Section 17(2) of the Income Tax Act - Perquisites in Income Tax

What are Perquisites as per Section 17 (2)?

Perquisites are any casual emoluments or benefits provided to an employee in addition to their salary or wages. They can be provided in cash or in kind. Any reimbursements offered by the employer do not form part of the perquisites. These perquisites can be both taxable as well as non-taxable.

Perquisites as per Section 17 (2) include the following:-

• Any accommodation provided by the employer.
• Any concession in the rent provided to the assessee by his employer.
• An obligation payable by the assessee.
• Expenditure for traveling.
• Any benefit/amenity granted free or at a concessional rate to specified employees, etc.
• The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, at a concessional rate to the assessee.
• Any sum payable by the employer, whether directly or through a fund other than a recognized provident fund or an approved superannuation fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity.
• Contribution amount to an approved superannuation fund by the employer in respect of the assessee.
• The value of any other fringe benefit or amenity.

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What are the Rules for the Valuation of Perquisites Under Section 17(2)?

Section 17(2) of the Income Tax Act, 1961 provides for the valuation of perquisites for tax purposes. The value of perquisites is the cost it has incurred for the organization.

Following are some of the common perquisites and their valuation under Section 17(2):

Rent-free or concessional accommodation:

• Value of furnished RFA
  Central and state government employees - License fees for the house are determined and reduced by the rent paid by the individual.
  For non-government employees, the perquisite value is 15% in cities with a population above 25 lakh, 10% for a population above 10 lakh but less than 25 lakh, and 7.5% for cities with a population less than 10 lakh. The value of the perquisite will be rent paid by the organization or 15% of the salary, whichever is less.
• Value of Furnished accommodation -
  The value is the same as the value of the furnished, increased by 10% of the cost of furniture. If the furniture is rented, the rates will be hiked by the amount paid by the organization for renting the furniture.
• Accommodation in a Hotel -
  The value of the perquisite is 24% of the salary or the charges paid to the hotel, whichever is less.

• Company car or vehicle: The value of a company car or vehicle provided by an employer is based on the actual cost to the employer, including depreciation, insurance, maintenance, and fuel expenses. However, suppose the vehicle is used partly for personal and official purposes. In that case, the value of the perquisite is calculated based on the distance traveled for personal purposes and the cost incurred by the employer.
  If the company reimburses running and maintenance costs, then the perquisite value is 1800+900(driver) for a vehicle with cubic capacity upto 1.6 liter. And the value is 2400+900(driver) if the vehicle’s cubic capacity is more than 1.6 liters.
  If the employee compensates for the maintenance and running cost, then the perquisite value is 600+900(driver) if the vehicle’s cubic capacity is upto 1.6 liter and 900+900(driver) if the cubic capacity is more than 1.6 liters.
• Health insurance or medical benefits: The value of health insurance or medical benefits provided by an employer is the actual cost incurred by the employer.
• Interest-free or concessional loans: The value of interest-free or concessional loans provided by an employer is the difference between the interest charged at the prescribed rate and the interest charged by the employer.
• Club membership: The value of club membership provided by an employer is the cost incurred by the employer.

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Taxability Of Perquisites

Perquisites are taxable under the head 'Salaries' only if they fulfill some criteria.

• During the continuance of the employment
• Personal benefits of the employee
• Directly dependent upon the service
• Derived as a result of the employer's authority
• Should be received from the employer
• Must be from a legal origin

Perquisites are divided into two parts- monetary and non-monetary. The monetary perquisites are taxable for all employees, while the non-monetary ones are taxable in the hands of specified employees.

Let us understand this more by dividing perquisites into three categories:-

• Perquisites taxable in all cases
• Perquisites not taxable
• Perquisites that are taxable only in the hands of specified Employees.

Perquisites that are taxable in all cases under Section 17(2)

• Dearness Allowance
  Dearness Allowance (DA) is a cash allowance paid to employees and pensioners by the government to hedge the impact of inflation. Similar to HRA, contribution to provident fund, etc. Dearness Allowance is entirely taxable for salaried employees as per the latest update of the Income Tax Act, 1961. The Income Tax Act also ensures that the tax liability of Dearness Allowance is declared in the field returns
• Interim Allowance
  Interim allowance refers to a temporary or provisional allowance granted to a person or entity while a final decision or settlement is being determined. If this allowance is provided in place of the final allowance, it is fully taxable.
• Project Allowance
  A project allowance is a sum of money allocated to a project team or individual to cover the expenses incurred during a project. This allowance is entirely taxable.
  
• Entertainment Allowance
  An entertainment allowance is a sum of money provided by an employer to an employee for entertaining clients, customers, or other business associates.
  A government employee can take the tax exemption under Section 17 (2) of whichever is the least in the following:-
  
