Valuation of Various Perquisites – for Calculating Salary Income

(A) Valuation of Perquisites: Sweeper, Gardener, Watchman, or Personal Attendant [Rule 3(3)]

Under Rule 3(3) of the Income Tax Rules, 1962, the provision of domestic servants (sweeper, gardener, watchman, or personal attendant) by an employer is considered a taxable perquisite for specified employees. Below are the key aspects of valuation and taxability:

1. Applicability & Taxability

• Taxable for:Only specified employees (directors, employees with >20% voting power, or those drawing salary >₹50,000/month) .
• Exempt for:Non-specified employees (not taxable).

2. Valuation Method

The taxable value is calculated as:

Value of Perquisite = Actual Cost to Employer – Amount Recovered from Employee

• Actual Cost to Employerincludes:
  • Salary paid to the servant (basic + allowances + bonus).
  • Excludes:Employer’s PF contributions or other non-salary payments .
• Reduction:Any amount paid by the employee for these services is deducted.

Example:

• Employer pays a sweeper ₹4,800/year and a personal attendant ₹14,400/year + ₹4,000 bonus.
• Employee pays ₹2,000/year for these services.
• Taxable value = (₹4,800 + ₹14,400 + ₹4,000) – ₹2,000 = ₹21,200.

3. Key Points

1. Covered Services:Only sweeper, gardener, watchman, or personal attendant are explicitly covered. Other domestic staff (e.g., cook, babysitter) may fall under residual perquisites and be taxable for all employees .
2. Personal Attendant vs. Personal Assistant:
   • Personal attendant:Handles domestic chores (e.g., supervising staff, escorting children).
   • Personal assistant:Assists in official work (not taxable under this rule) .
3. Full Cost Taxable:Even if the attendant works part-time, the full salary is taxable .
4. Reimbursement Scenario:If the employee hires the servant but claims reimbursement, it remains taxable for specified employees .

4. Comparison with Other Domestic Servants

TYPE OF SERVANT	TAXABILITY	VALUATION BASIS
Sweeper/Gardener/Watchman/Personal Attendant	Taxable for specified employees	Actual employer cost – employee contribution
Cook/Dhobi/Babysitter	Taxable for all employees (residual perquisite)	Fair market value or actual cost

(B)  Valuation of Perquisites: Supply of Gas, Electric Energy, or Water for Household Consumption [Rule 3(4)]

Under Rule 3(4) of the Income Tax Rules, 1962, the benefit provided by an employer to an employee in the form of gas, electricity, or water for household consumption is considered a taxable perquisite. Below are the key aspects of valuation and taxability:

1. Applicability & Taxability

• Taxable for:All employees (unless exempt under specific conditions).
• Exempt if:The supply is incidental to official duties (e.g., utilities provided at a remote work site).

2. Valuation Method

The taxable value is calculated based on the source of supply:

SUPPLY SOURCE	VALUATION BASIS
Employer pays an external agency (e.g., municipal corporation, private supplier)	Actual amount paid by the employer to the agency .
Employer uses own resources (e.g., captive power plant, borewell)	Manufacturing cost per unit incurred by the employer .

Example:

• Employer pays ₹12,000/year to an electricity board for an employee’s household consumption.
• Taxable value = ₹12,000(full amount paid by the employer).

(C)  Valuation of Free/Concessional Educational Facilities [Rule 3(5)]

Under Rule 3(5) of the Income Tax Rules, 1962, the value of perquisites arising from free or concessional educational facilities provided to an employee’s household members is determined as follows:

1. Applicability & Scope

• Covered Beneficiaries:
  • Employee’s children(including stepchildren and adopted children) .
  • Other household members(e.g., spouse, dependent parents) .
• Exclusions: Grandchildren or non-dependent relatives are not

2. Valuation Method

A. Institution Owned/Maintained by Employer

CONDITION	TAXABLE VALUE
Cost of education ≤ ₹1,000/month/child	Nil .
Cost of education > ₹1,000/month/child	Cost in a similar local institution – ₹1,000/month/child – Amount recovered from employee .

