may be prescribed.

Certain clarifications on definition of ‘perquisite’

It may be observed from the above definition that:

(a) The definition of ‘perquisite’ is an inclusive definition.

(b) In the case of ‘perquisites’ mentioned in clause (i), (ii) and (iii) above, the Act has used the word  ‘provided’, in clause (iv) the word used is ‘paid’ whereas in clause (v) the word used is ‘payable’. In clause  (vi) the words used are “value of any specified security or sweat equity share allotted or transferred by the  employer. Clause (vii) relates to contribution by the employer to approved superannuation fund in excess  of ₹1,50,000 and in clause (viii) the words used are the value of any other fringe benefit or amenity as  may be prescribed.

The word ‘provided’ is used only with reference to a facility provided by the employer to the employee. In the  first two clauses, the facilities provided are specifically mentioned, which are: (a) rent free accommodation and  (b) accommodation provided at concessional rates. These facilities are taxable in the hands of all employees.

Whereas, as per clause (iii) the value of any other benefit or amenity granted or provided whether free of cost  or at concessional rate will be taxable only in hands of three kinds of employees specified in that clause (i.e.  specified employees).

The above three perquisites will be taxable in the previous year in which these were ‘provided’ by the  employer to the employee. Once such facility is provided by the employer to the employee, it will be taxable and  it will be immaterial whether the employee actually uses this facility or not unless he has foregone or waived his  rights thereto. [CIT v Bawa Singh Chauhan (1984) 150 ITR 8 (Del)].

In the case of perquisites covered under clause (iv), the same shall be taxable in the previous year in which it  is actually paid by the employer. The payment may be in the form of reimbursement to the employee or may be  paid on his behalf for discharging the monetary obligation of the employee. These perquisites shall be taxable in  case of all employees.

Perquisites covered under clause (v) shall be taxable in the previous year, even though these were payable by  the employer at the end of the year. These perquisites shall be taxable even on due basis provided the employer  has undertaken the obligation to discharge such liability e.g. where the employee had undertaken to pay Life  Insurance Premium of the employee, any premium which was due in March, 2019 but was paid by the employer  in April, 2019, shall be treated as perquisite in the hands of employee of the previous year 2018-19, although the  same was paid in the previous year 2019-20. This will not be a perquisite for previous year 2019-20.

Perquisite mentioned in clause (vi) relates to specified security or sweat equity shares allotted or transferred  by the employer to the assessee. The value of such specified security or sweat equity shares allotted shall be  added to the gross salary of the employee.

Perquisite mentioned in clause (vii) relates to contribution by the employer to the approved superannuation  fund in excess of ₹1,50,000 per year per employee.

Perquisites taxable under clause (viii) are those fringe benefits or amenities which are prescribed. The value  of such prescribed perquisites shall be taxable in case of all employees (specified or non-specified).

In case of a non-specified employee perquisites mentioned in clauses (i), (ii), (iv), (v) and (viii) above only will  be taxable while if he is a specified employee, i.e. employee belongs to specified group besides (i), (ii), (iv), (v)  and (viii) perquisites covered under clause (iii) will also be taxable.

Clauses (vi) and (vii) are applicable only when the conditions mentioned therein are satisfied.

Taxability of Perquisites :

For income tax purpose, 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 Rs. 1,50,000.
  5. Tax-Free Perquisites

3.  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 1 7(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:

(i)      services of a sweeper, gardener, watchman or personal attendant,

(ii)     free or concessional use of gas, electric energy and water for household consumption,

(iii)    free or concessional educational facilities,

(iv)    use of motor car,

(v)     personal or private journey provided free of cost or at concessional rate to an employee or member of his household,

(vi)    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 perquisites 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.

Besides the above two kinds of perquisites the following shall also be taxable in the case of an assessee.

1.       The value of specific security or sweat equity share allotted or transferred by the employer or former employer free of cost or at concessional rate to the assessee. AND

2.       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.

Who is a Specified Employee [Section 17(2)(iii] —

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

(i)      he is a Director of a company; or

(ii)     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 words “beneficial-owner” are 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 holder 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.

(iii)    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 Rs. 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:

(a)      standard deduction to the maximum extent of Rs. 50,000 [Section 16(ia)]

(b)     entertainment allowance [to the extent deductible under section 16(ii)];

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

Example :

R is employed on part time basis with two companies i.e. X Company Ltd. and Y Company  Ltd. The particulars of his income for the previous year 2022-23 are as under: 

Particulars Company X Company Y
 
Basic Salary 62,000 33,000 
Education allowance for one child 1,800 
Reimbursement of electricity bills 2,000
Medical allowance 2,400
Employer’s contribution to recognised provident fund 1,800 1,500
Value of rent free accommodation taken by the employer on rent 3,000

R is neither a Director nor a substantial shareholder of either X Ltd. or Y Ltd. Is he a specified employee? 

