Section 17(2) of the Income Tax Act: Perquisites in Income Tax

Section 17(2) of the Income Tax Act: Perquisites in Income Tax. Section 17(2) of the Income Tax Act, 1961 defines perquisites as benefits or amenities provided to employees by their employers in addition to the salary or wages. These perquisites form an important component of the salary and are considered for taxation under the head 'Salaries'. The section outlines what constitutes a perquisite, its valuation, taxability, and exemptions available under the law.
What are perquisites as per Section 17(2) of the Income Tax Act?
Perquisites are benefits received by employees apart from their regular salary. These can be either in cash or kind and are extended by employers to provide additional comfort or facilitate work. These benefits include rent-free accommodation, car facilities, medical reimbursements, and other fringe benefits. Perquisites are taxable unless specifically exempted under the Act.
Under Section 17(2) of the Income Tax Act, perquisites include:

Rent-free accommodation provided by the employer.

Accommodation provided at concessional rent.

Value of any benefit or amenity granted by the employer.

Financial obligations discharged by the employer on behalf of the employee.

Shares allotted under sweat equity schemes at concessional rates.

Employer contributions to recognized retirement funds beyond specified limits.

Annual interest or dividend on such retirement funds.

Any other fringe benefits or amenities provided.

Rules for the Valuation of Perquisites Under Section 17(2) of the Income Tax Act
Valuation of perquisites is essential to calculate their taxable value. Section 17(2) of the Income Tax Act provides detailed methods to assess the value of various perquisites.
In case of rent-free accommodation:

For government employees, the valuation is based on the license fee determined by the government.

For non-government employees, the valuation is 15% of salary in cities with a population over 25 lakhs, 10% for cities with population between 10 to 25 lakhs, and 7.5% for cities with population below 10 lakhs.

For furnished accommodation, add 10% of the cost of furniture to the above value.

If furniture is rented, the actual rental paid is added.

Accommodation provided in hotels:

Taxable value is 24% of the salary or the actual hotel charges paid by the employer, whichever is less, if stay exceeds 15 days.

Valuation of car perquisites:

If the employer bears the maintenance cost, perquisite value is Rs. 1800 + 900 (driver) for cars with engine capacity up to 1.6L and Rs. 2400 + 900 for larger cars.

If employee bears the running costs, perquisite value is Rs. 600 + 900 or Rs. 900 + 900 depending on engine capacity.

Other perquisites:

Medical benefits are valued at the actual cost incurred.

Interest-free or concessional loans are valued as the difference between interest at prescribed rate and interest actually charged.

Club memberships and similar benefits are valued at the cost borne by the employer.

Taxability of Perquisites Under Section 17(2) of the Income Tax Act
Perquisites are taxable under the head 'Salaries' if they meet certain conditions:

They arise due to employer-employee relationship.

They are a personal benefit derived from employment.

They are legally derived from service rendered.

Perquisites are of two kinds: monetary and non-monetary. Monetary perquisites are always taxable. Non-monetary perquisites are taxable only for specified employees.
Perquisites taxable in all cases:

Dearness Allowance (DA) is fully taxable.

Interim Allowance given temporarily in lieu of final settlement is also fully taxable.

Project Allowance provided to carry out project work is taxable.

Entertainment Allowance is taxable except for government employees where exemption is the least of Rs. 5000, 1/5th of basic salary or actual allowance received.

Overtime Allowance is fully taxable as extra compensation for working beyond official hours.

Non-Practicing Allowance given to doctors or medical professionals not engaged in private practice is also taxable.

City Compensatory Allowance provided to employees working in expensive cities is taxable.

Cash Allowances are fully taxable as income.

Meals/tiffin Allowance is taxable unless exempted under rules.

Fixed Medical Allowance and Servant Allowance are taxable.

Warden Allowance paid to those supervising hostel or dormitory facilities is taxable.

Accommodation: If owned by the company, perquisite value depends on the population of the city:

15% of salary if the population is above 25 lakhs.

10% for cities between 10 to 25 lakhs.

7% for smaller towns. If leased, then lower of actual rent or 15% of salary is considered. Hotel accommodation for more than 15 days is valued at 24% of salary or actual hotel expense.

