Perquisites under Section 17(2) of the Income Tax Act

Perquisites are the additional benefits provided to the individuals and entities based on their job & position. These benefits are provided to the employees by their employers. This guide deals with the accountability of these additional benefits as per the quoted norms under section 17(2), Income Tax Act 1961.

What does a salary include?

The concept of salary is a wider concept in terms of the Income Tax Act. The term ‘salary’ is defined under the income tax act which includes:

  • Monetary payments such as basic salary, bonus, commission, allowances, etc.
  • Non-monetary benefits include housing accommodation, interest-free loans, medical facility, etc.

These non-monetary facilities are considered as perks to the employees. The taxability of these benefits is calculated as per the section 17(2), Income Tax Act.

Perquisite

The term ‘perquisite’ means a privilege, profit or gain. In terms of the income tax, it includes some extra benefits provided to the workers/ employees in addition to their basic salary. These benefits might be provided at some concessional rates or free of cost to the employees.

For example, rent-free accommodation, use of health club, provision of a vehicle for personal use, refreshment during working hours, etc.

Now, there are few questions raised in terms of taxability of these benefits that whether these perks will be taxable. If yes, then how the employees will value these received benefits. Moreover, taxpayers also wanted to know about the exemption in case of perquisite, if available.

Now, we discuss the features and taxability of these benefits and how it impacts individuals’ ITR.

Features of Perquisites

  • It can be provided in form of cash or in kind.
  • Perquisite can be taxable only in case of its legal originality. Any undue benefit taken by an employee without his employer’s consent can’t be considered as perquisite.
  • Reimbursement of incurred expenses during the performance of job is not considered as a perquisite.

Categories of ‘Perquisite’

On the basis of taxability, perquisites can be classified into 2 categories:

  1. Taxable perquisites
  • Accommodation at any concessional rate or rent-free accommodation is subject to tax with certain conditions.
  • Allotted specified securities or sweat equity shares to the employees
  • Value of motor-car for personal use is subject to tax with certain conditions
  • Provision of attendant/ personal worker
  • Gas, water or electricity supply by the employer
  • Reimbursement of medical expenses over & above Rs 15,000 in a FY
  • Concessional/free education service provided to the children of employees only if the amount exceeds Rs 1,000 per child in a month.
  • Loan at concession rate or interest-free loan provided (Except the case in which loan is given for the treatment of any prescribed diseased, and the aggregated loan amount is exceeding Rs 20,000).
  • Free/concessional foodservice & non-alcoholic beverages expenses if the amount exceeds Rs 50 per meal to an employee.
  • Gift, voucher or token in lieu of several gifts only if the amount exceeds Rs 5,000 in the financial year.
  • Accommodation, travelling, and touring facilities provided by the employer.
  • Club expenditure except for the case in which membership of health club and sports are provided uniformly.
  • Credit card expenses provided by the employer
  • Use of transportable assets other than computers and laptops
  • Transfer of transportable assets based on the certain conditions

Note: If the value of the above-mentioned perquisites is below the prescribed monetary value, it will be treated as an exemption.

  1. Exempt Perquisite for tax purpose
  • Transport facility
  • Telephone facility
  • Privilege passes as well as tickets
  • Training expenses
  • Leave travel concession is subject to tax exemption with certain conditions
  • Medical facilities up to the prescribed limits
  • Perquisites for rendering services outside the country.

Valuation of Perquisites

After understanding taxable perquisites & tax exempted perquisites, the next question arises how these benefits are being calculated. This comprehensive guide demonstrates the valuation of the most common perquisites as covered in pay packages.

Valuation of rent-free accommodation

The valuation of rent-free accommodation benefit can be categorized based on certain conditions, which is as follows:

The valuation of free accommodation benefit based on the population density of that particular area where the accommodation is being provided by the employer.

Population density where the accommodation is being providedPerquisite value to be taxed
<10 lakhs7.5% of salary
10 to 25 lakhs10% of salary
> 25 Lakhs15% of salary

Note: Salary of the employee would be calculated for the period during which the accommodation was occupied in the previous FY.

If the employer has taken that place on lease or rent, the value of the perquisite would be the lower one from the following options

  • Payable amount or actual rent paid by the employer
  • 15% of the employee’s salary

Note: This method is applicable in the case of unfurnished accommodation. On the other, in the case of furnished accommodation, the value of provided furniture will be added to the above-calculated value with the following condition:

  • If the employer-owned that furniture- 10% of the cost of furniture for each FY
  • If the employer hired that furniture from a 3rd party- Payable hire charges for the same

If the accommodation is being provided in a guest-house or hotel, in that that value of perquisite would be the lower one from the following option:

  • Payable hotel charge or already paid charges by the employer
  • 24% of the employee’s salary

Valuation of vehicle for personal use

The usage of motor car by the employees for their personal purpose is also a perquisite provided by the employers. This valuation can be categorized in the following situation which is as follows:

