Introduction

Perquisites, often referred to as perks, are benefits over and above the monetary compensation received by an employee. Perks range from monetary benefits such as allowances or commissions in addition to the basic salary, increments, and bonus components (profit share, stock options, etc), to non-monetary perks such as company cars, rent-free accommodation provided by employers, club memberships, or even gym memberships. 

What are Perquisites in Income Tax?

Perquisite meaning in income tax is important both for employees as well as employers. Perquisites, besides being incentives, also fall in the tax net in India as per the Income Tax Act. Precisely defined groups of perquisites fall within the tax ambit and need to be valued in determining the taxable income for individuals. Perquisites attract tax. Thus, any misunderstanding or neglect on the part of individuals to adhere to the tax aspect of the same can result in unwarranted delays and/or penalties from the tax assessing authorities for misreporting.

Furthermore, many rules, exemptions, and valuation methods can affect the tax treatment of perquisites. In this blog, you will learn about what perquisites are, what is the classification of perquisites, and the tax treatment of perquisites in income tax. This will help employers and employees to know about the income tax rules and regulations to enable them to follow the law and use these beneficial perquisites properly.

Importance of Perquisites in Income Tax

As you already know what is perquisite, this is time to focus on the benefits it provides.

Perquisite meaning in income tax is not only about receiving the extra benefits provided by the company to the employees but also understanding how those benefits improve employee engagement, retention, and the recruitment of the most talented individuals.

These benefits can encourage an employee to remain with an employer. The provision of different types of income tax perquisites allows a company to cater to its employees’ diverse needs and increase their job satisfaction and loyalty. Let’s discuss this in detail below.

Enhancing Employee Satisfaction and Loyalty

Perks play a major role in an employee’s job satisfaction. When companies provide additional benefits to fulfill employees’ different requirements, it makes them feel more welcomed and comfortable. For example, some perquisites, such as health insurance or gym membership, are for employees’ physical or mental well-being. Other indirect perks, such as flexible working hours or working from home opportunities, improve work-life balance, which an employee nowadays is more concerned about. If the employer cares about their employees’ well-being, the employees will want to stay more loyal to the company, which helps reduce the turnover rate.

Attracting and Retaining Top Talent

A good package of additional benefits can attract the best and the brightest talents to your organization. Most job-seekers today don’t judge a job offer purely by the salary; they also consider the range of other benefits. For example, it is widely known that modern workers, especially millennials and Gen Z, prefer workplaces that offer a friendly atmosphere, allow more time for hobbies and personal growth, and take care of their employees’ well-being. That’s why companies with gym memberships, pension policies, etc., are likely to be more attractive to potential employees than companies that do not have these facilities. Employee benefits packages are a key factor in retention, emphasizing the importance of a company’s commitment to employee happiness during recruitment and onboarding processes.

Boosting Productivity and Performance

Perquisites can also directly affect employees’ productivity and performance. Benefits such as company-provided tools (laptops and smartphones) can enable employees to do their jobs more efficiently and effectively. Likewise, perks such as on-site childcare or meal voucher facilities let employees save time and mitigate stress, allowing them to concentrate better on their tasks. Furthermore, offering perks that promote physical and mental well-being, such as gym memberships or mental health support, can lead to healthier, more motivated employees who are capable of sustaining higher levels of productivity over the long term.

Tax Efficiency and Financial Benefits

From a financial perspective, perquisites can also offer tax efficiency for both employers and employees. Certain perks, such as contributions to retirement funds or health insurance premiums, are often tax-free or taxed at a lower rate, providing a financial advantage to employees. In financial terms, non-cash benefits can be more cost-effective for employers than equivalent salary increases, offering employees valuable compensation while also keeping the employee’s total payroll cost down.

Differences Between Allowances and Perquisites

Although allowances and perquisites both provide additional benefits beyond a regular salary, they differ significantly in their nature, purpose, and tax implications. Understanding these differences is crucial for both employees and employers as it will help navigate the complexities of compensation and taxation effectively. Let’s understand the basic difference between what are allowances and what are perquisites through an example.

Suppose Ravi gets ₹2,000 per month extra on top of his basic salary for commuting to the office each day. This will be called a Transport Allowance. However, if Ravi’s company provides him with a 1.5-liter car, he can use the car for official and personal use. The company pays for the car, fuel, maintenance, and driver. Now, this is a prerequisite. 

Definition and Nature

Allowances are a fixed amount of money given to the employee to cover specific expenses. These are usually added to the employee’s basic pay. For instance, employees can use House Rent Allowance (HRA) to pay their house rent, and Transport Allowance to pay their traveling costs. The allowance is usually given directly to the employee as part of their monthly salary package.

