Taxability of Perquisites Under Income Tax Act

Benefits that an employee receives from their job, position and salary are called perquisites. These benefits can be in the form of reimbursements, fuel, company car, company-funded accommodations, employee loans, etc. Like how all income-generating individuals and business entities are liable to be taxed under the Income Tax Laws, these fringe benefits are also taxable. 

This blog will talk about such taxable benefits, their categories, taxation rates, and much more. Let’s begin!

Perquisites Under the Income Tax Act

perquisites can be defined as the benefits a person receives in lieu of their official position or job title by the employer. According to Section 17(2) of the Income Tax Act, PerquisiteSE can be defined as:

• The monetary value of any subsidiary drew or rent-free housing provided by the employer.
• An extra amenities or benefits are provided to the employees at a reduced rate or free.
• Any amount paid by the employer on behalf of the employee for any obligation.
• The employer’s contribution to the concerned assesses pension fund.
• The monetary value of shares is provided at a concessional rate or free of charge.

Categories of Perquisites

It is important to note that the taxation of Perquisite depends on the nature of the benefit. The Perquisite can be classified into three categories as described below.

Taxable Perquisite

Some of the employee’s benefits are liable to be taxed by the Income Tax Act. Some taxable benefits are medical cost reimbursed, subsidized/ free accommodation, utility bills paid by the employer, servant’s salary, and professional tax. Other fringe benefits like gifts of more than Rs 5,000/-, food coupons, gym membership, etc., are also taxable.

Tax-Exempt Perquisite

There are also some fringe benefits provided by the employer which are not liable to taxation. Some of the tax-free Perquisite according to the Income Tax Act are as follows:

• Travel reimbursement.
• Medical cost reimbursement.
• Computer or other such assets provided by the company.
• The employer offers refreshments.
• Use of gym facilities, health clubs, sports club interest-free salary advances.
• Employer’s EPF contribution.
• Free medical facilities.

Perquisite Taxable by Employees

This category is for the benefits like a car owned by the employer but used by the employee, educational facilities provided to the employee’s children, reimbursement of salary paid to domestic help, etc.

Who Pays Tax on Perquisite?

According to the Finance Act of 2005, any benefits that the employer provides over the salary are liable to be taxed. Such benefits are taxed at a rate of 30% of the entire monetary value of the Perquisite.

This tax is to be paid by the employer providing these additional benefits to the employee. This can be a firm, company, trust, association of persons, partnership, etc. 

Perquisite Tax Calculation

The taxation of Perquisite is calculated on the basis of the median of Income Tax calculated on the basis of the following factors:

• Taxation rate for the relevant financial year.
• Income as declared under salaries.
• Perquisite valuation for the tax amount paid by the employer. 

Let’s take a look at this calculator of tax on perqusite example to understand this a little better:

Let’s assume that Rakesh draws a salary of Rs 9,00,000, which includes 90,000 paid by the employer in the form of non-monetary benefits. The calculation of the perquisite tax will look something like this:

Income drew from Salary: Rs 8,00,000

Taxation on Salary at 4%: Rs 75,400

Applicable Taxation Rate : 75,400/8,00,000 * 100 = 9.4%

Tax Paid on Perquisite : 9.4% * 90,000 = Rs 8,316

The monthly amount to be deposited: 8,316/12 = Rs 693

This means that the employer will pay Rs 693 monthly as TDS.

Common Perquisites and their Taxation Rates

Let’s take a look at some of the common perquisite examples  and how they are taxed under the income tax laws with few commonly provided perquisites by the employers.

Housing Provided by Company

Several companies provide accommodation benefits to their employees; a perk offered apart from the salary. However, the rate of taxation depends on whether the house is leased, rented, or owned by the employer. The table given below shows the taxation rate of each of these situations:

Company Vehicle Provided by Employer

The rate of taxation on such benefits usually depends on two factors. First, whether the car is owned or being leased by the employer. Second, whether the vehicle is used for official use or the employee’s personal use. The taxation amount differs for each of these cases. The table given below shows the taxation rates for each of these situations:

Securities Options Provided by Employers

Providing stock or shares to the employees is one of the loyalties that is rewarded by the company these days. In such cases, the market value of such shares minus the amount obtained from the employee is the amount of tax applicable as a tax on Perquisite. The difference between the actual market value and the price the share is sold for is the capital gain of the employee; this is also taxable under the income tax laws. 

Conclusion

The tax rate of the Perquisite depends on the nature of the benefit. However, the rapidly growing economy means that several employers have adopted innovative ways of rewarding their employees for a job well done. Such benefits are often an essential part of an employee’s salary structure and have thus been classified as a separate taxable entity. 

Having a proper grasp of the idea of perquisites and how they are taxed helps the employee’s as it assists in understanding the resulting taxation better. Correctly understanding the taxation of perquisites further removes any doubts for companies regarding the TDS on the employee’s salary. 

Frequently Asked Questions (FAQs)