Example:

• Employer’s school cost: ₹15,000/year/child (₹1,250/month).
• Employee pays ₹3,000/year.
• Taxable value: (₹15,000 – ₹12,000 [₹1,000 × 12] – ₹3,000) = ₹0.

B. Other Institutions (Not Employer-Owned)

• Taxable Value= Actual cost incurred by employer – Amount recovered from employee.
• No ₹1,000/month exemption(applies only to employer-owned institutions) .

Example:

• Employer pays ₹20,000/year to a private school; employee contributes ₹5,000.
• Taxable value: ₹20,000 – ₹5,000 = ₹15,000.

Summary Table

SCENARIO	TAXABLE VALUE	EXEMPTION
Employer-owned school (≤₹1,000/month)	Nil	Full exemption
Employer-owned school (>₹1,000/month)	Cost in similar school – ₹1,000 – Employee payment	Partial exemption
Non-employer school	Actual cost – Employee payment	No ₹1,000 exemption

(D) Valuation of Free/Concessional Journeys for Transport Employees [Rule 3(6)]

Under Rule 3(6) of the Income Tax Rules, 1962, the provision of free or concessional travel facilities to employees (and their family members) in transport businesses (e.g., airlines, railways) is treated as a taxable perquisite. Below are the key provisions and valuation methods:

1. Applicability & Scope

• Covered Employees:
  • Employees of transport or travel businesses(e.g., airlines, railways, bus operators).
  • Excluded: Employees of non-transport businesses (e.g., IT companies providing travel benefits).
• Covered Benefits:
  • Free or discounted tickets for personal/private journeys(e.g., vacations, family trips).
  • Exempt: Journeys for official duties(e.g., work-related travel).

2. Valuation Method

The taxable value is calculated as:

Taxable Value = Market Value of the Journey – Amount Paid by Employee

• Market Value: The price charged to the general public for the same journey (e.g., full fare for a flight or train ticket).
• Employee Contribution: Any amount paid by the employee reduces the taxable value.

Example:

• An airline employee receives a free flight ticket (market value: ₹10,000) for a personal trip.
• Taxable value = ₹10,000 – ₹0 = ₹10,000.

3. Key Exceptions

1. Uniform Policy: If the benefit is uniformly available to all employees, it may be exempt (e.g., staff travel privileges in airlines).
2. Official Journeys: No perquisite arises if the travel is for work (e.g., crew members on duty).
3. Family Members: Benefits extended to spouse and childrenare taxable unless exempt under specific policies.

4. Comparison with LTC (Leave Travel Concession)

ASPECT	RULE 3(6) (TRANSPORT EMPLOYEES)	LTC (GENERAL EMPLOYEES)
Taxability	Taxable unless exempt (e.g., uniform policy)	Exempt up to specified limits
Valuation Basis	Market value of journey	Actual fare (shortest route)
Eligible Journeys	Personal/private trips	Home town or any place in India

(E)  Valuation of any Specified Security or Sweat Equity Shares

The valuation of specified securities (including sweat equity shares) is governed by Section 17(2)(vi) of the Income Tax Act, 1961, and Rule 3(8) & (9) of the Income Tax Rules, 1962. The taxable value is determined based on the fair market value (FMV) at the time of allotment or exercise of the option, minus any amount paid by the employee.

1. Definition of Specified Security & Sweat Equity Shares

• Specified Securityincludes:
  • Shares, stocks, bonds, debentures, derivatives, or other marketable securities.
  • Units issued by collective investment schemes.
  • Government securities.
  • Other instruments declared as securities by the Central Government .
• Sweat Equity Sharesare equity shares issued to employees/directors:
  • At a discountor for non-cash consideration (e.g., intellectual property, know-how, or value additions) .

2. When is the Perquisite Taxable?

• Taxable in the year of allotment/transfer(if issued after April 1, 2009).
• Applies if shares are issued:
  • Free of costor
  • At a concessional rate.

