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Perquisites Section 17(2) – Under Income Tax Act

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The Following article clearly explains the Perquisites Section 17(2) Under Income Tax Act. The article deals with the Meaning, Classification of and how are Perquisites taxed and who pays that Tax etc.Similar to how all income generating individuals and business houses are liable to pay income tax, certain fringe benefits or perquisite are attached to all earning individuals. Provision of medical facilities, housing allowance, provision of official vehicle are some of the most popular examples of perks or perquisite offered by employers to their employees. Using a car offered by your employer or a house provided by your employer could attract perquisite tax since these amenities are made available to you by your company over and above your salary.

Perquisites Section 17(2) - Under Income Tax Act

Perquisites meaning

Perquisites are benefits received by a person as a result of his/her official position and are over and above the salary or wages. These fringe benefits or perquisites can be taxable or non-taxable depending upon their nature. A lot of benefits and perks which come in addition to an individual’s salary are grouped under fringe benefits or perks. These components are taxed separately from the employer’s account so as to maintain transparency and accountability.

Perquisites Section 17(2) - Under Income Tax Act

Classification of Perquisites

Depending upon the tax that is levied on perquisites these can be classified into the following three heads.

  • Taxable Perquisites:Some of the perquisites that are taxable in nature are rent-free accommodation, supply of gas, water and electricity, professional tax of employee, reimbursement of medical expense, and salary of servant employed by employee. Taxable perquisites also include any other fringe benefit provided by employer to employee like free meals, gifts exceeding Rs.5000, club and gym facilities etc.
  • Exempted Perquisites:Non-taxable fringe benefits include travel allowance, computer or laptop provided by the company for official use, refreshment provided by employer during office hours, provision of medical aid, use of health club, sports club, telephone lines, interest free salary loan provided by employer to employees, contribution to provident fund by employers, free medical and recreational facilities and so on.
  • Perquisites taxable only by employees:

    This type of perquisites include car owned by company but sued by employee, education facility for children, service of domestic servant etc.

How are Perquisites taxed and who pays that Tax

Perquisites Section 17(2) - Under Income Tax Act

According to the Finance Act, 2005, perquisites are taxed by the government in case these perks are provided or are deemed to be provided to employees by employers. The rate at which perquisites are taxed is 30% of the value of fringe benefits. The perquisite tax is paid by the employer who furnishes these fringe benefits to employees. It can be a company, a firm, an association of persons or body of individuals.

Most common Perquisites and their Taxation –

Perquisites Section 17(2) - Under Income Tax Act

Examples

Some of the most popular perquisites provided by a major percentage of companies to their employees are accommodation, cars and stock options. Let us see how these perks are taxed and how is this tax calculated?

Company provided Accommodation:

A lot of employees are provided leased accommodation option by their employers. This cost of accommodation is taxable and is a perk offered by the company. The tax will however depend upon whether the place is rented, owned or leased by the employer.

The tax levied in the above listed cases is as depicted in the table below.

Type of AccommodationPopulation of the cityPercentage of tax
Owned by employerGreater than 25 lakhs15%
Between 10-25 lakhs10%
Below 10 lakhs7%
Leased by the employerActual rental paid or 15% whichever is lowerNA
Accommodation provided in a hotel or guest house for more than 15 days24%

Cars provided by Employer:

Perquisites Section 17(2) - Under Income Tax Act

The tax on this type of perquisite depends upon two factors. First is whether the car is owned or leased by the employer and second whether the car is being used only for official purposes or partly for personal purposes and partly for official use. In both the cases, the tax calculated will be different. The table below depicts the corresponding rate of taxation in the various cases that may arise.

Type of CarRate of tax
Small cars below 1.6 litresRs.1800 per month
Big cars above 1.6 litresRs.2400 per month

Stock options made available to Employees by Employer

Stocks or shares are the most common way of rewarding employees. Most companies offer stock options to employees. The fair market value less the amount recovered from employee is the amount of tax that is applicable on shares as perquisites. The difference between FMV and selling price of the share is the net capital gain in the hands of the employees and that is the amount that is taxable.

Perquisites are taxed as per their nature and the provision of the same by the employer. However, with the economy growing rapidly and globalization seeping in, most employers have gone global and are adapting to international ways of taking care of employees. Perquisites paid as part of perks is an important component for employees and has been segregated as a separate taxable component by the government of India.

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