Perquisites :
(1) The term ‘perquisite‘ indicates some extra benefit in addition to the amount that may be legally due by way of contract for services rendered. In modern times, the salary package of an employee normally includes monetary salary and perquisite like housing, car etc.
(2) Perquisite may be provided in cash or in kind.
(3) Reimbursement of expenses incurred in the official discharge of duties is not a perquisite.
(4) Perquisite may arise in the course of employment or in the course of profession. If it arises from a relationship of employer-employee, then the value of the perquisite is taxable as salary. However, if it arises during the course of profession, the value of such perquisite is chargeable as profits and gains of business or profession.
(5) Perquisite will become taxable only if it has a legal origin. An unauthorised advantage taken by an employee without his employer‘s sanction cannot be considered as a perquisite under the Act. For example, suppose Mr. A, an employee, is given a house by his employer. On 31.3.2015, he is terminated from service. But he continues to occupy the house without the permission of the employer for six more months after which he is evicted by the employer. The question arises whether the value of the benefit enjoyed by him during the six months period can be considered as a perquisite and be charged to salary. It cannot be done since the relationship of employer-employee ceased to exist after 31.3.2015. However, the definition of income is wide enough to bring the value of the benefit enjoyed by Mr.A to tax as “income from other sources”.
(6) Income-tax paid by the employer out of his pocket on the salary of the employee is a perquisite in the hands of the employee whether the payment is contractual or voluntary.
Definition: Under the Act, the term ‘perquisite‘ is defined by section 17(2) to include the following:
(a) the value of rent free accommodation provided to the assessee by his employer [section 17(2)(i)];
(b) The value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer [section 17(2)( ii)];
(i) Under section 17(2)(ii), the value of any concession in the matter of rent arising to an employee in respect of any accommodation provided by his employer is considered as “perquisite” chargeable to tax in the hands of the employee.
(ii) Rule 3(1) of the Income-tax Rules provides the basis of valuation of perquisites in respect of accommodation provided to an employee, as under:
(a) 15% of salary in cities having population exceeding 25 lakh
(b) 10% of salary in cities having population above 10 lakh up to 25 lakh
(c) 7.5% of salary in cities having population up to 10 lakh.
(iii) In case of furnished accommodation provided by an employer, the value arrived as above was to be further increased by 10 per cent of the cost of furniture, where the same is owned by the employer, or the actual hire charges paid by the employer in case the furniture is hired.
(iv) This method of perquisite valuation resulted in genuine hardship to employees availing facility of residential accommodation in remote areas, as the value of perquisite was determined as a percentage of salary of the employee, irrespective of the fair rental value of the property (which may be much lower than 15%/10%/7.5% of salary in such cases).
(v) Rule 3(1) was challenged as ultra vires before the Supreme Court in the case of Arun Kumar v. UOl (2006) 286 ITR 89. The Apex court, while holding that the provisions of Rule 3(1) were constitutionally valid, observed that the same would be applicable only if ‘concession in the matter of rent’ with respect to the accommodation provided by an employer accrues to the employee under the substantive provisions of section 17(2)(ii). The Assessing Officer, before applying
Rule 3(1), was required to establish that there was ‘concession in the matter of rent’ provided to the employee.
(vi) Further, as per the Apex court, the difference between the value as per Rule 3(1) and the rent recovered from the employee, could not per se be considered as
‘concession in the matter of rent‘ provided to the employee.
(vii) In order to clarify the correct intent of law, Explanations have been inserted in section 17(2)(ii) to provide that the difference between the specified rate (as shown
in column 2 of the table below) and the amount of rent recoverable/recovered from the employee would be deemed to be the concession in the matter of rent in case of accommodation owned by the employer. In case of accommodation taken on lease or rent by the employer, the difference between the actual lease rent or 15% of salary, whichever is lower, and rent recovered/recoverable from the employee would be deemed to be the concession in the matter of rent.
| (1) | (2) |
| Type of accommodation | Deemed concession in the matter of rent |
| Accommodation owned by the employer | |
| In cities having a population exceeding 25 lakh | 15% of salary minus rent recoverable from the employee. |
| In cities having a population exceeding 10 lakh but not exceeding 25 lakh | 10% of salary minus rent recoverable from the employee. |
| In other cities | 7½% of salary minus rent recoverable from employee |
| Accommodation taken on lease by the employer | Rent paid by the employer or 15% of salary, whichever is lower, minus rent recoverable from the employee. |
(viii) This deeming provision is applicable to employees other than Government employees. In case of furnished accommodation provided to such employees, the excess of hire charges paid or 10% p.a. of cost of furniture, as the case may be, over and above the charges paid or payable by the employee would be added to the value determined in column (2) above for determining whether there is a concession in the matter of rent.
