Section 17(2) of Income Tax Act – Perquisites Explained and How They're Taxed

Perquisites are often the least understood part of a salary package — many employees don't realise that a company car, subsidised accommodation, or an interest-free loan carries a specific, calculable tax value under Section 17(2). Understanding exactly how each benefit is valued, and which ones remain genuinely tax-free, helps you interpret your Form 16 accurately and plan your compensation structure smarter.

This page covers:

• What Section 17(2) defines as a perquisite
• Complete valuation rules for accommodation, vehicles, and loans
• Fully taxable vs. partially taxable vs. tax-exempt perquisites
• Worked examples showing exact perquisite calculations
• Who qualifies as a "specified employee" with additional provisions
• Employer obligations for reporting perquisites

Section 17(2) of India's Income Tax Act defines perquisites, which are non-cash benefits provided by an employer to an employee — such as rent-free accommodation, a company car, medical facilities, or interest-free loans — and specifies that these are generally taxable as part of salary, though some are exempt or have specific valuation rules.

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

For government employees, the value is the licence fee determined by the government. For non-government employees, Section 17(2) 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

For furnished accommodation, add 10% of the furniture cost per annum to the unfurnished value. If furniture is rented, the employer's actual rent paid is added instead.
 

Worked example: For an employee with a monthly salary of Rs. 50,000 in a metro city, annual salary is Rs. 6,00,000. Perquisite value = 15% of salary = Rs. 90,000 per annum.

Worked example: A 1.8L car with driver, all expenses paid by the company — monthly perquisite = Rs. 2,400 + Rs. 900 (driver) = Rs. 3,300; annual value = Rs. 39,600.

The perquisite value equals the difference between interest calculated at the prescribed rate and the actual interest paid by the employee.

Worked example: For a loan of Rs. 5,00,000 at zero interest when the market rate is 10%, the interest benefit is Rs. 50,000 — this becomes the taxable perquisite value.

• 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 organisation

These are taxable regardless of the employee's position or salary level.

• House Rent Allowance (HRA): Exempt to the lowest of actual HRA received, 50% of salary (metro) or 40% (non-metro), or 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

• Rent-free government accommodation: For Union Ministers, High Court/ Supreme Court judges, MPs, and other notified officials
• Interest-free medical loans: For treatment of specified diseases under Rule 3A; loans up to Rs. 2,00,000 (any purpose) are also exempt
• Free meals at workplace: Up to Rs. 50 per meal (old regime only); tea, snacks, and food in remote or offshore locations also exempt
• Employer's contribution to retirement funds: Exempt up to a combined limit of Rs. 7,50,000 annually across recognised PF, EPF, NPS, and superannuation funds — any excess is taxable as a perquisite
   

Additional tax-free perquisites for all employees

• Medical reimbursement for government hospital treatment
• Refreshments during working hours
• Non-transferable recreational facilities
• Laptops and computers for work use
• Interest-free loans up to Rs. 20,000
• Employer's telephone/ mobile for official use
• Group insurance premium paid by employer

Specified employees face additional perquisite provisions:

• A director of the company
• An employee with substantial interest (more than 20% voting power)
• An employee whose income exceeds Rs. 50,000, excluding perquisite value

Stock options: When shares are allotted, the difference between fair market value and the amount paid by the employee is a taxable perquisite. Capital gains at the time of eventual sale are taxed separately.
 

Employer-owned accommodation: If the property value is below Rs. 10,00,000, 7% is taxable; between Rs. 10,00,000-25,00,000, 10% is taxable; above Rs. 25,00,000, 15% is taxable. Hotel accommodation for more than 15 days is taxed at 24% of salary.

Employees are primarily responsible for paying tax on perquisites, but employers must:

• Calculate the perquisite value correctly
• Deduct appropriate TDS
• Include the perquisite value in Form 16
• Report high-value perquisites in Form 12BA

Employers failing to properly account for perquisites face penalties.

Understanding your complete perquisite structure matters when applying for a home loan, since lenders assess your total compensation — not just base salary — when evaluating eligibility. Wondering if you qualify for home loan benefits to reduce your tax burden? Check your eligibility with Bajaj Finance and find out instantly. Bajaj Finance offers home loans from 7.25% p.a.* with amounts up to Rs. 15 Crore* and tenures up to 32 years.

Section 17(2) governs a genuinely significant, often-overlooked component of taxable compensation — understanding exactly how accommodation, vehicles, loans, and other non-cash benefits are valued helps you interpret your total tax liability accurately.