What are Perquisites in Income Tax? Types & Tax Benefits

As a salaried employee, you may be receiving various monetary benefits or privileges in kind from your employer — over and above the salary or wage you are paid. In addition to the basic salary, you may receive various allowances and perquisites too. While you may be familiar with how allowances are taxed, the taxation of perquisites is a bit more complex.

In this article, we’ll delve a little deeper into this subject to better understand the meaning of perquisites in income tax, how they work and how they are taxed.

What are ‘Perquisites’ in Salary?

Perquisites in salary are additional privileges and benefits offered to employees by their employers. These perquisites are paid either in cash or offered in kind. They are often a part of your pay structure, over and above the basic salary. What’s more, perquisites in salary also form a part of the overall ‘cost to company’ (CTC) of each employee.

It is important to note that simple reimbursements of expenses incurred by the employee on the employer’s behalf are not considered perquisites in income tax. To better understand what perquisites in salary are, let’s discuss some common examples.

Examples of Perquisite in Salary

Perquisites are not mandatory components of any employee’s salary. However, certain privileges, when offered to employees, are considered to be perquisites in income tax. As per section 17(2) of the Income Tax Act, perquisites include the following:

The value of rent-free accommodation given by the employer to the employee
The value of rental concession for any accommodation provided to the employee by the employer
Any sum paid by the employer to meet any of the employee’s obligations
The value of any benefit or amenity offered free of charge or at concessional rates to specified employees
The value of any securities or sweat equity shares provided by the employer to the employee free of charge or at concessional rates
Any sum that the employer pays towards an employee’s life assurance or for their annuity contract (except payments made to a recognised provident fund or an approved superannuation fund)
Any amount exceeding Rs. 1 lakh paid by the employer to an approved superannuation fund for the employee’s benefit
The value of any other fringe or additional benefit offered by the employer to the employee in the course of the employment

Types of Perquisites in Income Tax

Depending on their tax implications, the perquisites in salary can be classified into the following three categories: taxable, tax-free and taxable only for specified employees. Let’s take a closer look at these different types of perquisites.

Perquisites Taxable for All Employees

Monetary perquisites are taxable for all employees who receive them. Some examples of such perquisites include reimbursements of expenses like salaries paid to the employee’s servant, gas/water/electricity bills, school fees, car expenses, etc.

Non-Taxable Perquisites

Some additional benefits are not considered as perquisites in salary, and therefore, are not subject to income tax. Examples of such non-taxable perquisites include:

Rent-free accommodation provided for 15 days or less when an employee is transferred
Rent-free accommodation provided at mining, power generation, dam or oil exploration sites
Any medical insurance premium paid or reimbursed by the employer
Expenses paid or reimbursed by the employer for the medical treatment of the employee or their dependents (provided such treatment is in a hospital maintained by the employer, the government or the local authority, or approved by the Principal Chief Commissioner or Chief Commissioner for treating specified diseases)
Any medical expenses paid or reimbursed by the employer, up to Rs. 15,000 per AY
Expenses paid or reimbursed by the employer for the medical treatment of the employee or their dependents obtained outside India (to the extent allowed by the Reserve Bank of India)
Expenses incurred for the overseas stay of the patient and one attendant (to the extent allowed by the Reserve Bank of India)
Travel expenses incurred for the patient and one attendant (if the employee’s gross total income is below Rs. 2 lakhs)

Perquisites Taxable Only for Specified Employees

Non-monetary perquisites offered by the employer, like free domestic help, gas/electricity/water, free use of car etc. are taxable in the hands of specified employees only. Specified employees include:

A director in the company
Any employee with a substantial interest in the company (like a beneficial owner with equity shares that carry 20% or more of the voting power)
Any employee whose salary income is over Rs. 50,000

Difference Between Allowance and Perquisites

Allowances are often misunderstood or mislabeled as perquisites. However, the two are entirely different. To help you better understand the meaning and treatment of allowances and perquisites in income tax, here’s a summary of how they compare.

Particulars	Allowances	Perquisites
Meaning	Allowances are fixed monetary benefits given to employees over and above their basic salary	Perquisites are monetary or non-monetary benefits provided by an employer to their employees
Nature	Generally cash payments	May be offered in cash or kind (through services or privileges)
Purpose	Allowances are generally given to cover specific expenses related to the job, such as travel, housing or medical expenses	Perquisites are usually provided as a privilege or benefit of employment to enhance the employee’s job satisfaction
Taxability	Many allowances are taxable, though some may be exempt up to certain limits under income tax laws	Perquisites can be taxable (for all or specified employees) or non-taxable depending on their nature and the rules set by the income tax laws
Examples	Travel allowance, house rent allowance (HRA), dearness allowance (DA) etc.	Company-provided accommodation, car, or driver, concessional loans, subsidised meals etc.
Valuation for Tax	Valued at the actual amount received by the employee	Valued based on the cost to the employer or as per specific rules laid down by tax laws

Tax Calculation on Perquisites

Benefits of Perquisites

The benefits of perquisites in salary extend beyond mere financial gains, offering both tangible and intangible advantages such as the following.

Enhanced Compensation Package

Perquisites can greatly enhance an employee’s overall compensation package. Non-monetary perks like company-provided cars, housing, or subsidised meals add value to the employee’s life without increasing their taxable income significantly. This holistic approach to compensation can be more tax-efficient compared to a straight salary increase.

Improved Job Satisfaction

Perquisites can also significantly improve job satisfaction and boost employee morale. Benefits such as flexible working hours, on-site childcare or wellness programs contribute to a better work-life balance. This enhanced job satisfaction often translates into higher employee retention rates that benefit the employer over the long term.

Retention of Top Talent

For employers, offering perquisites is a strategic tool for attracting top talent. In competitive job markets, a comprehensive perks package can distinguish an employer from its competitors. Perquisites tailored to employee needs can also demonstrate an organisation’s commitment to the well-being of its staff and foster a positive workplace culture.

Conclusion

The bottom line is that perquisites in salary are a crucial component of modern employment. They benefit both employees and employers. If you receive any perquisites as a part of your compensation package, you now know whether it will be taxable or exempt from tax.