Perks, or perquisites, are extra benefits or privileges provided to employees on top of their in-hand salary. In contrast to allowances, perquisites are usually non-monetary. Some examples of perquisites are company cars, rent-free accommodation, gym memberships, and medical facilities. Employers often offer perquisites to make their compensation packages more attractive and enhance overall employee satisfaction and loyalty.

Tax Implications

The taxation of allowances and perquisites is quite different. Allowances are taxable unless they are specifically exempted under the Income Tax Act. For instance, HRA is taxable but up to a specified limit. It is only partially tax-exempt, subject to certain conditions. Similarly, conveyance allowances may be exempt up to a specified limit. However, allowances like Special Allowance or Dearness Allowance are completely taxable and part of the employee’s total taxable income.

Perquisites can be taxable or non-taxable. Employer-provided medical facilities or provident fund contributions up to a fixed sum of money are tax-free perquisites. On the other hand, rent-free housing, company cars, etc., are treated as taxable perks and must be added to the employee’s taxable income.

Payment Mode

Allowances are the most common employee benefit. They are either paid in cash or part of the salary disbursement of an employee. Allowances are known for being predictable and fixed; thus they are easier to plan or budget from an employee’s viewpoint. They represent a definite amount of money that the employee receives. 

Perquisites, on the other hand, are offered in kind. They are non-cash benefits that the employer offers to enhance the overall compensation package.

Impact on Take-Home Salary

Allowances are paid in cash and added to the monthly pay; hence, they directly affect the employee’s net salary. 

Perquisites are non-monetary benefits, so they do not impact the take-home salary directly. However, the value of taxable perquisites is considered when calculating the total taxable income, which can indirectly affect the net income after taxes.

Comparison At a Glance: Allowances vs. Perquisites

Types of Perquisites in Income Tax

The perquisites can be of 3 types: tax-exempt, taxable, and taxable only for specified employees. Employers and employees need to know the types of perquisites in income tax and their tax implications.

1. Tax-Exempt Perquisites

These are non-taxable benefits offered by an employer that are aimed to promote the well-being and efficiency of the employee and simultaneously reduce the taxable income. Examples of these benefits include:

• Medical Facilities: Medical treatment for specified illnesses is given to employees or their family members at hospitals owned by the company or government hospitals
• Employer Contributions: Contributions made by employers to the Provident Fund (PF), National Pension Scheme (NPS), or Superannuation Fund as per limits prescribed by EPF and Miscellaneous Provision Act 1952; or Company’s Contribution to Superannuation Fund or EPF 2014 as per limits prescribed by EPF and Miscellaneous Provision Act 1952.
• Food and Beverages: Meals provided during office hours (up to a limit) are exempted from taxation.
• Laptops or Computers: Laptops or computers provided by the employer for official use are also tax-free.

2. Taxable Perquisites

These are benefits that are considered part of the employee’s income and are, therefore, subject to tax. Some of the most common taxable perquisites are as follows:

• Rent-Free Accommodation: Accommodation provided by the employer to the employee free of charge or at a concessional rate.
• Company Cars: When a company car is used privately, it is taxable. The valuation depends on whether the car is used for private or official purposes, and whether the car is owned by the employer or leased by the employee.
• Gifts above a certain value: If the employer gives a gift or voucher worth more than Rs 5,000, it is taxable.
• Interest-Free Loans: Loans provided by the employer at a concessional or interest-free rate are considered taxable perquisites.

In India, when employees receive stock options (typically through Employee Stock Option Plans, or ESOPs) as part of their compensation package, they have to pay tax on vesting and Capital Gains Tax on selling them.

3. Perquisites Taxable Only for Specified Employees

These benefits are taxable only for certain types of employees, such as a company director or employees whose income exceeds a certain threshold. Here are the perquisites examples:

• Sweat equity shares: Capital shares are given at a reduced or zero cost, typically to managerial employees or those with a pre-existing interest in the company. These shares are subject to tax.
• Club Memberships: The value of club memberships furnished by the employer is taxable to specified employees.
• Director’s Perquisites: Benefits provided to directors, such as personal expenses covered by the company, are taxable.
• High-Value Insurance: Employer-provided life or health insurance that exceeds certain limits is considered taxable.

Overview of Perquisites and Their Tax Implications

Taxation on Perquisites

Perquisites are considered part of the employee’s income and are taxed according to the applicable income tax slab. The tax calculation on perquisites varies depending on the type of perquisite provided. For instance, the taxable value of free accommodation provided by an employer is calculated at 10 to 30 percent of the salary, depending on the city’s location.

Rent-Free Accommodation

An employee whose salary is ₹12,00,000 per year has been given accommodation in the city with a population of more than 25 lakh.

Taxable Value: The perquisite value is 15% of the salary, which is ₹1,80,000.

Tax Calculation: Income tax is calculated on ₹1,80,000 added to the employee’s taxable salary, which is ₹13,80,000. The tax is calculated according to the income tax slab.

