Perquisites in Income Tax: What Every Taxpayer Must Be Aware Of
Benefits that an employee receives outside of their pay due to their official job are known as perquisites or perks. For taxability and accountability purposes, this is taxed differently. Some prerequisites are both taxable and exempt. All earners are entitled to certain fringe benefits or perks, much like all income-producing people and corporate establishments are required to pay income taxes. Providing medical facilities, housing allowances, and official vehicles are a few of the most well-known examples of benefits or privileges that employers provide to their staff. Since your employer provides these luxuries to you in addition to your salary, using a car or house that they supply you may be subject to perquisite tax.
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What are the Perquisites in Income Tax?
The benefits you receive from your employer in addition to your monthly income are known as perquisites. Certain benefits may be free from income tax, or you may be required to pay taxes on certain benefits. It covers basic perks like gas reimbursement, a car or lodging provided by the firm, etc. Medical facilities, interest-free loans, credit cards, and other things could also be considered prerequisites. The following are considered perquisites in salary under Section 17(2) of the Income Tax Act:
A payment from your employer towards an obligation you have
The price of extras or perks given to a specific worker at no cost or at a reduced rate, etc
The price of any lodging you get for free or at a discounted cost from your work.
The amount of any specific security or sweat equity shares that the assessee received directly or indirectly for free or at a discounted rate from the employer or previous employer
The price of any additional required fringe benefits or amenities
Examples of Perquisites and Their Taxation
1. Employer-Provided Accommodation
One typical perk that you can receive from your company is leased housing. Despite being a benefit or perk provided by your firm, this prerequisite is subject to taxes. Nonetheless, the tax would be based on who owned and how much the lodging was worth. You are required to pay a 7% tax if the property is owned by your firm and is not valued at more than Rs 10,000,000. The tax rate is 10% on properties worth between Rs 10,00,000 and Rs 25,00,000, and 15% on properties priced more than Rs 25,00,000. Nevertheless, if you pay the whole rent or 15% of it and the housing is leased by the company, taxes do not apply. However, you must pay 24% in taxes if you get hotel accommodation for more than 15 days.
2. Employer-Provided Transportation
The ownership and intended use of the vehicle determine how taxes are calculated for this perk. The vehicle may be owned by your employer or leased to you. However, you are free to use it for either personal or professional reasons, or both. These previously listed variables will determine how taxes are calculated. The monthly tax rate is Rs 1,800 for small cars with a fuel consumption of fewer than 1.6 litres and Rs 2,400 for large cars with a fuel consumption of more than 1.6 litres.
3. Employer-Provided Stock Options
Most businesses give their workers shares and stocks as rewards. As an employee, any net capital gains you personally obtain are subject to taxation. It is the discrepancy between the share's selling price and fair market value. The FMV less the amount that has been recouped from the employee is the applicable tax amount on shares in the form of perquisites.
Benefits Not Treated as Perquisites
The following list includes the particular perks that an employee receives and which shouldn't be viewed as requirements:
The value of healthcare services rendered to employees
The amount the employer contributes to a medical expense that the employee has incurred
The amount that an employer pays for an employee's health insurance to initiate or maintain coverage
The amount of money that the worker must pay for medical care
Types of Perquisites in Income Tax
Besides understanding the meaning of perquisites, you must know their classification from a tax perspective. Here are the different types of perquisites in income tax:
1. Tax-Free Perquisites in Income Tax
Certain fringe benefits provided by the company are tax-free. These include:
Medical Reimbursement: Up to Rs. 15,000 in medical expenditures paid for by employees and their families each year are free from taxes.
Conveyance Allowance: Up to Rs. 1,600 per month in conveyance allowance is tax-free when used for commuting between home and work.
Leave Travel Allowance (LTA): Under certain circumstances, LTA for domestic travel expenses incurred during leave periods is tax-free. Within a span of four calendar years, the exemption can be claimed twice for the actual cost of the journey.
Phone/Mobile Expenses: Up to a reasonable amount, tax is not applied to costs incurred for the official and personal use of a phone or mobile device.
Provident Fund: Up to a specific amount, the employer's contribution to an employee's approved Provident Fund (PF) is tax-free
Gratuity: Employees covered by the Payment of Gratuity Act and those employed by the government are exempt from tax on gratuities received.
Employer's NPS Contribution: Up to 10% of the employee's pay (basic plus DA) in contributions made by the employer to their National Pension System (NPS) account is tax-free.
Interest-free or Concessional Loans: The difference between the market interest rate and the actual interest charged is tax-free if the company offers interest-free or concessional loans to its employees.