Note – Once there is a deemed concession, the provisions of Rule 3(1) would be applicable in computing the taxable perquisite.
(ix) ―Salary‖ includes pay, allowances, bonus or commission payable monthly or otherwise or any monetary payment, by whatever name called, from one or more employers, as the case may be. However, it does not include the following, namely–
(1) dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;
(2) employer‘s contribution to the provident fund account of the employee;
(3) allowances which are exempted from the payment of tax;
(4) value of the perquisites specified in section 17(2);
(5) any payment or expenditure specifically excluded under the proviso to section 17(2) i.e., medical expenditure/payment of medical insurance premium specified therein.
(x) In case of Government employees, the excess of licence fees determined by the employer as increased by the value of furniture and fixture over and above the rent recovered/recoverable from the employee and the charges paid or payable for furniture by the employee would be deemed to be the concession in the matter of rent.
(c) The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases (i.e. in case of specified employees):
(i) by a company to an employee in which he is a director;
(ii) by a company to an employee being a person who has substantial interest in the company (i.e. 20% or more of the voting rights of the company);
(iii) by any employer (including a company) to an employee to whom the provisions of (i) & (ii) 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 benefits exceeds Rs 50,000 [Section 17(2)(iii)];
(d) Any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee [Section 17(2)(iv)];
(e) Any sum payable by the employer whether directly or through a fund, other than a recognised provident fund or 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 [Section 17(2)(v)];
(f) the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer or former employer, free of cost or at concessional rate to the assessee [Section 17(2)(vi)];
Specified security means ―securities‖ as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956. It also includes the securities offered under employees stock option plan or scheme. Sweat equity shares means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.
The value of specified security or sweat equity shares shall be the fair market value of such security or shares on the date on which the option is exercised by the assessee, as reduced by any amount actually paid by, or recovered from, the assessee in respect of such security or shares. The fair market value means the value determined in accordance with the method as may be prescribed by the CBDT. “Option” means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a pre-determined price.
(g) 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 lakh [Section 17(2)(vii)];
(h) the value of any other fringe benefit or amenity as may be prescribed by the CBDT [Section 17(2)(viii)].
It can be noted that the aforesaid definition of perquisite is an inclusive one. More terms can be added in.
Types of perquisites: Perquisites may be divided into three broad categories:
(1) Perquisites taxable in the case of all employees
(2) Perquisites exempt from tax in the case of all employees
(3) Perquisites taxable only in the hands of specified employees.
(1) Perquisites taxable in the case of all employees: The following perquisites are chargeable to tax in all cases.
(i) Value of rent-free accommodation provided to the assessee by his employer [Section 17(2)(i)]. Exception: Rent-free official residence provided to a Judge of a High Court or to a Judge of the Supreme Court is not taxable. Similarly, rent-free furnished house provided to an Officer of Parliament, is not taxable. [For valuation, refer to para 1.20]
(ii) Value of concession in rent in respect of accommodation provided to the assessee by his employer [Section 17(2)(ii)].
(iii) Amount paid by an employer in respect of any obligation which otherwise would have been payable by the employee [Section 17(2)(iv)]. For example, if a domestic servant is engaged by an employee and the employer reimburses the salary paid to the servant, it becomes an obligation which the employee would have discharged even if the employer did not reimburse the same. This perquisite will be covered by section 17(2)( iv) and will be taxable in the hands of all employees.
(iv) Amount payable by an employer directly or indirectly to effect an assurance on the life of the assessee or to effect a contract for an annuity, other than payment made to RPF or approved superannuation fund or deposit-linked insurance fund established under the Coal Mines Provident Fund or Employees‘ Provident Fund Act. However, there are schemes like group annuity scheme, employees state insurance scheme and fidelity insurance scheme, under which insurance premium is paid by employer on behalf of the employees. Such payments are not regarded as perquisite in view of the fact that the employees have only an expectancy of the benefit in such schemes.
(v) the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer or former employer, free of cost or at concessional rate to the assessee.
(vi) the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds ` 1 lakh.