  • 1/5th of the basic salary, the amount received in the form of allowance or Rs. 5,000. All other employees have to pay tax on it.
• Overtime Allowance
  Overtime allowance is an additional payment to an employee for any time worked beyond their normal hours. This additional payment compensates the employee for the extra time and effort they put in to complete their work. Any amount that is given for this is completely taxable.
• Non-Practising Allowance
  NPA is provided to doctors, dentists, and other healthcare professionals employed by the government but must be actively engaged in clinical practice. This can include professionals working in administrative roles, teaching positions, or research positions. Any amount that is given for this is completely taxable.
• City Compensatory Allowance
  City Compensatory Allowance (CCA) is an allowance provided to employees to compensate for the higher cost of living in certain cities or urban areas. CCA is generally offered to employees required to work in cities or urban areas where the cost of living is higher than the average. Any amount that is given for this is completely taxable.
• Cash Allowance
  A cash allowance is a payment made by an employer to an employee as a form of compensation, typically in addition to their regular salary or wages. Cash allowances may be provided for various reasons, such as to help cover the costs of specific job-related expenses, to incentivize certain behaviors or actions, or to reward employees for their performance. Any amount that is given for this is completely taxable.
• Meals/tiffin Allowance
  A meal or tiffin allowance is provided to employees to cover the cost of meals or snacks they consume during work hours. The allowance is typically designed to compensate for the additional expense employees may incur while working away from home or when they cannot prepare their meals. Any amount that is given for this is completely taxable.
• Fixed Medical Allowance
  Fixed Medical Allowance (FMA) is a type of allowance provided to government employees as a reimbursement for medical expenses incurred by them and their family members. It is a fixed amount paid monthly, quarterly, or annually to cover medical expenses such as doctor consultations, medicines, diagnostic tests, and hospitalization.
• Servant Allowance
  A servant allowance is provided to employees to help cover the cost of employing a domestic helper or servant. The allowance is intended to help offset the cost of hiring someone to help with household chores, such as cooking, cleaning, and childcare.
• Warden Allowance
  A warden allowance is paid to employees responsible for overseeing the welfare of individuals in a specific setting, such as a dormitory, hostel, or prison. The allowance is intended to compensate employees for the additional responsibilities and duties involved in ensuring the safety and well-being of the individuals under their care. The allowance is completely taxable.
• Accommodation offered by the organization
  These accommodations are taxable and a perquisite provided by the organization. The tax rate on these accommodations depends on whether the employer/company leases, rents or owns the place.
  

  Type of Accommodation	Population of the City	Tax Percentage
  Owned by the organization	Greater than 25 lakh	15%
  	Between 10 lakh to 25 lakh	10%
  	Below 10 lakh	7%
  Leased by the organization	Actual rental paid or 15%, whichever is lower	NA
  	Accommodation provided in a guest house or hotel for over 15 days	24%

  
  Actual rent or 15% of the value, whichever is less- NA

Perquisites that are not taxable under Section 17(2)

• House Rent Allowance (HRA)
  HRA is defined as a house rent allowance. It is the amount paid by the employer to the employees to help them meet the costs of living in rented accommodation. Most employers of private and public sector/organizations pay HRA as one of the sub-components of salary to their employees. The exemption for HRA benefit is the minimum of:
  • The total amount of HRA received
  • 50 percent of salary (Basic salary + Dearness Allowance) if living in metro cities or 40 percent for non-metro cities
  • Excess of rent paid annually over 10% of annual salary (Basic salary + DA)
• Special Allowance
  Special Allowance is covered by section 10 (14)(i) of the Income Tax Act. It is tax-exempt to the extent of the amount spent for the official purpose for which it is given to claim the tax exemption.
• Children education allowance
  To promote education and literacy, the Income Tax Department introduced various tax benefits on education that allow you to reduce the amount of your taxable income, thus reducing the payable tax. Children’s Educational Allowance of INR 100 per month is allowed per child for up to two children studying in an educational institution. An allowance of INR 300 per month per child for up to two children is given to those staying in hostels as a hostel expenditure allowance.
• Transport Allowance
  Transport allowance is the money you receive from your employer for commuting from your residence to the office and vice-versa. A transport Allowance of Rs.3,200 per month is tax-free for handicapped employees. Handicapped employees mean all those who are blind deaf, dumb, or orthopedically handicapped with a disability of the lower extremities.
  • Perquisites that are not taxable only in the hands of specified employees
  These perquisites are usually paid to judges, employees of UNO, and government servants and are not taxable.

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Employees Eligible for Tax-Free Perquisites

Here are some of the common tax-free perquisites available to employees:

• Medical Reimbursement: Reimbursement of medical expenses incurred by employees and their family members up to Rs. 15,000 per year is exempt from tax.
• Conveyance Allowance: Conveyance allowance provided for commuting between home and office up to Rs. 1,600 per month is exempt from tax.
• Telephone/Mobile Expenses: Expenses for official and personal use of telephone or mobile phone bills up to a reasonable limit are exempt from tax.
• Leave Travel Allowance (LTA): LTA for the cost of travel during leave periods within India, subject to certain conditions, is exempt from tax. The exemption is available for the actual travel expenses, and it can be claimed twice in a block of four calendar years.
• Meals in Office: The value of free or subsidized meals provided by the employer during working hours in the office is exempt from tax.
• Interest-free or Concessional Loans: If the employer provides interest-free or concessional loans to employees, the difference between the market interest rate and the actual interest charged is exempt from tax.
• Gratuity: Gratuity received by government employees and employees covered under the Payment of Gratuity Act is exempt from tax.
• Provident Fund: The contribution made by the employer to the employee's recognized Provident Fund (PF) is exempt from tax, subject to certain limits.
• Employer's Contribution to NPS: The contribution made by the employer to the employee's National Pension System (NPS) account is exempt from tax up to 10% of the salary (basic plus DA).

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How to Calculate Perquisite Taxes?

Let us understand this with an illustration:-

An employee has a head salary of Rs 9 lakh, which includes perquisites provided by the company, which is Rs. 70,000.
As mentioned above, in such cases, the perquisite tax will be charged under salary, which is Rs. 9 lakh.
Gross Salary- 9 Lakh
Education and health cess-4%-75,400
Average Tax Rate-(75400/9,00,000)*100=8.37%
Thus, the tax paid on the perquisite amount 70000/- will be 8.37%*70,000=5859
Hence, the monthly TDS amount will be 5859/12 = 488.25.

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Who Pays the Perquisite Taxes?

An organization, firm, or group of individuals who provide their employees with all fringe benefits and perquisites must pay the perquisite taxes. The Government taxes perquisites at a rate of 30% of the total value of fringe benefits.

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