In essence, perquisites are privileged earnings or profits that are not included in a standard wage. In actuality, they are extra advantages on top of a person’s wage. It’s important to realise that perquisites are both taxable and exempt. Salaried individuals must learn more about the taxability of perquisites in order to account for the associated taxes and take use of possible exemptions.
What are perquisites?
Perquisites are a term that refers to a set of requirements that must be met. These are advantages that an individual enjoys as a result of his or her official position. It is paid on top of a person’s pay or wages.
Perquisites, according to the definition in Section 17(2) of the Income Tax Act, include:
- The value of subsidised or rent-free housing supplied by the employer.
- Value of any benefit or amenity provided to certain employees for free or at a reduced charge.
- Any sum paid by the employer to cover a responsibility that the assessee was obligated to cover.
- Employer contributions to a superannuation fund relating to the taxpayer in question.
- Value of specified shares or securities transferred or allocated to employees by the former or current employer, either directly or indirectly. These shares or securities are either offered at a discounted rate or are given away for free.
It’s important to remember that depending on their nature, perquisites can be tax-free or taxable. It is divided into three categories based on the taxability of perquisites.
Advantages of Perquisites
Perquisites are extra benefits that come with a specific job description. If an individual has a sales profile, for example, he or she will be expected to undertake a lot of field work. This implies that the employee will be required to travel frequently for work objectives. Traveling on a daily basis will cost the employee a lot of money in terms of fuel, automobile maintenance, meals, and lodging, among other things. To guarantee that the employee is not burdened by such costs, the company or the employer typically provides perquisites in addition to the salary to cover such costs.
Difference between Allowance and Perquisites
|Allowance is a set amount of money paid on a regular basis in addition to the wage.||Employers provide small benefits or perks for free in addition to the regular income.|
|It is taxable on a due/accrued basis, regardless of whether it is paid in addition to or in lieu of wages.||In the hands of employees, it is taxable|
|Transportation allowance, phone allowance, and so on are examples.||Rent-free housing, free power, and so on are examples.|
What are the Different Types of Perquisites?
Perquisites are divided into the following categories based on their taxability:
1) Taxable perquisites
Water, electricity, and gas supply, rent-free housing, professional tax, the income of domestic help hired by the employee, medical expenditure reimbursements, and other perquisites are all taxed.
Other perks, such as free meals, club and gym memberships, and gifts costing more than Rs. 5000, are also taxed.
2) Tax-free perquisites
These are the items that are excluded from paying taxes. Travel allowances, medical and recreational facilities, a company-supplied laptop or desktop, refreshments offered during office hours, and interest-free salary loans are among the most frequent tax-free benefits. Aside from them, the usage of amenities such as a sports club, a health club, and telephone lines are also tax-free.
3) Perquisites taxed by employees
Perquisites include, among other things, cars (which are owned by employers but must be utilised by employees), domestic help, and educational possibilities for children.
Perquisite Taxes: Who Pays Them?
Perquisites will be taxed by the government when such benefits have been supplied or are perceived to have been offered to employees by employers, according to the Finance Act of 2005. Perquisites should be taxed at a rate of 30% of the total value of the available fringe benefits. Employers who provide these above-mentioned benefits to their employees must pay the perquisite tax. They can be a corporation, a partnership, a group of people, or a group of people.
How are Perquisites Taxes Calculated?
In general, perquisite taxability is estimated as an average of income tax based on the following factors:
- The tax rate for the current fiscal year.
- Income charged under ‘salaries’.
- For the amount of tax paid by the employer, the value of perquisites is calculated.
- Perquisite Tax Calculation Example: Assume that a normal employee’s income under ‘Salaries’ is Rs. 800000, including Rs. 90000 in non-monetary perquisites paid by the employer. The perquisite tax, according to the ITA, will be —
Rs. 800000 is the amount of income that is charged under the ‘Salaries’ heading. @4% tax on pay, including education and health cess – Rs. 75400. 75400/800000 x 100 = 9.4 percent average tax rate.9.24 percent x 90000, or Rs. 8316, is the tax paid on Rs. 90000.. The monthly sum to be placed is Rs. 8316/12, or Rs. 693.
As a result, employers will deduct Rs. 693 from the employee’s salary as TDS.
Perquisites that are exempt from taxes
Tax exemptions are available for the following items:
- Perquisites for performing services outside of India are permissible. These privileges are granted to Indian nationals under Section 10(7) of -the Indian Constitution.
- Officials are provided with a rent-free apartment. For example, a judge of the Supreme Court, a judge of the High Court, a Parliamentary official, a Union Minister, and so on.
- There are no perks for expenses made by the company on behalf of their employees in the form of phone or mobile phone bills.
If interest-free or concessional loans were made available for the treatment of disorders listed in Rule 3A, perquisites are excluded from tax. In the case of a petty loan of less than Rs. 200000, however, the amount is not taxed. For paid employees, having a good understanding of common perks and how their values are taxed is beneficial, as it allows them to properly account for the ensuing taxation. A thorough understanding of the taxability of perquisites removes any remaining questions about TDS on their salaries and allows employees to work more cooperatively with their employers.