Perquisites: Meaning, Types, Calculation, and Examples

We all must have heard that perquisites should be considered in any executive compensation package but what exactly they are?  A perquisite is essentially a benefit, can be in cash or kind, that is offered by employers to employees with respect to their job position, which is in addition to cash salary or wages.  Perquisites include cases where the employer reimburses expenses or even pays for obligations incurred by the employee. Also, it's very important for a salaried employee to be more aware of how tax is charged on perquisites so that he can take advantage of all possible exemptions. 

These benefits can be taxable or non-taxable depending upon their nature and are also referred to as fringe benefits. 

Did You Know?

If you have received any non-monetary perquisites from the employer on which he has already paid the tax, then such perquisites are exempted for the employer under sec10(10CC) of the Income Tax Act.

Perquisites Meaning

Under section 17(2) of the Income-tax Act, “perquisite” is defined as including

• The value of any rent-free accommodation given to the employee.
• Any amount which was to be actually paid by the assessee is reimbursed by the employer as an obligation.
• The value of any perk/amenity given to the employee either for free or at a lower rate:

1. By a company to an employee who is a director
2. By a company to an employee who has a substantial interest in the company
3. By an employer or a company to an employee to whom the two aforesaid provisions do not apply. Additionally, an employee whose income under the head ‘Salaries’ exceeds ₹ 50,000 excluding all the benefits and amenities

• Any security or sweat equity shares of a value given by the employer either free or at a lower rate to the assessee.
• Any sum paid by the employer for assurance of the life of the employee or to effect a contract for an annuity.
• Contribution by the employer to an approved superannuation fund to the extent which exceeds ₹ 1,50,000

Also Read: Medical Allowance: Its Exemption Rate, Limit and How To Calculate

Allowance V/S Perquisites

Types of Perquisites

On the basis of their taxability Perquisites can be classified into three categories which are as follows:

Taxable Perquisites

This category covers perquisites on which tax is levied and includes benefits such as accommodation either rent-free or at a reduced rate, electricity, reimbursement of medical expenses, professional tax of employee etc.

Benefits such as gym and club memberships, free meals and gifts valued at more than ₹5000 also fall under this category.

Exempted Perquisites/ Tax-free Perquisites

This category covers those items on which tax is not levied as they are exempted from tax and includes items such as travel allowances, medical facilities, and laptops used for office purposes, and refreshments given during office hours. Zero Interest loans are one of the most common tax-free benefits. Other things such as the utilization of facilities such as a health club, telephone lines and sports clubs also fall in this category.

Perquisites Taxable Only by Employees

These types of fringe benefits include cars owned by companies but used by employees, education facilities for children, domestic help etc.

What is Taxability of Perquisites and Who Pays Perquisite Taxes?

The Finance Act 2005, states that tax is levied on perquisites by the government when these benefits are supplied or are received by employees offered to them by their employers. Tax levied on perquisites is 30% of the value of the total fringe benefits received by an employee.

The employer pays the tax on the fringe benefits offered by him to his employees. The employer here refers to a company, a firm, an association of persons or a body of individuals. It is to be noted that such tax paid is considered as a non-monetary perquisite which is exempt from the hands of the employee.

Benefits of Perquisites

Perquisites are some additional perks besides the salary which are given with respect to the job profile of an employee at work. Let's consider an example; if an individual has a sales profile, he or she will be expected to undertake a lot of work and will be required to travel frequently for work objectives which will further lead to an increase in expenses in terms of fuel, automobile maintenance, meals, and lodging, among other things. To make sure that the employee is not burdened by such costs, the company or the employer typically provides perquisites along with the salary to cover his expenses.

Also Read: All About Special Allowance - its Taxation & Calculation in India

Examples of Perquisites

Accommodation Provided by Company

Companies offer leased accommodation options to their employees. This type of benefit is a perquisite and is taxable in nature. However, the tax rate will vary on whether the place is owned, leased, or rented by the company/employer.

Here's how the tax would be levied for the above-listed cases:

Cards Provided by the Employer

When the car is provided to the employee to be used only for official purposes, it will not be taxable. Two more cases may arise. First when the car is owned or leased by the employer and second when the car is being used partly for personal purposes and partly for official use. The tax calculation will be different in both these cases. The table given below will show the rate of taxation in different cases that may arise.

Calculation of Taxability of Perquisites

Mostly, taxability of perquisite is calculated as an average of income tax that is computed through the following:

• Rate of tax for the given fiscal year
• Income charged under ‘salaries’
• Value of perquisites for the amount of tax reimbursed by the employer

Let’s understand this with the help of an example:

Assuming that the income of a regular employee is ₹ 8 lakh charged under the head ‘Salaries’ including ₹ 90,000 which is paid by the employer as non-monetary perquisites. As per the ITA, the perquisite tax will be –

Income charged under ‘Salaries’ – ₹ 8 lakh

Tax on salary inclusive of education and health cess at 4% – ₹ 75,400

75400/800000 x 100 = 9.4% (average tax rate)

Tax paid on ₹ 90000 = 9.24% x 90,000 i.e. ₹ 8,316

The amount to be deposited every month – ₹ 8,316/12, i.e. ₹ 693

Hence, ₹ 693 will be paid by the employers as TDS on employee’s salary.

Conclusion

In simple words, Perquisites are the benefits, either in cash or in-kind, offered by employers to employees in relation to their job position, which is in addition to cash salary or wages. We often take allowance and perquisites as the same thing but allowance is the financial benefit enjoyed by the employee and can be spent on the other hand, perquisites are only the advantage that is received. These benefits can either be taxable or non-taxable depending upon their nature. Also, it can be classified into three categories on the basis of its taxability.
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