Section 17 (2) of Income Tax Act

Perquisites, meaning in income tax, are the privileges that employees earn from their employer/organisation other than their monthly salary. Depending on their nature and certain policies, these prerequisites can be taxable or nontaxable.

Some simple examples of perquisites are income tax, medical bills exemption under Section 17 (2), interest-free loans, fuel reimbursements, company-provided car or accommodation and much more that will be discussed in further sections.

-Value of Furnished Accommodation

The value calculated is the same as the value of the furnished property, increased by 10% of the cost of the furniture. But if the furniture is rented, then the price will be hiked by the amount paid by the employer for renting the furniture.

-Health Insurance or Medical Benefits

The value of perquisites as per Section 17 (2) that the employer provides is the actual cost incurred by the employer.

-Furnished RFA Value

For central and state government employees, the licence fees for the house are specified and deducted from the rent paid by the individual. For non-government employees, perquisites in income tax are 15% for cities with a population above ₹25 lakhs, then 10% for a population above ₹10 lakhs but less than ₹25 lakhs. Finally, for cities with a population of less than 10 lakhs, it is 7%.

The value of the perquisite will be the rent paid by the organisation or 15% of the salary, whichever is less.

-Club Membership

The employer provides club membership value of perquisites as per Section 17 (2), which is the cost incurred by the employer itself.

-Company Car or Vehicle

The employer compensates the value of the company car or vehicle based on the actual cost to the employer, which includes depreciation, maintenance, insurance and fuel expenses.

However, the vehicle is partly used for official purposes and partly for personal use. In that case, the value of perquisites in income tax is computed based on the amount of distance travelled for personal use and the cost incurred by the employer for it.

Also Read: What is Professional Tax?

The perquisites in income tax are divided into two parts: monetary and non-monetary perquisites. While monetary perquisites are taxable for all employees, non-monetary perquisites are taxable for specified employees. To better understand them, let us divide the perquisites into these categories:

Perquisites Taxable in All Cases Under Section 17 (2) of Income Tax Act

-Dearness Allowance

Dearness allowance or DA is a cash allowance paid by the government to employees and pensioners to safeguard them against the impact of inflation. As per the latest Income Tax Act 1961, the dearness allowance is entirely taxable for salaried employees and it ensures that their taxability of dearness allowance is declared in the field returns.

-Interim Allowance

An interim allowance is a provisional or temporary allowance granted to a person or entity when a final decision or settlement is determined. When an interim allowance is paid instead of a final allowance, it is fully taxable.

-Overtime Allowance

As its name suggests, an overtime allowance is an additional payment made to an employee for any time they have worked beyond their normal working hours. The payment compensates the employee for the additional time and effort they put in to complete their work. The amount given as an overtime allowance is also fully taxable.

-Project Allowance

A project allowance is a sum of money allocated by the employer to a project team or individual to pay for all expenses incurred during the project's work. Thus, this allowance is entirely taxable.

-Entertainment Allowance

Entertainment allowance, as its name suggests, is the allowance provided by the employer for the entertainment of clients, business associates or customers.

A government employee can claim tax exemption under Section 17 (2) of the Income Tax Act, whichever is the least, 1/5th of the basic salary, the amount received in the form of allowance or 5,000. All other employees are still liable to pay tax for entertainment allowance.

-Cash Allowance

A cash allowance is a payment made by an employer to its employees as compensation in addition to their salary or wages. The employer gives cash allowances for various reasons, such as incentivising employees for certain actions or behaviours, covering the cost of specific work-related expenses, or rewarding employees for their work. The amount given as a cash allowance is completely taxable.

-City Compensatory Allowance

City compensatory allowance, or CCA, is an allowance that employers provide to their employees as compensation for the higher cost of living in certain cities or urban areas. The allowance is often provided to employees who are required to work in urban areas or cities with a higher cost of living than the average. The amount paid as CCA is completely taxable.

-Servant Allowance

As the name suggests, these income tax perquisites are provided to employees to cover the cost of employing a servant or helper. The allowance is meant to compensate for the cost of hiring a person to help them with household chores like cooking, cleaning, etc.

**-Warden Allowance **-

Employers pay their employees a warden allowance under Section 17 (2) of the Income Tax Act when the employee is responsible for supervising the welfare of an individual in certain circumstances, such as a hostel, dormitory or prison.

The warden allowance is taxable and intended to compensate employees for the additional responsibilities and duties they perform to ensure the safety and welfare of the individuals under their care.

-Non- Practising Allowance

A non-practising allowance or NPA is an allowance that is provided to dentists, doctors and other healthcare professionals who are employed by the government but must be actively engaged in clinical practice.

It can include professionals who are working in administrative roles, research positions or teaching positions. The amount given as a non-practising allowance is completely taxable under section 17 (2) of the Income Tax Act.

