Understanding perquisites under Section 17(2) of Income Tax Act helps employees and employers manage tax implications better. Perquisites are additional benefits provided by employers beyond regular salary. These benefits can significantly impact your tax liability and financial planning.
This article will explain Section 17(2) of Income Tax Act provisions, how perquisites are valued, and their tax treatment. We'll also see how understanding these rules helps in making informed financial decisions.
What is Section 17(2) of Income Tax Act?
Section 17(2) of Income Tax Act defines perquisites as benefits that employees receive from employers in addition to their salary. According to Section 17(2) of Income Tax Act, perquisites include any payment in cash or kind that provides personal advantage to the employee.
The Income Tax Act classifies perquisites into three main categories under Section 17(2):
- Perquisites taxable for all employees
- Perquisites taxable only for specified employees
- Tax-free perquisites
Section 17(2) of Income Tax Act also specifies how these benefits should be valued for taxation purposes. The tax treatment depends on the nature of the perquisite and whether they are provided in cash or kind.
What are the perquisites per Section 17(2) of the Income Tax Act?
Section 17(2) of Income Tax Act lists various benefits that qualify as perquisites. Here's a comprehensive table of perquisites under Section 17(2):
| Type of Perquisite | Description | Tax Treatment |
| Rent-free accommodation | Housing provided by employer | Taxable based on location and salary |
| Concessional rent accommodation | Housing at reduced rent | Taxable on concessional value |
| Vehicle facility | Car provided for personal/official use | Taxable based on engine capacity and usage |
| Interest-free/concessional loans | Loans at zero or reduced interest | Taxable on interest benefit |
| Medical benefits | Reimbursement of health expenses | Taxable beyond limits |
| Club memberships | Paid memberships to clubs | Fully taxable |
| Sweat equity shares | Shares given at concessional rates | Taxable on differential value |
| Gas/electricity/water supply | Utilities paid by employer | Fully taxable |
| Education benefits | Payments for education | Partially exempt |
| Travel and tour benefits | Vacation expenses covered | Taxable with some exemptions |
Understanding Section 17(2) of Income Tax Act provisions helps determine which benefits are taxable and how they affect your overall tax liability. Wondering if you qualify for home loan benefits to reduce your tax burden? Check your eligibility with Bajaj Housing Finance Home Loan and find out instantly by entering your mobile number and OTP.
Rules for the valuation of perquisites in income tax
Section 17(2) of Income Tax Act provides detailed rules for valuing different perquisites. These valuation rules ensure fair assessment of the benefit's worth for taxation purposes.
Rent-free accommodation valuation
For government employees, the value is the license fee determined by the government. For non-government employees, Section 17(2) of Income Tax Act prescribes:
- 15% of salary for cities with population above 25 lakh
- 10% of salary for cities with population between 10-25 lakh
- 7.5% of salary for cities with population below 10 lakh
Furnished accommodation value
The value equals the unfurnished accommodation value plus 10% of the furniture cost per annum. If furniture is rented, the actual rent paid by the employer is added to the accommodation value.
Company vehicle valuation
When a company provides a vehicle, Section 17(2) of Income Tax Act values it as:
- With chauffeur and expenses paid by employer: Rs. 1,800 per month for cars up to 1.6L engine and Rs. 2,400 for larger cars
- If employee pays for running expenses: Rs. 600/900 per month depending on engine capacity
Additional Rs. 900 per month if chauffeur is provided
Interest-free loans
The perquisite value is the difference between the interest calculated at prescribed rates and the actual interest paid by the employee.
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What is the taxability of perquisites under Section 17(2) of the Income Tax Act?
Section 17(2) of Income Tax Act categorises perquisites based on their taxability:
Fully taxable perquisites
- Dearness allowance
- Overtime allowance
- City compensatory allowance
- Entertainment allowance (except for government employees)
- Cash allowances
- Servant/warden allowances
- Medical allowances beyond exemption limits
- Non-practicing allowance
- Accommodation provided by the organization
These are taxable regardless of the employee's position or salary level under Section 17(2) of Income Tax Act.
Partially taxable perquisites
- House Rent Allowance (HRA): Exempt to the lowest of:
- Actual HRA received
- 50% of salary for metro cities (40% for non-metros)
- Actual rent paid minus 10% of salary
- Children's education allowance: Rs. 100 per month per child (maximum two children) exempt
- Transport allowance: Rs. 3,200 per month exempt for differently-abled employees
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Tax exempt perquisites
Below are some common perquisites that are fully or partially exempt from tax under Section 17(2) of the Income Tax Act. These benefits are not added to your taxable salary, provided the conditions laid down in the Act are met.
