What Is Perquisites

Introduction

Income tax is a crucial aspect of the financial world, and taxpayers must comply with their countries' tax laws. As individuals or businesses earn income, they must pay a portion of it as tax to the government. However, each country's tax laws provide specific benefits or perks to help taxpayers reduce their tax liability.

These benefits are known as perquisites or “perks.” This blog explores the concept of perquisites in income tax, the types of perquisites available, and how they can benefit taxpayers.

What are the Perquisites in Salary?

Perquisites refer to the benefits or additional payments an employer provides to an employee in addition to the regular salary or wages. In India, these are defined under the Income Tax Act of 1961.

Examples of Perquisites

A few examples of perquisites commonly provided by employers to their employees in India include the following:

●    Company-provided accommodation
●    Company car
●    Club membership
●    Stock options
●    Education expenses
 

What Are the Different Types of Perquisites?

Perquisites are the additional benefits or payments an employer makes to an employee in addition to the regular salary or wages. The different types of perquisites include the following.

1.    Monetary perquisites: These are the perquisites provided in cash or money. For example, house rent allowance, conveyance allowance, medical allowance, and leave travel allowance.

2.    Non-monetary perquisites: These are the perquisites provided in kinds, such as the provision of a company car, accommodation, or free meals. Non-monetary perquisites are subject to valuation, and their value is added to the employee's taxable income.

3.    Stock options: Stock options are the right to purchase a company's stock at a predetermined price. This perquisite is commonly provided to employees in senior management positions.

4.    Retirement benefits: Employers may provide various retirement benefits such as the Employee Provident Fund (EPF), gratuity, pension, or superannuation as a perquisite.

5.    Perquisites for business owners: Business owners may receive certain perquisites such as using company-owned assets, travel and entertainment expenses, and reimbursement for expenses incurred for personal use.

6.    Taxable: These benefits are taxable, and some examples include rent-free accommodation, providing gas, water, and electricity, paying the employee's professional tax, reimbursing medical expenses, and paying the salary of a servant employed by the employee.

7.    Non-taxable: These benefits are non-taxable.

8.    Taxable only by the employees: This type encompasses various items, such as education benefits for an employee's children, a car owned by the employer that the employee uses, and so on.
 

Difference Between Allowances and Perquisites

Allowances and perquisites are both types of additional payments or benefits an employer provides to an employee. However, there are some key differences between the two:

The Benefit of Perquisites

Perquisites has several benefits for employers and employees, including the following.

1.    Attracting and retaining talent: Offering attractive perquisites can help employers attract and retain talented employees. Employees are more likely to stay with an employer who offers additional benefits and perks that enhance their work experience and quality of life.

2.    Motivation and job satisfaction: Providing perquisites can motivate employees and increase their job satisfaction. Perquisites can help employees feel valued and appreciated, improving their morale and motivation to work harder and achieve their goals.

3.    Improved productivity: Providing perquisites can improve employee productivity by reducing stress and enhancing work-life balance. For example, offering gym memberships or wellness programs can help employees stay healthy and reduce stress, leading to improved productivity.

4.    Tax benefits: Some perquisites may offer tax benefits to both employers and employees. For example, providing transportation or meals as a perquisite may be tax-deductible for the employer and tax-exempt for the employee.

5.    Competitive advantage: Offering attractive perquisites can give employers a competitive advantage in the job market. In a competitive job market, those who offer better perquisites are more likely to attract top talent and retain their best employees.
 

Taxation on Perquisites Under Income Tax Act

Perquisites is subject to taxation under the Income Tax Act in India. The value of perquisites is added to the employee's taxable income, and the tax treatment depends on the type of perquisite and the terms of employment. Here are some examples of how perquisites are taxed under the Income Tax Act.

●    Rent-free accommodation
If an employer provides rent-free accommodation to an employee, the value of the perquisite is calculated as the fair market rent of the accommodation minus any rent paid by the employee.

For example, if the fair market rent of the accommodation is Rs. 20,000 per month and the employee pays Rs. 5,000 per month as rent, the value of the perquisite is Rs. 15,000 per month. This value is added to the employee's taxable income and taxed at the applicable rate.

●    Company car
If an employer provides a car to an employee for personal use, the value of the perquisite is calculated based on the cost of the car, depreciation, and other expenses. The value of the perquisite is calculated as 1.20 times the cost of the car minus any amount paid by the employee towards using the car.

For example, if the car costs Rs. 10 lakhs, the value of the perquisite is Rs. 12 lakhs. If the employee pays Rs. 1 lakh towards using the car, the value of the perquisite is Rs. 11 lakhs. This value is added to the employee's taxable income and taxed at the applicable rate.

●    Club membership
If an employer provides club memberships to employees, the value of the perquisite is calculated as the annual membership fee paid by the employer, divided by the number of employees who use the club facility.

For example, if the employer pays an annual membership fee of Rs. 2 lakhs for a club and 10 employees use the facility, the value of the perquisite is Rs. 20,000 per employee. This value is added to the employee's taxable income and taxed at the applicable rate.

Employers and employees must understand the tax implications of perquisites and comply with the relevant tax regulations. Employers may seek professional advice to ensure compliance with the Income Tax Act, and employees may consult with a tax advisor to understand the tax implications of the perquisites provided to them by their employers.

Tax-Exempt Perquisites

While employers provide their employees with several perquisites that are considered taxable income under the category “Income from Salaries”, some are exempt from tax.

●    Leave travel concessions subject to conditions
●    Medical treatment/expenditure
●    Computer/laptop for official use
●    Fees paid for corporate membership
●    Annual premium paid for personal accident policy
●    Subscription to work-related periodicals and journals
●    Gifts not exceeding Rs.5,000 per annum
●    Others