Meals in the Office: The value of free or heavily subsidised meals given by the employer is tax-exempt while the employee is present in the office.
2. Taxable Perquisites in Income Tax
Benefits offered by employees, such as gas, water, and electricity supplies, rent-free housing, medical bill reimbursements, etc., are considered perquisites and are subject to taxes. In addition, taxable perks include the employee's servants' salaries, additional advantages like presents valued at more than Rs 5,000, complimentary meals, access to a gym and club, and so on.
3. Perquisites Taxable Only for Employers
If you use company-owned vehicles, take advantage of childcare facilities, hire domestic help, etc., these benefits are taxable, and the employee is responsible for paying the applicable taxes.
Tax Calculation on Perquisites
The taxability of perquisites is based on the average of your income tax that is due. The computation process is affected by the following variables:
The tax slab rate for a certain financial year
The income listed under "salaries"
The expense of benefits for the tax sum that the employer has paid
For a clearer example, consider this. Assume that the income shown under "Salaries" is Rs 10 lakh plus any non-cash benefits that your employer provides, totaling Rs 1 lakh. The Income Tax Act states that the perquisite tax would be:
Income listed under "salaries: Rs 10 lakh
Tax including the 4% health and education cess: Rs 54,600 (if the new tax system is chosen)
Average rate will be (54600/10,00,000 x 100) = 5.46%
Tax paid on Rs 1 lakh will be Rs 5.46% x Rs 1,00,000 = Rs 5,460.
The monthly deposit required is Rs 455 (Rs 5,460/12), so your employer will deduct Rs 455 from your pay as TDS.
Rules Regarding Taxability of Perquisites under the Salaries Heading
Only some types of perquisits fall under the "Salaries'' heading and are subject to taxation. The criteria include:-
Personal benefits of the employee
For the duration of the employee's work
Directly reliant on the service
Resulting from the employer's power; to be received from the employer
Having a legitimate source
The two categories of perks are non-monetary and monetary. While non-monetary benefits are taxable in the hands of certain employees, monetary benefits are subject to taxation for all employees. We will now highlight the taxability of different perquisites in detail.
Perquisites Taxable in All Cases under Section 17(2)
Dearness Allowance: The government pays out Dearness Allowances (DAs) to protect workers and pensioners from the effects of inflation. According to the most recent revision of the Income Tax Act, of 1961, Dearness Allowance is fully taxable for salaried employees. Additionally, the Income Tax Act makes sure that the Dearness Allowance tax due is disclosed in field forms.
Project Allowance: A project allowance is a set amount of money given to a team or individual to help with project-related expenses. This allowance is subject to full taxation.
Interim Allowance: A temporary or provisional allowance given to a person or business while a settlement or final decision is being made is referred to as an interim allowance. This allowance is fully taxable if it is given instead of the final allowance.
Cash Allowance: An employer may give a cash allowance to a worker as a kind of compensation; this is usually paid on top of the worker's base pay. Cash allowances can be given for several reasons, including assisting with the cost of particular job-related expenses, rewarding employees for their success, or encouraging particular behaviours or actions.
Entertainment Allowance: A sum of money given by an employer to an employee for entertaining customers, clients, or other business colleagues is known as an entertainment allowance. An employee of the government may claim the tax exemption under Section 16(2) of the lowest of one-fifth of the base pay, plus any allowances received, or Rs. 5,000. Tax on it must be paid by all other employees.
Overtime Allowance: An employee receives overtime allowance as extra compensation for each time they work past their regular workday. The employee is compensated for the extra time and effort they invested in finishing their assignment with this additional money. Any payment made for this is fully subject to taxes.
Non-Practicing Allowance: Physicians, dentists, and other government-employed healthcare professionals are eligible for NPA, but they must be actively practicing clinical medicine. Professionals in administrative, teaching, or research capacities can fall under this category. Any payment made for this is fully subject to taxes.
City Compensation Allowance: Employees are given an allowance known as the City Compensatory Allowance (CCA) to help offset the greater cost of living in some cities or metropolitan areas. Employees compelled to work in cities or other metropolitan regions where the cost of living is higher than average are typically eligible for CCA. Any payment made for this is fully subject to taxes.
Predetermined Health Benefit: A sort of allowance known as a Fixed Medical Allowance (FMA) is given to government workers to cover medical costs that they and their families incur. It is a set sum of money paid on a monthly, quarterly, or yearly basis to cover various medical costs, including hospital stays, prescription drugs, doctor visits, and diagnostic testing.