Perquisites Partly Taxable Under Section 17(2) of the Income Tax Act
Some perquisites are partially exempt and partially taxable:
House Rent Allowance (HRA):

HRA is exempt to the extent of:

Actual HRA received,

50% of salary if in metro cities or 40% in non-metros,

Rent paid in excess of 10% of salary.

Balance amount is taxable.

Children Education Allowance:

Rs. 100 per month per child (up to 2 children) is exempt.

Hostel expenditure allowance is exempt up to Rs. 300 per month per child for two children.

Transport Allowance:

Exempt up to Rs. 3200 per month for handicapped employees including blind, deaf, or orthopedically disabled individuals.

Tax-Free Perquisites for Employees Under the Income Tax Act
Several perquisites are specifically exempt under the Act:

Medical Reimbursement up to Rs. 15,000 annually is exempt.

Gratuity received by government employees and those under Gratuity Act is tax-free.

Employer contributions to Provident Fund (within prescribed limit) are exempt.

Employer's contribution to NPS up to 10% of basic salary + DA is exempt.

Interest-free or concessional loans are exempt up to the difference between market and actual interest.

Types of Perquisites in Income Tax
Tax-Exempted Perquisites:

Company-provided laptops and computers.

Office refreshments.

Travel allowance for official work.

Telephone or mobile bill reimbursements.

Employer contributions to recognized PF.

Recreational facilities or free medical checkups.

Taxable Perquisites:

Water, electricity, and gas supply by employer.

Medical reimbursements not meeting exemption criteria.

Rent-free accommodation.

Salary of domestic help paid by employer.

Gifts above Rs. 5000 in value.

Gym, meals, or club facilities provided by employer.

Perquisites Taxable for Specified Employees Under Section 17(2) of the Income Tax Act
Specified employees include:

Directors in the company.

Employees holding more than 20% equity in the employer company.

Employees drawing salary over Rs. 50,000.

Perquisites provided free or at concessional rates to specified employees are taxable. This includes all kinds of non-cash benefits not covered under exempt or partially exempt categories.
Employees Eligible for Tax-Free Perquisites
Tax-free perquisites are allowed to employees under specific heads:

Medical reimbursement up to Rs. 15,000 annually.

Conveyance allowance up to Rs. 1,600 per month.

Telephone and mobile bills for official and limited personal use.

Leave Travel Allowance (LTA) is exempt for two trips in a block of four years, for travel within India.

Meals provided during working hours at office are exempt.

Interest-free or concessional loans are exempt up to prescribed limit.

Gratuity received is tax-exempt for eligible employees.

Employer contribution to PF and NPS are exempt up to the defined limits.

Examples of Calculation of Perquisites Under Section 17(2) of the Income Tax Act
Accommodation:

For company-owned property less than Rs. 10 lakhs, 7% of value is taxable.

Between Rs. 10–25 lakhs, 10% is taxable.

Over Rs. 25 lakhs, 15% is taxable.

For leased properties, perquisite is nil if employee pays actual rent or 15% of salary.

Hotel stay exceeding 15 days incurs a 24% tax.

Transportation:

Small cars below 1.6 liters: Rs. 1800 monthly perquisite.

Large cars above 1.6 liters: Rs. 2400 monthly.

Add Rs. 900 monthly if driver facility is included.

Stock Options:

Perquisite value = Fair Market Value (FMV) – amount paid by employee.

Capital gains on sale = Selling price – FMV (considered for tax).

Who Pays the Perquisite Taxes Under Section 17(2) of the Income Tax Act?
Generally, the value of perquisites is added to the salary and taxed in the hands of the employee. However, if the employer chooses to bear the tax burden, it becomes a non-monetary benefit and grossing up is done to compute tax.
Organizations must deduct tax at source (TDS) on the value of perquisites provided. Fringe benefit tax earlier levied on employers is now discontinued, and tax is now paid by employees on perquisites received.
Benefits of Perquisites for Employees

Improve employee morale and job satisfaction.

Help employers retain talent and reduce attrition.

Enhance employee loyalty and commitment to the organization.

Offer financial relief or lifestyle benefits without direct cash payouts.

Support employee welfare and productivity through healthcare, housing, and travel assistance.