-Fixed Medical Allowance

Fixed Medical Allowance, or FMA, is a type of allowance provided to government employees as a reimbursement for their and their families' medical expenses.

The allowance amount is fixed and is paid monthly, quarterly or annually to cover medical expenses such as doctor’s visits, consultations, diagnoses, treatment, etc. It is a completely taxable allowance.

-Meals/Tiffin Allowance

As the name says, the meal or tiffin allowance is paid to employees to compensate for snacks and meal expenses that they consume during their working hours.

It is typically designed to cover employees' additional expenses if they are not able to cook meals while working away from home. The amount of the allowance is completely taxable.

-Accommodation Offered by the Organisation

The accommodations offered by the organisation are fully taxable and subject to the organisation's requirements. The rate of tax is decided by whether the employer rents or owns the accommodation. Look at the table here to better understand the tax rates:

Also Read: Section-56 of the Income Tax Act
Perquisites Not Taxable Under Section 17 (2) of Income Tax Act

-House Rent Allowance

A house rent allowance or HRA is an allowance amount paid by the employer to their employees so that they can meet the costs of living in rented accommodation. Most private organisations and employers pay HRA as one of the subcomponents of their employee’s salary. The minimum exemption that employees can get under HRA perquisites in income tax are:

The total HRA amount received.

Excess rent paid annually over 10% of annual salary (Basic salary + DA)

50% of salary (Basic salary + Dearness allowance) if the employee is living in a metro city and 40% if living in a non-metro city.

-Children Education Allowance

The Children's Education Allowance is financial support extended by the Income Tax Department of India to promote literacy. Through this allowance, employees can reduce their taxable income and decrease their payable tax.

The amount of ₹100 per month per child studying in an educational institution is allowed under the children's education allowance. An allowance of ₹300 per month per child for up to two children is provided for those who are living in a hostel.

-Transport Allowance

It is an allowance paid by the employer to their employee for travelling to and from their house to the office. The amount of ₹3,200 transportation allowance is exempted from tax for disabled employees. These disabled employees include blind people and orthopedically handicapped people with lower levels of extremities.

Also Read: How to Calculate HRA Tax Exemption Online with Example

Medical Reimbursement: As per Section 17 (2) of the Income Tax Act, for medical reimbursement, any medical expenses for up to ₹15,000 per year incurred by the employees and their family members are exempted from the tax.

Gratuity: Any gratuity amount received by government employees and the employees that are covered under the Payment of Gratuity Act are exempted from the tax.

Provident Fund: The contribution made by the employer towards the employee Provident Fund (PF) is exempted from tax up to certain limits.

Employer’s Contribution to NPS: Any contribution made by the employer towards the employee’s National Pension System (NPS) account is exempted from the tax for up to 10% of the salary (basic plus DA).

Concessional Loans: Under these perquisites in income tax, if an employer provides interest-free or concessional loans to their employees, then the difference between the market interest rate and actual interest is exempted from the tax.

The calculation of the taxability of perquisite is done with an average income tax based on:

• Rate of tax for the given fiscal year

• Income charged under “Salaries” head

• Value of the perquisites for the tax amount paid by the employer

Example of Perquisites in Income Tax

The income tax charged under the “Salaries” head of employee A is ₹8 lakhs, including ₹90,000 non-monetary perquisites that the employer pays. Now, as per ITA, the perquisite tax will be the income charged under the “Salaries” head ₹8 lakhs.

• Tax on salary inclusive of education and health cess @ 4%= ₹75, 400

• Average tax rate = 7₹5,400/ ₹8,00,000 X1 00 = 9.4%

• Tax paid on ₹90,000 = 9.24% X 90,000 = ₹8,316

• The amount that needs to be deposited every month = 8,31,600/ 12 → ₹693

• Thus, ₹693 needs to be paid by the employers as TDS on employee A’s salary.

Also Read: How to Calculate Income Tax on Salary?
Who is Responsible for Paying Perquisites in Income Tax?

Any employer, organisation, firm, or group of individuals who provide their employees with perquisites and fringe benefits must pay the value of perquisites as per Section 17 (2). The percentage of perquisites is 30% of the total value of fringe benefits that need to be paid to the government.

People often get confused between allowances and perquisites in income tax and try to draw similarities. However, these concepts are different from one another. Let us understand them in the table below:

Also Read: Income Tax Exemptions for Salaried Employees

The knowledge of perquisites meaning in income tax is crucial for every employee to know the tax implications of perquisites provided by their employer. Similarly, it is also important for employers to be aware of all the rules and regulations governing the perquisites to ensure they comply with the Income Tax Act rules and regulations.

With the help of the information provided here, both parties can gain crucial insights into the perquisites of income tax and play their part of responsibility.

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