Perquisites are fringe benefits under income tax provided by employers to their employees, apart from their regular salary. These benefits often come in non-monetary forms like rent-free accommodation, company car, club memberships, etc. While these income tax perks enhance employee well-being, they also have tax implications for the employees.

Taxability of Perquisites:

• Taxable Perquisites:
  • Value of rent-free accommodation: Depending on the income tax employer and nature of accommodation, different valuation rules apply. Generally, it’s 10% of salary or actual rent paid by employer, whichever is lower.
  • Concession in rent: The amount of concession received by the employee.
  • Benefits provided at concessional rates: The difference between the actual cost and the amount paid by the employee.
  • Employer-paid obligations: Any sum paid by the employer that would have otherwise been paid by the employee (e.g., club membership fees).
  • Other taxable perquisites: Interest-free loans, employer contributions to unapproved funds, etc.
• Tax-Exempt Perquisites:
  • Employer contributions to provident funds and approved superannuation funds.
  • Reimbursement of medical expenses.
  • Recreational facilities provided by the employer.
  • Free meals provided at the workplace.
  • Leave travel allowance (LTA) up to specified limits.

Tax Rate on Perquisites:

Taxable perquisites are taxed at a flat rate of 30% on their perquisite value. This income tax is added to the employee’s income under income tax the head “Salaries” and taxed as per their applicable income tax slab.

Valuation of Perquisites:

The Income Tax department provides specific rules for valuing different types of perquisites. These rules are based on factors like actual cost, rental value, salary percentage, etc. You can find detailed information on valuation rules in the IncomeTax Act and relevant circulars.

Employer’s Responsibility:

The employer is responsible for calculating the perquisite value and deducting tax at the prescribed rate. The employer then income tax deposits the deducted tax to the government along with their regular tax payments.

Employee’s Responsibility:

Employees are income tax responsible for disclosing all perquisites received in their income tax return and paying any additional tax due.

                         EXAMPLE

Assumptions:

• Employee receives a perquisite of rent-free accommodation in Chennai.
• Employee’s salary is Rs. 50,000 per month.
• The population of Chennai was more than 25 lakhs in the 2001 census.

Calculation:

1. Value of perquisite:
   • According to Income Tax rules, the value of rent-free accommodation is 15% of the employee’s salary in cities with a population exceeding 25 lakhs.
   • Therefore, the value of the perquisite = 15% * Rs. 50,000 = Rs. 7,500 per month.
2. Taxable amount:
   • The entire value of the perquisite is taxable.
   • Therefore, the taxable amount = Rs. 7,500 per month.
3. Tax on perquisite:
   • The perquisite is taxed at the applicable income tax slab rate.
   • Assuming the employee falls under the 20% tax slab, the tax on the perquisite = 20% * Rs. 7,500 = Rs. 1,500 per month.
4. Annual tax:
   • Monthly tax * 12 months = Rs. 1,500/month * 12 months/year = Rs. 18,000/year.

Therefore, the employee income taxwill have to pay an annual tax of Rs. 18,000 on the perquisite of rent-free accommodation provided by the employer in Chennai.

                 FAQ QUESTIONS

1. CIT vs. Trustees of Sir Ratan Tata Trust [AIR 1977 SC 1038]:

In this case, the Supreme Court held that the value of income taxfree accommodation provided by the employer to the employee is taxable as a perquisite. This judgment established the principle that any benefit or amenity provided by the employer to the employee, irrespective of its nature, would be considered a perquisite and added to the employee’s taxable income.

2. CIT vs. Hindustan Aeronautics Ltd. [1994] 209 ITR 342 (SC):

This case income tax dealt with the taxability of interest-free loans provided by the employer to employees. The Supreme Court held that such loans would not be considered perquisites if the interest charged was equal to or exceeding the prevailing bank rate. However, if the interest rate was lower, the difference between the prevailing bank rate and the actual interest charged would be taxable as a perquisite.

3. CIT vs. Associated Cement Companies Ltd. [1994] 207 ITR 812 (SC):

income taxThe Supreme Court held that such loans would not be taxable as perquisites if they were granted for specific purposes and the conditions laid down in Rule 3A of the Income Tax Rules were met.

4. CIT vs. B.N. Bhattacharjee [1976] 102 ITR 569 (Cal):

This caseincome tax dealt with the valuation of perquisites where the actual cost of providing the benefit was not readily available. The court ruled that in such situations, the perquisite could be valued at a reasonable approximation based on the market value or similar available data.

5. CIT vs. S. Ramamurthy [2011] 333 ITR 396 (Mad):

This caseincome tax addressed the issue of club memberships provided by employers to employees. The court held that the initial fee paid by the employer for acquiring the corporate membership would not be included in the perquisite value. However, the annual subscription fees and any additional charges incurred for availing the club facilities would be taxable as a perquisite.

6. CIT vs. Dr. V. Ramachandran [2017] 395 ITR 316 (Mad):

This caseincome tax dealt with the taxability of educational expenses reimbursed by the employer for the children of their employees. The court ruled that such reimbursements would be taxable as perquisites if they exceeded the specified limits prescribed under the Income Tax Rules.

7. Assistant Commissioner of Income Tax vs. T.N. Godavari Power & Thermal Corporation Ltd. [2020] 424 ITR 77 (Mad):

This case clarified the tax treatment of food coupons provided by employers to employees. The court ruled thatincome tax such coupons would be taxable as perquisites if they were not exchangeable for cash and could only be used for purchasing food items