Section 17(2) of the Income Tax Act ensures that any additional benefits provided by employers to employees are fairly taxed. It provides clarity on what constitutes a perquisite, how it is valued, and when it is taxable. Knowing about this section helps both employers and employees plan their compensation structures efficiently and in compliance with tax laws.
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Section 17(2) of the Income Tax Act, 1961 defines perquisites as benefits or amenities provided to employees by their employers in addition to the salary or wages. These perquisites form an important component of the salary and are considered for taxation under the head 'Salaries'. The section outlines what constitutes a perquisite, its valuation, taxability, and exemptions available under the law.

What are perquisites as per Section 17(2) of the Income Tax Act?

Perquisites are benefits received by employees apart from their regular salary. These can be either in cash or kind and are extended by employers to provide additional comfort or facilitate work. These benefits include rent-free accommodation, car facilities, medical reimbursements, and other fringe benefits. Perquisites are taxable unless specifically exempted under the Act.

Under Section 17(2) of the Income Tax Act, perquisites include:

Rent-free accommodation provided by the employer.
Accommodation provided at concessional rent.
Value of any benefit or amenity granted by the employer.
Financial obligations discharged by the employer on behalf of the employee.
Shares allotted under sweat equity schemes at concessional rates.
Employer contributions to recognized retirement funds beyond specified limits.
Annual interest or dividend on such retirement funds.
Any other fringe benefits or amenities provided.

Rules for the Valuation of Perquisites Under Section 17(2) of the Income Tax Act

Valuation of perquisites is essential to calculate their taxable value. Section 17(2) of the Income Tax Act provides detailed methods to assess the value of various perquisites.

In case of rent-free accommodation:

For government employees, the valuation is based on the license fee determined by the government.
For non-government employees, the valuation is 15% of salary in cities with a population over 25 lakhs, 10% for cities with population between 10 to 25 lakhs, and 7.5% for cities with population below 10 lakhs.
For furnished accommodation, add 10% of the cost of furniture to the above value.
If furniture is rented, the actual rental paid is added.

Accommodation provided in hotels:

Taxable value is 24% of the salary or the actual hotel charges paid by the employer, whichever is less, if stay exceeds 15 days.

Valuation of car perquisites:

If the employer bears the maintenance cost, perquisite value is Rs. 1800 + 900 (driver) for cars with engine capacity up to 1.6L and Rs. 2400 + 900 for larger cars.
If employee bears the running costs, perquisite value is Rs. 600 + 900 or Rs. 900 + 900 depending on engine capacity.

Other perquisites:

Medical benefits are valued at the actual cost incurred.
Interest-free or concessional loans are valued as the difference between interest at prescribed rate and interest actually charged.
Club memberships and similar benefits are valued at the cost borne by the employer.

Taxability of Perquisites Under Section 17(2) of the Income Tax Act

Perquisites are taxable under the head 'Salaries' if they meet certain conditions:

They arise due to employer-employee relationship.
They are a personal benefit derived from employment.
They are legally derived from service rendered.

Perquisites are of two kinds: monetary and non-monetary. Monetary perquisites are always taxable. Non-monetary perquisites are taxable only for specified employees.

Perquisites taxable in all cases:

Dearness Allowance (DA) is fully taxable.
Interim Allowance given temporarily in lieu of final settlement is also fully taxable.
Project Allowance provided to carry out project work is taxable.
Entertainment Allowance is taxable except for government employees where exemption is the least of Rs. 5000, 1/5th of basic salary or actual allowance received.
Overtime Allowance is fully taxable as extra compensation for working beyond official hours.
Non-Practicing Allowance given to doctors or medical professionals not engaged in private practice is also taxable.
City Compensatory Allowance provided to employees working in expensive cities is taxable.
Cash Allowances are fully taxable as income.
Meals/tiffin Allowance is taxable unless exempted under rules.
Fixed Medical Allowance and Servant Allowance are taxable.
Warden Allowance paid to those supervising hostel or dormitory facilities is taxable.

Accommodation: If owned by the company, perquisite value depends on the population of the city:

15% of salary if the population is above 25 lakhs.
10% for cities between 10 to 25 lakhs.
7% for smaller towns. If leased, then lower of actual rent or 15% of salary is considered. Hotel accommodation for more than 15 days is valued at 24% of salary or actual hotel expense.