3. Calculation of Taxable Value

The taxable perquisite is computed as:

Taxable Value = FMV on the date of exercise – Amount paid by the employee

A.  Fair Market Value (FMV) Determination

(i) Listed Shares (Traded on a Recognized Stock Exchange)

• Single Exchange Listing:
  • FMV = Average of opening & closing priceon the exercise date.
• Multiple Exchanges:
  • FMV = Average of opening & closing price on the exchange with the highest trading volume.
• No Trading on Exercise Date:
  • FMV = Closing price on the nearest preceding trading date.

(ii) Unlisted Shares

• FMV = Value determined by a merchant banker(not older than 180 days before exercise).

4. Tax Treatment at Different Stages

STAGE	TAXATION	APPLICABLE VALUE
At Allotment	Taxed as “Salary Income” under Section 17(2)(vi)	FMV (exercise date) – Employee’s payment
At Sale	Taxed as Capital Gains (STCG/LTCG)	FMV at allotment = Cost of Acquisition

Example:

• An employee exercises an option for 100 sweat equity sharesat ₹50/share when FMV is ₹200/share.
• Taxable Perquisite= (₹200 – ₹50) × 100 = ₹15,000 (added to salary income).
• If sold later at ₹300/share, Capital Gain= (₹300 – ₹200) × 100 = ₹10,000 (taxed as LTCG/STCG).

(F)  Taxation of Employer Contributions to RPF, NPS & Superannuation Fund [Section 17(2)(vii)]

Under Section 17(2)(vii) of the Income Tax Act, 1961, employer contributions to Recognized Provident Fund (RPF), National Pension System (NPS), and Approved Superannuation Fund are treated as taxable perquisites if they exceed specified limits.

1. Taxability Rules for Employer Contributions

FUND TYPE	TAX TREATMENT	EXEMPTION LIMIT	TAXABLE PERQUISITE VALUE
Recognized Provident Fund (RPF)	Exempt up to 12% of salary	12% of (Basic + DA)	Employer contribution > 12% of salary
National Pension System (NPS) [Section 80CCD(1)]	Exempt up to 10% of salary (Basic + DA)	10% of salary	Employer contribution > 10% of salary
Approved Superannuation Fund	Exempt up to ₹7.5 lakh/year (combined employer + employee)	₹7.5 lakh	Employer contribution > ₹7.5 lakh

Notes:

• Salary for RPF/NPS calculation= Basic + DA (if part of retirement benefits) + Commission (if applicable).
• Superannuation Fund limit (₹7.5 lakh)includes:
  • Employer contributions +
  • Any accretion (interest/dividends) +
  • Employee’s voluntary contributions.

2. Calculation of Taxable Perquisite

A.  Recognized Provident Fund (RPF)

• Exempt:Employer contribution ≤ 12% of salary.
• Taxable:Excess contribution is added to salary income.

Example:

• Basic + DA = ₹10,00,000
• Employer RPF contribution = ₹1,50,000 (15%)
• Exempt portion = 12% of ₹10,00,000 = ₹1,20,000
• Taxable perquisite = ₹1,50,000 – ₹1,20,000 = ₹30,000

B.  National Pension System (NPS) [Section 80CCD(1)]

• Exempt:Employer contribution ≤ 10% of salary.
• Taxable:Excess contribution is added to salary income.

Example:

• Basic + DA = ₹8,00,000
• Employer NPS contribution = ₹1,00,000 (12.5%)
• Exempt portion = 10% of ₹8,00,000 = ₹80,000
• Taxable perquisite = ₹1,00,000 – ₹80,000 = ₹20,000

C.   Approved Superannuation Fund

• Exempt:Total contributions (employer + employee) ≤ ₹7.5 lakh/year.
• Taxable:Excess contribution is added to salary income.

