MonoHRWhat are Perquisites Meaning in Income Tax?
According to the Income Tax, perquisites are benefits or payments provided to an employee in addition to their regular salary or wages. These benefits may be provided either in cash or in other ways. It can be taxable or exempt, depending on its nature, and certain perquisites are taxable only for specified employees.
What are the Perquisites in Salary?
Salary perquisites refer to the additional benefits or privileges provided to employees by their employers, such as bonuses, cash allowances, company cars, and accommodation. These advantages can be a valuable supplement to an employee’s salary package, although they may also have tax implications.
Types of Perquisites or Perks
Based on their characteristics and purpose, perquisites can be classified into the following categories:
Taxable Perquisites
Taxable perquisites are considered part of an employee’s income and are, therefore, subject to tax under the Income Tax Act of India.
Non-Taxable Perquisites
Non-taxable perquisites are exempt from tax if they meet the specific conditions and limits specified in the Income Tax Act.
Monetary Perquisites
Monetary perquisites are direct financial benefits offered to employees.
Non-Monetary Perquisites
Non-monetary perquisites are benefits provided in kind (not cash).
Perquisites for Specified Employees
The value of any benefit or perquisite provided either free of charge or at a concessional rate, which is not included in the categories mentioned above, will be taxable to specified employees.
Monetary vs Non-Monetary Perquisites
Differences Between Allowances and Perquisites
Although both allowances and perquisites are additional forms of compensation that employees receive from their employers, they are effective in different ways within the context of employee benefits.
Perquisite under Section 17 (2) and Exemptions in India
Perquisite under Section 17(2) of the Indian Income Tax Act encompasses benefits or privileges granted by an employer to an employee, which are subject to taxation unless specifically exempted by law.
This section aims to capture all forms of employee compensation, ensuring that both cash and non-cash benefits are included in taxable income.
Taxable Perquisites vs. Exempt Perquisites
Under various provisions of the Indian Income Tax Act, certain perks are subject to taxation, whereas some perquisites are exempt.
Perquisite Benefits for Employees
Apart from wages, no employee perks or extra bonuses are provided to the employees. These can lead to increased job satisfaction and improved workers’ health. Common types of fringe benefits include:
Health Benefits
Most companies provide health insurance, organize events or personal training sessions to promote the physical and psychological well-being of their staff, and offer complimentary gym memberships.
Transportation
Organizations can provide company cars, transport, or subsidized public transportation to reduce the stress associated with commuting.
Workplace Amenities
This can include free meals, snacks, or coffee, and all recreational facilities within the working environment, thus improving morale.
Flexible Work Arrangements
Flexible arrangements like teleworking, flexible work hours, or reduced working weeks provide workers with the tools to manage their home and work lives effectively.
Professional Development
Professional development is another way employers facilitate their employees, offering training sessions, seminars, and sponsorship for tuition.
Valuation of Perquisites
Valuation of perquisites under Section 17(2) of the Income Tax Act means calculating the taxable value of benefits or perks provided by an employer to employees. Different perquisites have specific valuation rules to ensure fair taxation.
Examples of Perquisite Valuation
15% of salary incentives with population > 25 lakh
- Rent-free or concessional accommodation
- Company Car: Taxable value depends on engine capacity, who bears running costs, and whether a driver is provided.
- Concessional/Interest-free loans: Taxable value = Interest at SBI rate - Actual interest paid by employee
- Other perquisites: Club memberships, utilities (gas, electricity), and medical benefits are valued as per IT rules.
Calculation of Perquisites as per Section 17 (2)
The taxable value of perquisites is added to salary income, and income tax is calculated at the applicable slab rates, including cess. Employer contributions to retirement funds beyond ₹7.5 lakh (EPF, NPS, Superannuation) are also taxable as perquisites.
Example of Perquisites Calculation under Income Tax Act
- Employee Salary: ₹9,00,000 (includes ₹1,00,000 as taxable perquisites).
- Total Tax Liability: ₹85,700 (including cess).
- Average Tax Rate: 85,700 ÷ 9,00,000 = 9.53%.
- Tax on Perquisites: 9.53% × 1,00,000 = ₹9,533.
- Monthly TDS on Perks: 9,533 ÷ 12 = ₹794 deducted from salary.
Reporting and Compliance
Employers have several obligations when it comes to the income tax law, such as:
- Performing tax deductions at source (TDS) on perks offered to workers.
- Providing Form 12BA to an employer stating details of the benefits given to employees.
- Keeping records of additional payments made to staff members.
The law also places specific responsibilities on employees, such as:
- Including perks acquired on their income tax returns.
- Paying taxes on taxable perks.
- Maintaining records of perks received.
Tax Planning Strategies
Many strategies are available to employees for reducing taxes related to perks, including:
- Designing conversion functions that best suit tax needs.
- Utilizing non-taxed indemnities or reimbursements to cover expenditures.
- Deducting against costs incurred in respect of paid benefits subject to taxation.
- Channeling funds into stock/shares or equity purchases through different ESOPs available for employees, including those who work remotely from their homes, offices, etc.
- Engaging tax-deferred pension programs at best buy prices requires approval from government agencies; thus, taxes are not prominently featured on them.
FAQs
How Can Employees Ensure Compliance with Taxation Policies Related to Perquisites?
Employees must be aware of the perquisites under the Indian Income Tax Act that can be taxable. Monetary perquisites are direct financial benefits offered to employees. or exempt, maintain their benefit records, and contact a tax professional if they are doubtful about the specific benefit tax implications.
Who are the Specified Employees for Perquisites?
According to the Income Tax Act, 1961, a specified employee is an individual who works in the public or private sector and earns a salary of more than ₹1,00,000 per year.
What are the Consequences of Not Reporting Perquisites Accurately for Taxation Purposes?
Not accurately reporting perks for assessment purposes may result in penalties, fines, and possible legal consequences. Therefore, employers and employees must follow taxation policies concerning perks to avoid any trouble.
What are Perquisites in CTC?
When your employer gives you extra benefits along with your basic salary, these are called perquisites for income tax. However, reimbursements from your employer are not included as perquisites. These benefits are part of your pay structure and are included in the total cost to the company (CTC).
What are Perquisites Examples?
Employers often provide various perquisites to enhance their employee compensation packages. Common examples of these perks include company cars, rent-free housing, and stock options, all of which aim to improve employee satisfaction and attract talent.