Compute his net monetary income 

Solution:

Particulars
Basic salary   95,000
Education allowance 1,800  
Less: Exempt 1,200 600
Reimbursement of electricity bills   2,000
Medical allowance   2,400
    1,00,000
Less: Standard deduction   50,000
Net monetary income   50,000

As the monetary income of X does not exceed ₹50,000, he is not a specified employee. For this purpose,  value of rent free accommodation has not been included in the gross salary for determining whether he is a  specified employee or not as it is a non-monetary perquisite although it shall be fully taxable while computing his  gross salary. 

Important note.—Any allowance or perquisites paid or allowed as such outside India by the Government of  India to a citizen of India, for rendering service outside India, is exempt from tax. [Section 10(7)]

4.  Tax-free Perquisites (for all employees)

(1)     Medical facility: The value of any medical treatment provided to an employee or any member of his family in a hospital, dispensary or a nursing home maintained by the employer shall be a tax-free perquisite.

(2)     Recreational Facilities: Any recreational facility provided to a group of employees (not being restricted to a select few employees) by the employer is not taxable.

(3)     Training of employees: Any expenditure incurred by the employer, for providing training to the employees or by way of payment of fees of refresher courses attended by the employees.

(4)     Use of health club, sports and similar facilities provided uniformly to all employees by the employer.

(5)     Expenses on telephone, including a mobile phone, actually incurred on behalf of the employee by the employer.

(6)     Contribution made by the employer in a recognised provident fund, in the scheme referred to in section 80CCD(1); and in an approved superannuation fund upto Rs. 7,50,000.

(7)     The premium paid by the employer on an accident policy taken out by it in respect of the employee would not be a perquisite.

(8)     Amount given by employer of assessee to assessee’s child as scholarship is exempt under section 10(16).

(9)     Food and beverages provided to employees: The following shall be a tax free perquisite in the hands of the employees—

(i)      free food and non-alcoholic beverages provided by the employer to his employees during working hours:

(a)      at office or business premises or

(b)     through paid vouchers which are not transferable and usable only at eating joints. (Not allowed if opted for section 11SBAC)

Provided the value of such meal is upto Rs. 50 per meal.

(ii)     Any tea or snacks provided during working hours.

(iii)    Free food and non-alcoholic beverages during working hours provided in a remote area or on offshore installation.

(10)   Loans to employees: In the following cases the value of benefit to the assessee resulting from the provision of interest free or concessional loan shall be nil:

(a)     where the amount of loans are petty, not exceeding in the aggregate Rs. 20,000

(b)     loans made available for medical treatment in respect of diseases specified in rule 3A of the Income-tax Rules. However, the exemption so provided shall not apply to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

(11)   Perquisites provided outside India: Perquisites provided by the Government to its employees, who are citizens of India for rendering services outside India, are not taxable. [Section 10(7)]

(12)   Rent free House/Conveyance facility: Rent free official residence and conveyance facilities provided to a Judge of the Supreme Court of High Court is not a taxable perquisite.

(13)   Residence to officials of Parliament, etc.: Rent free furnished residence (including maintenance thereof) provided to an officer of the Parliament, a Union Minister or Leader of Opposition in Parliament, is not a taxable perquisite.

(14)   Accommodation in a remote area: The accommodation provided by the employer shall be a tax free perquisite if the accommodation is provided to an employee working at mining site or an onshore oil exploration site or a project execution site, or a dam site or a power generation site or an offshore site which—

(a)      being 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

(b)     is located in a remote area.

(15)   Educational facility for children of the employee: Where the educational institution itself is maintained and owned by the employer and free educational facilities arc provided to the children of the employee or where such free educational facilities are provided in any institution by reason of his being in employment of that employer, there shall be no perquisite value if the cost of such education or the value of such benefit per child does not exceed Rs. 1,000 p.m.

(16)   Use by the employee or any member of his household of laptops and computers belonging to the employer or hired by him.

(17)   Leave Travel Concession

(18)   Tax paid by the employer on non-monetary perquisites: Tax paid by the employer on non- monetary perquisites of the employee shall be exempt in the hands of the employee. [Section 10(10CC)]

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