Tiffin/Meal Allowance: Employees receive a lunch or tiffin allowance to help with the expense of any meals or snacks they eat while at work. Usually, the allowance is meant to make up for any extra costs that workers could have when working from home or when they are unable to prepare their own meals. Any payment made for this is fully subject to taxes.
Fixed Medical Allowance: A sort of allowance known as a Fixed Medical Allowance (FMA) is given to government workers to cover medical costs that they and their families incur. It is a set sum of money paid on a monthly, quarterly, or yearly basis to cover various medical costs, including hospital stays, prescription drugs, doctor visits, and diagnostic testing.
Servant Allowance: Employees receive a servant allowance to assist defray the expense of hiring a servant or domestic helper. The goal of the allowance is to lessen the expense of employing someone to assist with childcare, cleaning, and other home duties.
Wardens Allowance: A warden allowance is given to staff members who are in charge of making sure that people are safe in a certain environment, like a prison, hostel, or dorm. The purpose of the allowance is to recompense staff members for the extra obligations and tasks associated with guaranteeing the security and welfare of the people in their care. The allowance is subject to full taxation.
Accommodation Offered by the Organization: These accommodations are given by the organisation as a perk and are taxable. Whether the employer/company owns, rents, or leases the space determines the tax rate on these accommodations.
Perquisites Not Taxable under Section 17(2)
House Rent Allowance (HRA): An allowance for house rent is known as an HRA. It is the sum that the company gives the workers to assist in covering the cost of living in rental housing. The majority of employers, both in the public and commercial sectors, include HRA in their employees' salaries as a subcomponent. The minimum threshold for the HRA benefit exemption is:
The whole amount of HRA received
If residing in a metro area, 50% of pay (Basic salary + Dearness Allowance); if not, 40% of salary
Annual rent exceeding 10% of base pay plus dependent allowance
Special Allowance: The Income Tax Act's section 10 (14)(i) addresses Special Allowance. To the degree that money is spent on the official purpose, for which it is provided to claim the tax exemption, it is tax-exempt.
Children’s Education Allowance: The Income Tax Department has implemented several tax incentives related to education that enable you to lower your taxable income and, consequently, the amount of tax that must be paid to support literacy and education. For a maximum of two children enrolled in an educational institution, each child is eligible to receive Rs 100 per month in Children's Educational Allowance. Hostel expenses are reimbursed to guests sleeping in hostels, up to two children, each receiving a monthly allowance of Rs 300.
Transportation Allowance: The money your employer pays you for transport expenses when you commute from your home to the workplace and back is known as your transport allowance. Workers with disabilities are eligible for a tax-free monthly travel allowance of Rs. 3,200. Employees classified as handicapped include individuals who are blind, deaf, dumb, or have lower limb impairments due to orthopaedic impairments.
Conclusion
An employee gains from perks in a variety of ways. For example, a fieldwork-appointed employee must travel extensively to do his duties. In this scenario, the employee's load is somewhat relieved if their employer covers the cost of food and travel-related charges.
FAQ
Q1. Is HRA a perquisite?
While CLA is regarded as a benefit that is provided to employees by their employer and is taxable in the employee's hands, HRA is an allowance that is added to your salary and is tax-exempt to a certain amount (under IT laws). That is to say, as an employee, you are required to pay income tax on the house's perquisite value.
Q2. Who pays perquisite taxes?
According to the Finance Act of 2005, perks that employers either deliver to their employees or are deemed to have given to them would be subject to government taxation. Preferences should ideally be taxed at a rate equal to thirty percent of the whole amount of fringe benefits received. Interestingly, companies who offer their staff the aforementioned advantages are the ones who are responsible for paying the perquisite tax. They could be an organisation, a business, a group of people, or an association of people.
Q3. How are perquisites treated for income tax purposes?
The Finance Act of 2005 states that benefits are subject to government taxation if they are given to employees or are assumed to be given to them by their employers. Thirty percent of the value of fringe benefits is the tax rate on perks.
Q4. Are perquisites a part of salary?
Only when benefits are received by an employee from their employer—whether current, past, or future—are they considered part of their salary income. Rewards from sources other than employers are subject to taxes under the categories of "Profits and gains of business or profession" and "Income from other sources."
Q5. Are perquisites taxable?
Given that they are regarded as a component of the employee's remuneration package, perks are normally taxable.
Q6. How are perquisites taxed?
Perquisites may have different tax treatment based on the nation and the applicable laws. However, typically, the employee's income is increased by the perquisite's value, which is then taxed at the appropriate rate.