Example:

• Employer contribution = ₹6,00,000
• Employee voluntary contribution = ₹2,00,000
• Total = ₹8,00,000
• Exempt limit = ₹7.5 lakh
• Taxable perquisite = ₹8,00,000 – ₹7,50,000 = ₹50,000

3. Key Exceptions & Additional Deductions

1. NPS Additional Deduction [Section 80CCD(2)]
   • Employer contribution up to 10% of salary (14% for govt. employees)is deductible (over ₹7.5 lakh limit).
   • This is separate from ₹1.5 lakh limit under Section 80C.
2. Tax on Superannuation Fund Withdrawal
   • Employer contribution + interestis taxable if withdrawn before 5 years of continuous service.
   • Tax-freeif withdrawn after 5 years (unless exceeding ₹7.5 lakh limit).

4. Reporting in ITR & Form 16

• Employer’s Responsibility:
  • Report taxable perquisites in Form 16 (Part B, Perquisites section).
• Employee’s Responsibility:
  • Disclose taxable amounts in ITR-1/ITR-2 under “Income from Salaries”.

5. Comparison of Tax Treatment

FUND TYPE	EXEMPTION LIMIT	TAXABLE IF…	ADDITIONAL DEDUCTION (IF ANY)
RPF	12% of salary	>12% of salary	No (covered under Section 17(2)(vii))
NPS [80CCD(1)]	10% of salary	>10% of salary	Extra ₹50,000 under 80CCD(1B) (employee’s voluntary contribution)
Superannuation Fund	₹7.5 lakh/year	>₹7.5 lakh	No (but withdrawals may be tax-free after 5 years)

(G) Treatment of Medical Facilities [Proviso to Section 17(2)]

Medical facilities provided by employers to employees or their families are governed by Section 17(2) of the Income Tax Act, 1961, and its provisos. The taxability of these benefits depends on the type of hospital, nature of treatment, and approval status. Below is a detailed breakdown:

1. Medical Treatment in India

(A) Tax-Exempt Medical Facilities

The following medical expenses are not taxable as perquisites:

1. Government/Employer-Owned Hospitals

• Treatment in hospitals owned/maintained by:
  • Central/State Government.
  • Local authorities (e.g., municipal hospitals).
  • The employer itself.

2. Approved Private Hospitals

• Hospitals approved by the Chief Commissionerfor treating specified diseases (e.g., cancer, TB, heart disease) under Rule 3A.
• The hospital must meet stringent infrastructure and staffing requirements (e.g., operation theaters, round-the-clock doctors).

3. Health Insurance Premiums

• Premiums paid/reimbursed by the employer for IRDA-approved policies are exempt.

4. COVID-19 Treatment

• Expenses incurred by the employer for COVID-19 treatment are fully exempt.

(B) Taxable Medical Facilities

• Reimbursement for treatment in non-approved private hospitalsis taxable unless:
  • The hospital is approved under Rule 3A.
  • The treatment is for a specified disease(e.g., cancer, AIDS).
• Medical allowance(fixed cash allowance) is always taxable, even if used for treatment.

2. Medical Treatment Outside India

Expenses for overseas treatment are exempt only if:

1. Approved by RBI: Costs of treatment, travel, and stay (for patient + 1 attendant) are exempt up to RBI limits.
2. Income Limit: The employee’s gross total income(before including travel expenses) must not exceed ₹2 lakh.

3. Key Conditions for Exemption

• For approved hospitals: The employee must submit a hospital certificateand receipts with their ITR .
• Family Definition: Includes spouse, children, and dependent parents/siblings .

4. Practical Implications

SCENARIO	TAXABILITY	DOCUMENTATION REQUIRED
Treatment in govt. hospital	Fully exempt	Hospital bills
Treatment in approved private hospital (Rule 3A)	Exempt	Hospital certificate + bills
Reimbursement for non-approved hospital	Taxable	Bills (no exemption)
Overseas treatment (RBI-approved)	Exempt up to limits	RBI approval + income proof

Note: Employers must report taxable reimbursements in Form 16, while employees must disclose them in ITR.