SituationCar below 1.6 CC engineCar Above 1.6 CC. engineIf the chauffeur is provided by the employer to run the car, then an additional amount as mentioned below will be charged
Vehicle owned or hired by the employer & expenses on running & maintenance are borne by the employerMonthly Rs. 1,800 Monthly Rs. 2400Monthly Rs. 900
Car owned or hired by the employer but the expenses on maintenance & running for such personal & private use are fully borne by the employee. Monthly Rs. 600Monthly Rs. 900
Monthly Rs. 900

Valuation of movable assets provided by the employer

The valuation of movable assets for tax purpose can be calculated with the following prescribed limits:

Type of assetsValue of perquisite for tax purpose
Computers and electronic itemsActual cost excluded depreciation (50% by written down value method for the completed year of usage)
Motor CarActual cost excluded depreciation (50% by written down value method for the completed years of usage)
Other assetsActual cost excluded depreciation (20% by straight line method for the completed years of usage)

Valuation for the transfer of movable assets for tax purpose

The valuation of other perquisites depends upon the actual cost incurred by the employer or actual benefit received by the employees.

Type of assetsValue of perquisite for tax purpose
Computers and electronic itemsActual cost excluded depreciation (50% by written down value method for the completed year of usage)
Motor CarActual cost excluded depreciation (50% by written down value method for the completed years of usage)
Other assetsActual cost excluded depreciation (20% by straight line method for the completed years of usage)

Differences between perquisites & allowances

Allowances are provided in cash to the employees. It includes a fixed amount of sum to meet certain requirements on monthly basis. It depends on the employee that whether he use allotted cash for that specified purpose or not. This amount in form of allowances are the part of pay package whereas perquisites may or may not the part of pay package. Perquisites are the additional benefits for the employees which may or may not be provided in cash form and the taxability of the benefits depends upon the value of received benefits.

HRA (House rent allowance)

HRA is one of the valuable components of the salary package provided to the employees by their employers. If an employee receives HRA as part of the salary and he lives in a rented apartment, then he can claim for full/partial HRA exempt under section 10. However, if the employee doesn’t live in a rented apartment then this allowance will be fully taxable.

How to calculate house rent allowance

HRA calculation depends on 4 factors which are as follows:

  • HRA component of the salary
  • Salary
  • Rent paid
  • Location of the rented residence

HRA Exemption Rules

HRA exemption for tax purpose is least one from the following options:

  1. Actual HRA received
  2. Rent paid is reduced by 10% of the salary
  3. 50% of the basic salary if taxpayer lives in a metro city
  4. 40% of the basic salary if taxpayer lives in a non-metro city

Since the least option of the above will be exempt from tax, taxpayers can ask their employer to restructure their salary to get optimize tax benefit.

If all the mentioned factors remain constant then HRA tax exemption can be calculated on annual basis. However, any factor is changed within the relevant FY, then calculation will be done on monthly basis.

HRA exemption calculation through example

Suppose Mr. Sumit lives in Noida, and his basic salary is Rs 30,000 monthly. The HRA component is Rs 15,000 but he actually paid Rs 10, 000 for rental accommodation. How much HRA exemption he can get?

To solve the problem, let us calculate the factors affecting HRA tax exemption.

  1. Actual HRA received is Rs 1,80,000 (15,000 x 12)
  2. Actual rent paid is Rs 120,000 and reducing amount is Rs 36,000 (10% of salary), hence the amount will be Rs 84,000 only.
  • 50% of the basic salary is Rs 1,80,000

Hence, the least option will be Rs 84,000 that Mr. Sumit can get as HRA exemption.

How can Taxblock help you in understanding salary allowances?

Just like HRA tax exemption under sec. 10, the income tax act covered several other tax-saving provisions, but individuals might fail to claim these tax benefits due to lack of knowledge & procedures. Therefore, they should take professional help for this job. Filing ITR and saving taxes becomes easy when individuals have professional support. Here, Tax Block come into the picture. Individuals can either go with our intuitive income tax e-return platform or let our experts file it for them. Tax Block have a team of tax experts to accurately file client’s tax returns online by providing maximum tax benefits.

For taking HRA benefit, an individual need to pay rent to his landlord, means owner of the house in which he lives. However, the owner of the house can be his parents but one thing needs to be remembered that at least 70% of the rent amount that he pays to his parents get added to the taxable income of his parents also.

If the actual rent paid exceed the limit of Rs 1 lakh per annum, then PAN of the landlord is mandatory to mention in ITR to claim HRA exemption.

According to the section 80 G of the Income Tax Act, individuals are allowed to claim for HRA tax benefit even if they don’t get HRA from their employers.

It is mandatory to get the PAN Card details of the employer to claim HRA exemption. However, if the landlord doesn’t have PAN then the tenant must get a declaration from the landlord regarding the same. Moreover, it will be better to get PAN details or declaration form before he shifted on rent to avoid all such hassles

An individual can claim an HRA tax benefit if he is living with his parents as per certain conditions. For HRA tax exemption, a tenant needs to pay rent to his landlord, which means the owner of the house in which he lives. However, the owner of the house can be his parents but one thing needs to be remembered that at least 70% of the rent amount that he pays to his parents get added to the taxable income of his parents also.

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