- Rent-free government accommodation: Certain government officials, such as Union Ministers, judges of the High Court or Supreme Court, Members of Parliament, and other notified officials, are provided with accommodation by the government. The value of such accommodation is treated as a tax-exempt perquisite and is not included in their salary income.
- Interest-free or concessional medical loans: If an employer provides an interest-free or low-interest loan to an employee for the treatment of specified diseases listed under Rule 3A, the benefit is exempt from tax. Additionally, loans taken from the employer that do not exceed Rs. 2,00,000 are also exempt, regardless of the purpose.
- Perquisites covered under Section 10(7): Certain allowances and benefits provided by the Indian government to its employees and citizens, as specified under Section 10(7) of the Income Tax Act, qualify as tax-exempt perquisites.
- Free meals at the workplace: The cost of free food and non-alcoholic beverages provided by the employer during working hours is exempt up to Rs. 50 per meal. Tea, snacks, and food provided in remote areas or offshore installations are also exempt. This exemption is available only under the old tax regime.
- Employer’s contribution to retirement funds: Contributions made by the employer to recognised PF, EPF, NPS, and superannuation funds are exempt up to a combined limit of Rs. 7,50,000 in a financial year. Any amount beyond this limit is taxable as a perquisite under Section 17(2).
Employees eligible for tax-free perquisites
Section 17(2) of Income Tax Act allows certain perquisites to be tax-free for all employees:
- Medical reimbursement for treatment in government hospitals
- Refreshments provided during working hours
- Recreational facilities (non-transferable and non-convertible)
- Laptops and computers provided for work
- Employer contribution to statutorily recognized provident funds
- Interest-free loans up to Rs. 20,000
- Use of employer's telephone or mobile for official purposes
- Group insurance premium paid by employer
For specified employees, Section 17(2) of Income Tax Act has additional provisions. A specified employee is:
- A director of the company
- An employee with substantial interest (>20% voting power)
- An employee whose income exceeds Rs. 50,000 excluding perquisite value
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Calculation of value of perquisites per Section 17(2)
Calculating the taxable value of perquisites under Section 17(2) of Income Tax Act follows specific rules:
Example 1: Rent-free accommodation
For an employee with monthly salary of Rs. 50,000 in a metro city:
- Annual salary: Rs. 6,00,000
- Value of perquisite: 15% of salary = Rs. 90,000 per annum
Example 2: Company car
For a 1.8L car with driver, all expenses paid by company:
- Monthly perquisite value: Rs. 2,400 + Rs. 900 (driver) = Rs. 3,300
- Annual perquisite value: Rs. 39,600
Example 3: Interest-free loan
For a loan of Rs. 5,00,000 at zero interest when market rate is 10%:
- Interest benefit: Rs. 50,000
- Taxable perquisite value: Rs. 50,000
The amount calculated is added to the employee's income and taxed at applicable tax slab rates as per Section 17(2) of Income Tax Act.
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Who pays the perquisite taxes?
Under Section 17(2) of Income Tax Act, employees are primarily responsible for paying taxes on perquisites. However, employers must:
- Calculate the perquisite value correctly
- Deduct appropriate TDS (Tax Deducted at Source)
- Include perquisite value in Form 16
- Report details in Form 12BA for high-value perquisites
Employers failing to properly account for perquisites face penalties under Section 17(2) of Income Tax Act. Employees must ensure all perquisites are properly reported in their tax returns.
Examples of perquisites
Transportation, housing, and financial benefits are some of the most common perquisites offered by employers. These benefits improve employee welfare but may be taxable depending on their nature and value.
Accommodation provided by your company
Employer-provided accommodation is a widely offered perquisite. When the accommodation is owned by the employer, its taxable value depends on the property’s valuation. If the value is below Rs. 10,00,000, 7% of the value is taxable. For properties valued between Rs. 10,00,000 and Rs. 25,00,000, 10% is taxable, while properties above Rs. 25,00,000 attract tax at 15%.
If the accommodation is leased by the employer, tax is not applicable when the employee pays the full rent or 15% of the rent. However, accommodation provided in a hotel for more than 15 days is taxable at 24% of salary.
Employer-provided transportation
Cars provided by employers are another common perquisite. The tax treatment depends on whether the car is owned or leased by the employer and whether it is used for official purposes, personal use, or both.
For personal use, the monthly taxable value is Rs. 1,800 for small cars with engine capacity below 1.6 litres and Rs. 2,400 for larger cars with engine capacity above 1.6 litres.
Stock options rewarded to employees
Many organisations reward employees through stock options. When these shares are allotted, the difference between the fair market value and the amount paid by the employee is treated as a taxable perquisite. Any capital gains earned later, at the time of sale, are taxed separately as per applicable capital gains rules.
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