Giving tax on your salary definitely feels heart wrenching. Understanding your pain, the government and your employer can help you feel good about everything. The employer can recognise your efforts, and the government encompasses it into Section 17(2) of the Income Tax Act, 1961. In simpler terms, Section 17 exemption involves additional benefits from the employer to the employee, protecting it from tax.
Perquisites According to Section 17(2) of the Income Tax Act
The perquisites, as indicated by the Income Tax Department, are
- Accommodation/rent-free or concession provided by the employer
- Any sum paid by the employer to meet the obligatory amount due through the assessee
- Value of the benefit or amenity granted free of cost or at a concessional rate to specified employees
- Shares or investments, directly or indirectly, offered at lower prices or without any cost
- Amount to be given by the organisation through funds or directly through as life insurance of the employee
- Value of amount given by the organisation to superannuation fund for the employee
- Value of additional perks or benefits.
Valuation of Perquisites under Section 17(2)
Rent-free or concessional accommodation
- Value of furnished RFA: 15% in cities populated with 25 lakh people, 10% in cities populated between 1 to 25 lakh people and 7.5% for cities with less than 10 lakh population.
- Value of furnished accommodation: Similar to furnished value, increased by 10% of the furniture cost.
- Accommodation in a hotel: 24% of the salary or charges paid to the hotel, whichever is less
- Company car or vehicle: It depends on the actual cost to the employer, which includes insurance, depreciation, fuel expenses and maintenance.
- Health insurance or medical benefits: Actual cost incurred by the employer
- Interest-free or concessional loans: It is the difference between the interest charged at the prescribed rate and the interest charged by the employer
- Club membership: As per the cost incurred by the employer.
Taxability of Perquisites
The employee has to pay tax under the ‘Salaries’ label if they fulfil the following criteria:
- Personal benefits of employee
- Received from employer
- During the continuance of the employment
- Personal benefits of the employee
- Must be from legal origin
- Directly dependent upon the service
- Derived as a result of the employer’s authority
Categories of Perquisites
Perquisites are of two types: monetary and non-monetary. The monetary perquisites are taxable for all employees, while non-monetary perquisites are taxable for specific employees.
Perquisites taxable in all cases
Some of the important cases in this category are:
- Dearness allowance: Cash allowance for employees and pensioners against inflation.
- Project allowance: The sum of money allocated to a project team or individual to cover project expenses
- Interim allowance: Temporary or provisional allowance granted during pending final decision or settlement
- Entertainment allowance: Amount the employer provides to entertain the customers, business associates or clients. It is, however, exempted under section 16 (2).
- City compensatory allowance: Allow employees to meet the living cost in urban areas and a few cities.
- Cash allowance: It is an additional cash allowance awarded other than regular salary or wages. It is provided to cover specific job-related expenses, reward employees for their performance, and to incentivise behaviours or actions.
- Non-Practising Allowance: NPA is provided to professionals like dentists, healthcare professionals and doctors engaged in clinical practice. It also includes professionals working in administrative roles, research and teaching positions.
- Fixed medical allowance: It is provided to government employees to reimburse the medical cost incurred by the individual and their family. It is the fixed amount paid at regular intervals to meet expenses like medicines, hospitalisation, doctor consultations and diagnostic tests.
Perquisites not taxable under Section 17(2)
Another important case here is
- House rent allowance: Amount paid to meet the living cost in rented accommodation. The HRA benefit exemption is a minimum of the total amount of HRA received, 50% and 40% of salary in metro or non-metro cities and excess of rent paid annually over 10% of annual salary
- Transport allowance: The amount received from the employer for travel between residence and office. The tax-free component is INR 3200 per month for handicapped employees.
- Special allowance: It is covered under section 10 (14)(i) of the Income Tax Act. Individuals need not pay the tax till it is used for the special official purpose of assigning.
- Children’s education allowance: The IT Department allows tax benefits for the education of children. The deducted money, up to INR 100 per month for children in school and INR 300 per month, is exempted from tax.
Perquisites Non-Taxable in the Hands of Specified Employees
The category includes employees of
- Government servants
Types of Tax-Free Perquisites
The common tax-free prerequisites available to employees are:
- Conveyance allowance: Upto INR 1600 per month is exempted from tax for travel between home and office
- Meals in office: Value of subsidised or free meals provided in the office during working hours as provided by the employer
- Gratuity: The employees covered under the Payment of Gratuity Act are exempted from tax
- Leave travel allowance or LTA: The exempted tax here includes the cost of travel within India under certain conditions applicable during leave periods. The exemption is possible only twice in a block of four calendar years and in the case of the actual travel expenses.
- Medical reimbursement: The tax-exempt limit is up to INR 15000 per year.
- Provident fund: Contribution of the employer to the recognised Provident Fund of the employee subject to certain limits.
- Telephone/mobile expenses: Official and personal use of mobile or telephone bills up to reasonable limit
- Interest-free or concessional loans: In the case of interest-free or concessional loans, the difference between the actual interest charge and market interest rate is exempted from tax.
- Employer’s contribution to NPS: The contribution from the employer is exempted from tax up to 10% of the salary.
Frequently Asked Questions
1. What is the prerequisite in section 17(2) of the Income Tax Act?
Prerequisite is defined as the casual emolument or benefit attached to an office or position in addition to salary or wages. It can be cash or other gifts.
2. What is section 194R of the Income Tax Act 1961?
It refers to a tax deduction on benefits or perquisites concerning profession and business. It excludes non-monetary forms of perks and benefits received in the business or profession.
3. What comes under the Section 17 exemption?
The section 17 exemption encompasses medical facility and reimbursement, employee training, use of health club and other such facilities.
4. What are sweat equity shares?
Sweat equity shares refer to shares provided to employees at a concessional rate to reward their efforts.
5. How many children are allowed for educational allowance?
Two children are allowed for education allowance.