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 A, an employee, is given a house by his employer. On 31.3.2010, 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 31-3-2010. However, the definition of income is wide enough to
bring the value of the benefit enjoyed by employee 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);
(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).
(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).

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.

Value of rent-free accommodation provided to the assessee by his employer [Section 17(2)(i)]

Valuation of unfurnished accommodation:

Central and State Government employees (including military personnel):

Value of perquisite = Licence Fees determined by Union / State Government – Rent actually paid
by the employee.

Note: This provision does not include employees of a local authority (like port commission or
Municipal Corporation) and foreign Government.
(B) Private sector employees:

Employee Value of perquisite

Where the accommodation Where accommodation is provided in a city where population as per
is owned by the employer. 2001 census is:
(a) 10 lakh or less – 7.5% of salary;
(b) More than 10 lakh up to 25 lakh -10% of salary.
(c) More than 25 lakh – 15% of salary
In respect of the period during which the said accommodation was
occupied by the employee during the previous year as reduced by
the rent, if any, actually paid by the employee.
Where the accommodation The value of perquisite would be the lower of the following:
is taken on lease or rent by (a) Actual amount of lease rental paid or payable by the employer ;
the employer and provided or
to the employee (b) 15% of salary.
This value would be reduced by the rent, if any, actually paid by the
employee.

“Salary” for this purpose includes the basic pay, dearness allowance which forms part of salary
for retirement benefits, taxable allowances, bonus or commission payable monthly or otherwise
or any monetary payment, by whatever name called from one or more employers.
It does not include the following, namely:-
(a) Dearness allowance, unless it enters into the computation of superannuation or retirement
benefits of the employee concerned;
(b) Employer’s contribution to the provident fund account of the employee;
(c) Allowances which are exempted from payment of tax;
(d) The value of perquisites specified under section 17(2) of the Income-tax Act;
(e) Any payment or expenditure in the nature of allotment of shares, debentures or warrants under
ESOP or any other scheme;
(f) Any allowance in the nature of medical facility to the extent not taxable.
For computing salary, for the purpose of valuation of perquisite in respect of rent-free
accommodation, basic salary, bonus etc. are to be considered on due basis.

(2) Valuation of furnished accommodation: When the accommodation provided to the

employee is furnished by the employer, the computation of the value of the perquisite has to be
done in the following manner:—
Step 1: Compute the value of the perquisite as if the accommodation is unfurnished.
Step 2: To the value arrived at in Step 1 above, add the value of furniture as follows:
(a) If the furniture is owned by the employer, then value of furniture is to be added on the basis of
10% p.a. of the original cost of the furniture, or
(b) If the employer has taken the furniture on hire, then value of furniture is the actual hire
charges borne by the employer.
Note:
1. This addition in respect of furnished accommodation is applicable to all categories of
employees.
2. In this context, the term ‘furniture’ will include TV sets, radio sets, refrigerators and other
household appliances, air-conditioning plant or equipment or other similar appliances or gadgets.

(3) Valuation of accommodation provided in a hotel: Where the accommodation is provided

by the employer (Government or other employer) in a hotel, the value of the perquisite will be
lower of:
a. 24% of salary paid or payable for the previous year or
b. the actual charges paid or payable to such hotel for the period during which such
accommodation is provided.
The above value is reduced by the rent, if any, actually paid or payable by the employee.

Note: 1. The value of this perquisite will not be calculated if the employee is provided such
accommodation for a period not exceeding in aggregate 15 days on the transfer from one place to
another.
2. “Hotel” includes licensed accommodation in the nature of motel, service apartment or guest
house.

(4) Accommodation provided at the time of transfer:

Where on account of his transfer from one place to another, the employee is provided with
accommodation at the new place of posting while retaining the accommodation at the other place,
the value of perquisite shall be determined with reference to only one such accommodation which
has the lower value (as determined according to the above provisions) for a period not exceeding
90 days and thereafter the value of perquisite shall be charged for both such accommodations in
accordance with the valuation rules.
Exceptions:
However, none of the above valuation rules would be applicable to any accommodation provided
to an employee working at a mining site/onshore oil exploration site/project execution site/dam
site/power generation site/offshore site which, -
(i) being of a temporary nature and having plinth area not exceeding 800 sq. feet, is located at
least 8 kms away from the local limits of any municipality or cantonment board; or
(ii) is located in a remote area. [Remote area means an area that is located at least 40 kms away
from a town having a population not exceeding 20,000 based on latest published all India census].
Thus, the abovementioned accommodation shall be a tax-free perquisite.
Valuation of provision for domestic servants [Sub-rule (3) of Rule 3]

The value of perquisite is determined as under:

Servant Servant’s salary Value of perquisite Taxable in the

appointed by paid by hands of

Employee Employer Actual cost incurred by the All employees

employer on the servant
Employer Employer Actual cost incurred by the Specified
employer on the servant employee

Note: Where the employee is paying any amount in respect of such servant facility, the amount
so paid shall be deducted from the value of perquisite determined above.

Valuation of supply of gas, electricity or water supplied by employer

The value of perquisite is determined as under:

Facility in the Value of perquisite Taxable in the

name of Provided from Provided from hands of
own source outside
Employee Manufacturing cost Amount paid to the All employees
to the employer supplier
Employee Manufacturing cost Amount paid to the Specified
to the employer supplier employees

Note: Where the employee is paying any amount in respect of such services, the amount so paid
shall be deducted from the value of perquisite determined above.

Valuation of free or concessional educational facilities [Sub-rule (5)

of Rule 3]

The value of perquisite is determined as under:

Facility Value of perquisite Taxable in

provided to Provided in a Provided in any the
school owned by other school hands of
the employer
Children Cost of such education in Cost of such education. Specified
similar school (There (There would be no employee
would be no perquisite if perquisite if the cost of
the cost of education does education does not exceed
not exceed Rs.1,000 p.m. Rs.1,000 p.m. per child
per child)
Other household Cost of such education in Cost of such education Specified
 member similar school incurred employee

Note:
1. If the employee incurs the expenditure of school fees and the same is reimbursed by the
employer, then the entire amount of reimbursement so made, shall be fully taxable in the hands of
all employees.

2. Child includes step child as well as the adopted child of the employee.

3. “Household member” shall include -

(a) Spouse
(b) Children and their spouses
(c) Parents
(d) Servants and dependants.