Interest-Free Loan

An employee is given an interest-free loan of ₹5,00,000 for personal use, and the government charges an interest rate of 8%.

Taxable Value: The notional interest on the loan is ₹40,000 (₹5,00,000 x 8%). This amount is perquisite.

Tax calculation: ₹40,000 is added to the total income, which is ₹5,40,000, and taxed at the applicable income tax slab rate.

Common Perquisites and Their Benefits

The table shows common perquisites examples and their advantages, which not only reduce personal expenses but also enhance the quality of life for the employee and increase productivity and satisfaction.

Legal Aspects and Compliance

The legal framework for perquisites is largely defined under Section 17(2) of the Income Tax Act of India. It states what is perquisite and how to value it. Rule 3 of the Income Tax Rules provides the valuation methods for perquisites such as rent-free housing, motor cars, and interest-free loans. The employer must evaluate the taxable value of perquisites provided to an employee and report it correctly in the employee’s income. This income is subject to tax deductions at source (TDS).

Failure to do so can lead to legal consequences such as penalties and fines. Employers must keep themselves informed of any changes in tax law and make sure that their payroll systems are capable of processing the complexities of perquisite taxation. Regular audits and consultations with tax experts can help maintain compliance with perquisite taxation. Furthermore, employers should be transparent with employees about perquisite taxation and make them aware of what is legally owed and what benefits perquisites will provide for them.

Automating Perquisite Management

Today, general payroll software usually incorporates smart tools for managing perquisites, such as calculating, tracking, and reporting facilities like free housing, company cars, stock options, and health benefits. 

Key Features

• Payroll software tracks the perquisites provided to each employee, and valuations are automatically assigned based on predefined rules
• Modern payroll systems are designed to ensure compliance with tax laws
• Payroll software allows HR teams to customize perquisite packages for different employee groups
• Automated tools provide real-time data on perquisite usage, allowing employers to monitor benefits distribution and manage costs effectively

Benefits of Using Payroll Software

Overall Efficiency: Automation eliminates the need for calculations and paperwork, reducing the time the HR and finance teams spend managing perquisites. This allows them to focus on strategic issues.

Enhanced Compliance: With built-in compliance features, payroll software ensures that all perquisites are managed following legal requirements, reducing the risk of non-compliance penalties.

Accuracy and Error Reduction: Payroll software automates perks handling, reducing the scope of errors that can happen through manual handling. This ensures that the benefits are provided to employees correctly, avoiding unnecessary disputes.

Employee Satisfaction: Automating perquisite management is transparent and reliable, which may increase employee satisfaction. Employees will be more likely to trust a system that delivers their benefits accurately and timely.

Conclusion

Perquisites in income tax can be useful in attracting and retaining top talent, increasing employee satisfaction, and ensuring that workforce incentives align with organizational objectives. These perquisites help organizations gain a competitive advantage by supplying relatively cost-effective employee benefits. Looking ahead, there is likely to be a trend for perquisites to become more personalized, flexible, and sustainable, reflecting the evolving work environment. For example, as remote work becomes more prevalent, organizations might offer perks such as home office set-ups, wellness programs, and flexible working hours. Embracing these trends could help organizations build a more motivated, productive, and loyal workforce, which will be essential for organizations to thrive in the long term.

FAQs

Who is responsible for paying taxes on perquisites?

Employees are taxed for the value of perquisites provided. Employers typically determine the taxable value of perquisites and deduct the corresponding tax from the employee’s salary as part of the income tax withholding process.

How do perquisites affect employee net salary?

Perquisites are not a component of net salary. Rather, they represent a part of the employee’s total compensation. However, taxable perquisites will reduce the total net salary due to additional tax liabilities imposed on these benefits.

How do companies determine which perquisites to offer?

Companies set perks according to industry standards, job positions, and company policy. Management decides on those prequisites, considering several factors such as employee retention, incentive, job attractiveness, and the company’s budget.

How can employees maximize the benefits of perquisites?

Once you understand the taxes involved, you can maximize your perquisite benefits by picking perquisites that have the greatest value. Perquisites that are exempt from tax and employer-provided benefits contributions can boost your total compensation package.

What are the implications of perquisites on retirement benefits?

Retirement funds can enhance retirement benefits by increasing savings. However, excessive perquisites may lead to higher taxable income, potentially affecting the net value of retirement savings after tax deductions.

Can perquisites be transferred or shared with family members?

Some perquisites, like health insurance or accommodation, may be extended to family members, depending on company policy. 

How do perquisites vary across different industries?

Depending on the industry, the perks can be quite different. For example, firms in the tech industry might offer stock options and flexible work schedules, whereas manufacturers will give staff housing and transportation. The perks depend on what is typical for the industry, what is necessary for the job, and what the staff expects.