(H) Treatment of Leave Travel Concession/Assistance (LTC/LTA) [Section 10(5)]

Leave Travel Concession (LTC) or Leave Travel Allowance (LTA) is a tax-exempt benefit provided by employers to employees for domestic travel during leave periods. Governed by Section 10(5) of the Income Tax Act, 1961, and Rule 2B of the Income Tax Rules, it allows employees to claim exemptions on travel expenses under specific conditions.

1. Eligibility & Key Conditions

To claim LTA/LTC exemption, the following conditions must be met:

• Domestic Travel Only: Journeys must be within India (international trips are ineligible).
• Travel During Leave: Must be undertaken during an approved leave period (not weekends/holidays unless leave is applied).
• Two Journeys per Block: Exemption is allowed for two trips in a four-year block(current block: 2022–2025).
• Family Coverage: Includes spouse, two children(born after 1/10/1998), and dependent parents/siblings.
• Actual Travel Proof Required: Tickets, boarding passes, or invoices must be submitted to the employer.

2. Exemption Calculation & Modes of Travel

The exempt amount is the lower of:

• Actual travel expenses incurred, or
• Prescribed limits based on the mode of travel:

MODE OF TRAVEL	EXEMPTION LIMIT
Air Travel	Economy fare of Air India (shortest route) or actual expense, whichever is lower.
Rail Travel	First AC fare (shortest route) or actual expense, whichever is lower.
Other Public Transport	First/Deluxe class fare (if no rail connectivity) or equivalent AC rail fare.

Exclusions:

• No exemption for hotel stays, food, local transport, or sightseeing.
• Airport transfers(e.g., cab fares) are not covered.

3. Unused LTA & Carry Forward Rules

• Unclaimed LTAin a block (e.g., 2022–2025) can be carried forward to the first year of the next block (2026).
• Only one unutilized journeycan be carried forward.
• Forfeiture: If not claimed in the first year of the next block, the benefit lapses.

4. Special Cases & Recent Updates

A.  LTC Cash Voucher Scheme (COVID-19 Relief)

• Introduced in 2020for employees unable to travel due to pandemic restrictions.
• Allowed tax exemption if employees spent 3x the LTA amounton GST-rated goods/services (12% or higher).
• Validity: Ended on March 31, 2023(for block 2018–2021).

B.  New vs. Old Tax Regime

• Old Regime: LTA exemption is available.
• New Regime (Section 115BAC): No LTA exemption(all deductions removed).

5. Documents Required for Claiming LTA

Employees must submit:

• Form 12BB(declaration to employer).
• Original tickets(air/rail/bus).
• Boarding passes(for air travel).
• Payment proofs(bank statements, credit card receipts).

(I)   Profit in Lieu of Salary [Section 17(3)]

Section 17(3) of the Income Tax Act defines “profits in lieu of salary”—that is, income received by an employee in connection with employment, but not part of regular salary or perquisites.

What’s Included:

These amounts are taxable under the head “Income from Salaries”, even though they may not be part of monthly pay:

1. Terminal compensation – e.g., severance pay or compensation on resignation or retirement.
2. Payments from unrecognized provident or superannuation funds.
3. Proceeds from a Keyman Insurance Policy received by the employee.
4. Amounts received before joining or after termination of employment (e.g., signing bonus, post-exit payments).
5. Any other sum received from the employer, voluntarily or under legal obligation, that’s not covered under salary or perquisites.

What’s Not Included:

• Gratuity (if exempt under Section 10(10)),
• Commuted pension (if exempt under Section 10(10A)),
• Leave encashment (if exempt under Section 10(10AA)),
• Retrenchment compensation (if exempt under Section 10(10B)).

Example:

Suppose Ms. Iyer resigns and receives ₹10 lakh as a one-time exit bonus. This amount is not part of her regular salary, but since it’s received from her employer in connection with her employment, it is taxable as “profit in lieu of salary” under Section 17(3).