Perquisites under Income Tax Act
Perquisites under Income Tax Act
A perquisite is a non-cash benefit granted by an employer to the employee. Under the Income Tax Act, a perquisite is defined as a benefit which an employee avails of or is entitled to on account of the employee’s job or position in the enterprise. Obtaining perquisites has important tax consequences for the employee. When an employee obtains a perquisite during the course of employment, the perquisite is taxable as a part of the assessment of the employee. The value of the perquisites received by an employee is included under the salary income of the employee. On account of the perquisites, the taxable income of the employee may exceed the basic exemption limit. When the taxable income crosses the basic exemption limit, the requirement for Tax Deducted at Source (TDS) arises. The taxpayer should note that perquisites are non-cash consideration, whereas the TDS on the salary of the employee is a cash withholding. When the income crosses the basic exemption limit and TDS withholding is made, it becomes mandatory for the taxpayer to file an income tax return. Thus, while perquisites offer benefits to the taxpayer, they also come with tax-implications. Hence, it is up to the taxpayer to choose between various perquisites, keeping in mind the tax implications of each.
Classification of Perquisites
For income tax purposes, Perquisites are classified into the following categories:
- Perquisites that are taxable only when the employee belongs to a specified group.
- Perquisites which are taxable in the hands of all categories of employees.
- Specified security or sweat equity shares transferred or allotted by the employer to the assessee.
- Employer’s contribution to the approved superannuation fund to the extent it exceeds Rs.1,50,000.
- Tax-free Perquisites
Perquisites Taxable for all Categories of Employee
The following perquisites are taxable irrespective of the category to which the employee belongs:
- Value of rent-free accommodation provided to the assessee by his employer.
- Value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer.
- Value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:
- By a company to an employee who is a director
- By a company to an employee is a person having a substantial interest in the company
- By any employer, including a company, to any employee whose income under the head ‘salaries’, after excluding the value of all benefits or amenities not provided for by way of monetary payments, exceeds fifty thousand rupees
- Usage of a vehicle provided for the journey by the assessee from his residence to his office or other places of work and back to his residence shall not be regarded as a benefit or amenity granted or provided to him free of cost or at a concessional rate.
- Amount paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee.
- Amount paid to effect an assurance on the life of the assessee or to effect a contract for an annuity otherwise through a specified or approved fund.
- Value of employee stock options or sweat equity shares allotted or transferred free of cost or at concessional rate to the employee.
- Employer’s contribution to the superannuation fund, not exceeding rupees one lakh fifty thousand.
Taxable Fringe Benefits
A fringe benefit is a type of perquisite for which tax has to be separately paid in advance by the taxpayer. The following fringe benefits are covered under the Act:
- Value of accommodation provided to the employee.
- Value of use of motor car provided to the employee.
- Value of services of a sweeper, watchman, gardener and personal attendant.
- Value of supply of gas, electricity or water for employee’s household consumption.
- Value of free or concessional educational facilities provided to members of the household of the employee.
- Value of free of cost or concessional fare by an employer engaged in the business of carriage of goods or passengers provided to any member of the household of the employee.
- Value of benefit arising from the provision of interest-free or concessional loan provided to the employee or any member of the household of the employee.
- Value of travelling, touring, accommodation and any other expenses paid for or borne or reimbursed by the employer for any holiday availed of by the employee or any member of his household.
- Value of free food and non-alcoholic beverages provided by the employer to an employee excluding such provision during working hours at office or business premises or through non-transferable paid vouchers useable at only eating joints.
- Value of any gift or voucher or token in lieu of which such gift can be received by the employee or any member of his household, where such value in the aggregate exceeds rupees five thousand during the previous year.
- Amount of membership fee and annual fee incurred by the employee or any member of his household charged to a credit card including any add-on card borne by the employer.
- Amount of annual or periodical fee in a club incurred by the employee or any member of his household borne by the employer.
- Value of usage of any movable asset of the employer used by the employee or any member of his household.
- Value of benefit arising from the transfer of a movable asset belonging to the employer to the employee or any member of his household.
- Value of any other benefit or amenity, service, right or privilege provided by the employer.
Taxpayers should note that the Government has abolished the system of separately taxing fringe benefits with effect from 01.04.2011.
Employee Benefits Not Treated as Perquisites
The specified benefits received by an employee should not be treated as perquisites. Hence, the following items will not be included under the head of Salaries:
- Value of any medical treatment provided to an employee or any member of his family in any hospital maintained by the employer.
- The sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family:
- In any hospital maintained by the Government or any local authority or any other hospital approved by the Government for the purposes of medical treatment of its employees
- For the prescribed diseases or ailments, in any hospital approved by the Principal Chief Commissioner or Chief Commissioner in accordance with the prescribed guidelines. In such a case the employee should attach with the return of income a certificate from the hospital specifying the disease or ailment for which medical treatment was required and the receipt for the amount paid to the hospital.
- Premium which was borne by an employer in relation to an employee, to effect or to keep in force an insurance on the health of the employee or member of his family under any scheme approved by the Central Government or the Insurance Regulatory and Development Authority.
- Any sum paid by the employer in respect of any expenditure actually incurred by the employee on his medical treatment or treatment of any member of his family not exceeding fifteen thousand rupees in the financial year.
- Any expenditure incurred by the employer or paid by the employer to the employee in respect of:
- Medical treatment of the employee, or any member of the family of such employee, outside India.
- Travel and stay abroad of the employee or any member of the family of such employee for medical treatment.
- Travel and stay abroad of one attendant who accompanies the patient in connection with such treatment, subject to the condition that the expenditure on medical treatment and stay abroad shall be excluded from perquisite only to the extent permitted by the Reserve Bank of India; however, the expenditure on travel should be excluded from perquisite only in the case of an employee whose gross total income does not exceed two lakh rupees.
Employees who can Avail of Tax-free Perquisites
For the following types of employees, certain perquisites can be availed without attracting tax-obligations:
- When the taxpayer is a director of the company in which the assessee is employed. However, reimbursement of expenses to a director by a company will not be regarded as a taxable perquisite.
- If an employee has a substantial interest in the company. A person who has a substantial interest in the company is a person who is the beneficial partner of shares, not being shares entitled to a fixed value of dividend whether with or without a right to participate in the profits, carrying not less than 20% of the voting power. This provision indicates that even if a person is not a registered holder of shares in a company but has any beneficial interest in the shares, the person would be covered by the given definition. Conversely, even if a person is a registered holder of shares but has no beneficial interest in the shares, then the person would not be covered by the definition. Thus, beneficial ownership of the shareholding is the criterion under the Act.
- When the employee’s income under the head Salaries from all the employers put together, exclusive of the value of all the benefits or amenities not provided for by way of monetary payments, exceeds Rs.50,000. Income for this purpose would include all taxable monetary payments such as basic salary, dearness allowance, bonus, and commission but does not include the value of any non-monetary benefits and perquisites.
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