Perquisites Partly Taxable Under Section 17(2) of the Income Tax Act

Some perquisites are partially exempt and partially taxable:

House Rent Allowance (HRA):

HRA is exempt to the extent of:

Actual HRA received,
50% of salary if in metro cities or 40% in non-metros,
Rent paid in excess of 10% of salary.

Balance amount is taxable.

Children Education Allowance:

Rs. 100 per month per child (up to 2 children) is exempt.
Hostel expenditure allowance is exempt up to Rs. 300 per month per child for two children.

Transport Allowance:

Exempt up to Rs. 3200 per month for handicapped employees including blind, deaf, or orthopedically disabled individuals.

Tax-Free Perquisites for Employees Under the Income Tax Act

Several perquisites are specifically exempt under the Act:

Medical Reimbursement up to Rs. 15,000 annually is exempt.
Gratuity received by government employees and those under Gratuity Act is tax-free.
Employer contributions to Provident Fund (within prescribed limit) are exempt.
Employer's contribution to NPS up to 10% of basic salary + DA is exempt.
Interest-free or concessional loans are exempt up to the difference between market and actual interest.

Types of Perquisites in Income Tax

Tax-Exempted Perquisites:

Company-provided laptops and computers.
Office refreshments.
Travel allowance for official work.
Telephone or mobile bill reimbursements.
Employer contributions to recognized PF.
Recreational facilities or free medical checkups.

Taxable Perquisites:

Water, electricity, and gas supply by employer.
Medical reimbursements not meeting exemption criteria.
Rent-free accommodation.
Salary of domestic help paid by employer.
Gifts above Rs. 5000 in value.
Gym, meals, or club facilities provided by employer.

Perquisites Taxable for Specified Employees Under Section 17(2) of the Income Tax Act

Specified employees include:

Directors in the company.
Employees holding more than 20% equity in the employer company.
Employees drawing salary over Rs. 50,000.

Perquisites provided free or at concessional rates to specified employees are taxable. This includes all kinds of non-cash benefits not covered under exempt or partially exempt categories.

Employees Eligible for Tax-Free Perquisites

Tax-free perquisites are allowed to employees under specific heads:

Medical reimbursement up to Rs. 15,000 annually.
Conveyance allowance up to Rs. 1,600 per month.
Telephone and mobile bills for official and limited personal use.
Leave Travel Allowance (LTA) is exempt for two trips in a block of four years, for travel within India.
Meals provided during working hours at office are exempt.
Interest-free or concessional loans are exempt up to prescribed limit.
Gratuity received is tax-exempt for eligible employees.
Employer contribution to PF and NPS are exempt up to the defined limits.

Examples of Calculation of Perquisites Under Section 17(2) of the Income Tax Act

Accommodation:

For company-owned property less than Rs. 10 lakhs, 7% of value is taxable.
Between Rs. 10–25 lakhs, 10% is taxable.
Over Rs. 25 lakhs, 15% is taxable.
For leased properties, perquisite is nil if employee pays actual rent or 15% of salary.
Hotel stay exceeding 15 days incurs a 24% tax.

Transportation:

Small cars below 1.6 liters: Rs. 1800 monthly perquisite.
Large cars above 1.6 liters: Rs. 2400 monthly.
Add Rs. 900 monthly if driver facility is included.

Stock Options:

Perquisite value = Fair Market Value (FMV) – amount paid by employee.
Capital gains on sale = Selling price – FMV (considered for tax).

Who Pays the Perquisite Taxes Under Section 17(2) of the Income Tax Act?

Generally, the value of perquisites is added to the salary and taxed in the hands of the employee. However, if the employer chooses to bear the tax burden, it becomes a non-monetary benefit and grossing up is done to compute tax.

Organizations must deduct tax at source (TDS) on the value of perquisites provided. Fringe benefit tax earlier levied on employers is now discontinued, and tax is now paid by employees on perquisites received.

Benefits of Perquisites for Employees

Improve employee morale and job satisfaction.
Help employers retain talent and reduce attrition.
Enhance employee loyalty and commitment to the organization.
Offer financial relief or lifestyle benefits without direct cash payouts.
Support employee welfare and productivity through healthcare, housing, and travel assistance.