(vii) The value of any other fringe benefit or amenity as may be prescribed by the CBDT.
(2) Perquisites exempt from tax in all cases: The following perquisites are exempt from tax in all cases –
(1) Telephone provided by an employer to an employee at his residence;
(2) Transport facility provided by an employer engaged in the business of carrying of passengers or goods to his employees either free of charge or at concessional rate;
(3) Privilege passes and privilege ticket orders granted by Indian Railways to its employees;
(4) Perquisites allowed outside India by the Government to a citizen of India for rendering services outside India;
(5) Sum payable by an employer to a RPF or an approved superannuation fund or deposit – linked insurance fund established under the Coal Mines Provident Fund or the Employees‘ Provident Fund Act;
(6) Employer‘s contribution to staff group insurance scheme;
(7) Leave travel concession;
(8) Payment of annual premium by employer on personal accident policy effected by him on the life of the employee;
(9) Refreshment provided to all employees during working hours in office premises;
(10) Subsidized lunch or dinner provided to an employee;
(11) Recreational facilities, including club facilities, extended to employees in general i.e., not restricted to a few select employees;
(12) Amount spent by the employer on training of employees or amount paid for refresher management course including expenses on boarding and lodging;
(13) Medical facilities subject to certain prescribed limits; [Refer to point 10 of para 1.20]
(14) Rent-free official residence provided to a Judge of a High Court or the Supreme Court;
(15) Rent-free furnished residence including maintenance provided to an Officer of Parliament, Union Minister and a Leader of Opposition in Parliament;
(16) Conveyance facility provided to High Court Judges under section 22B of the High Court Judges (Conditions of Service) Act, 1954 and Supreme Court Judges under section 23A of the Supreme Court Judges (Conditions of Service) Act, 1958.
(3) Perquisites taxable only in the hands of specified employees [Section 17(2)(iii)]: The value of any benefit or amenity granted or provided free of cost or at concessional rate which have not been included in 1 & 2 above will be taxable in the hands of specified employees: Specified employees are:
(i) Director employee: An employee of a company who is also a director is a specified employee. It is immaterial whether he is a full-time director or part-time director. It also does not matter whether he is a nominee of the management, workers, financial institutions or the Government. It is also not material whether or not he is a director throughout the previous year.
(ii) An employee who has substantial interest in the company: An employee of a company who has substantial interest in that company is a specified employee. A person has a substantial interest in a company if he is a beneficial owner of equity shares carrying 20% or more of the voting power in the company.
Beneficial and legal ownership: In order to determine whether a person has a substantial interest in a company, it is the beneficial ownership of equity shares carrying 20% or more of the voting power that is relevant rather than the legal ownership.
Example: A, Karta of a HUF, is a registered shareholder of Bright Ltd. The amount for purchasing the shares is financed by the HUF. The dividend is also received by the HUF. Supposing further that A is the director in Bright Ltd., the question arises whether he is a specified employee. In this case, he cannot be called a specified person since he has no beneficial interest in the shares registered in his name. It is only for the purpose of satisfying the statutory requirements that the shares are registered in the name of A. All the benefits arising from the shareholding goes to the HUF. Conversely, it may be noted that an employee who is not a registered shareholder will be considered as a specified employee if he has beneficial interest in 20% or more of the equity shares in the company.
(iii) Employee drawing in excess of ` 50,000: An employee other than an employee described in (i) & (ii) above, whose income chargeable under the head ‘salaries‘ exceeds Rs 50,000 is a specified employee. The above salary is to be considered exclusive of the value of all benefits or amenities not provided by way of monetary payments.
In other words, for computing the limit of ` 50,000, the following items have to be excluded or deducted:
(a) all non-monetary benefits;
(b) monetary benefits which are exempt under section 10. This is because the exemptions provided under section 10 are excluded completely from salaries. For example, HRA or education allowance or hostel allowance are not to be included in salary to the extent to which they are exempt under section 10.
(c) Deduction for entertainment allowance [under section 16(ii)] and deduction toward professional tax [under section 16(iii)] are also to be excluded. If an employee is employed with more than one employer, the aggregate of the salary received from all employers is to be taken into account in determining the above ceiling limit of
Rs 50,000, i.e., Salary for this purpose = Basic Salary + Dearness Allowance + Commission, whether payable monthly or turnover based + Bonus + Fees + Any other taxable payment + Any taxable allowances + Any other monetary benefits – Deductions under section 16]