Perquisites in Income Tax: Meaning, Types, Valuation and Taxability Under Section 17(2)

Imagine one of your employees relocates to another city for a new role. The company provides a leased apartment, assigns them a car for the first few months, and payroll processes everything without issue.

Six months later, the employee notices a higher TDS deduction and reaches out, convinced there’s been a payroll mistake. After all, no additional salary was ever credited to their account.

In reality, payroll is working exactly as it should.

The apartment, the company car, and many other employer-provided benefits are treated as perquisites under Section 17(2) of the Income Tax Act, 1961. Although employees don’t receive these benefits as cash, they can still form part of taxable salary.

Whether a perquisite is fully taxable, exempt, or taxable only for specified employees depends on the nature of the benefit and the rules prescribed under the Income Tax Act and Rule 3 of the Income Tax Rules.

Understanding those rules matters for more than just tax calculations. For HR and payroll teams, they influence compensation design, TDS deductions, Form 16 reporting, and overall payroll compliance. For employees, they explain why taxable income and take-home pay don’t always move together.

This guide explains what qualifies as a perquisite, how different types are taxed and valued, which benefits remain exempt, and how the rules apply in practical payroll scenarios. It also highlights the latest provisions applicable for AY 2026–27, helping HR teams, payroll professionals, and employees navigate perquisite taxation with confidence.

On that note, let’s get started.

Perquisites Meaning in Income Tax

Go back to that employee with the company flat and car. Neither benefit paid them a rupee directly, yet both count as taxable income.

That’s the core idea behind a perquisite: it’s any extra benefit, facility, or advantage an employee gets from an employer on top of salary, whether it arrives as cash, as something in kind, or as an obligation the employer settles on the employee’s behalf.

According to the tax code, perquisite is a casual emolument or benefit attached to a position, over and above wages, that puts something in the employee’s pocket.

Reimbursements repay an employee for money already spent on the company’s behalf. Perquisites create an actual economic gain, whether that’s free housing, a subsidized loan, or shares handed over at a discount. Because of that gain, tax law pulls perquisites into “Income from Salaries” even though they never touch a payslip.

Once a benefit qualifies as a perquisite, the next question is who it’s taxable for, and that comes down to a simple split.

Monetary vs Non-Monetary Perquisites

• Monetary perquisites: An employer settling a personal bill, for instance. Taxable for every employee, without any exceptions.
• Non-monetary perquisites: Free use of a company facility or asset and taxable only for a defined group of specified employees, covered further down.

This split is usually the first filter to apply when a new benefit shows up in a compensation package and someone asks whether it needs to be taxed. Get the answer here right, and most of what follows in this guide is just working out the number.

Perquisites vs Allowances: Key Distinctions

Before going further into perquisites specifically, it helps to separate them from something they get confused with constantly: allowances. The two show up next to each other on a salary slip, but they behave in almost opposite ways once tax comes into the picture.

Why this matters for compensation design: Allowances sit in the cash component of the CTC and get taxed as they’re paid. Perquisites might not touch cash flow at all, yet they still need a separate valuation and reporting.Two benefits that look identical on an offer letter can end up taxed in completely different ways, which is a common source of employee confusion during appraisal season.

With that distinction in place, it’s worth looking at where perquisites actually get their legal weight from, since that’s what decides which benefits fall under this umbrella at all.

Section 17(2) of Income Tax Act

Everything discussed so far traces back to one provision. Section 17(2) decides what qualifies as a perquisite under salary income.

It works alongside Section 17(1), which defines salary and allowances, and Rule 3 of the Income Tax Rules, 1962, which supplies the actual valuation math. In short, Section 17(2) tells you what is taxable, and Rule 3 tells you how much.

The section itself lists out exactly which benefits fall under its scope, and it’s worth having this list on hand because most disputes trace back to whether a benefit fits one of these clauses.

What Does Section 17(2) Cover

• Rent-free accommodation provided by the employer
• Any concession in rent on accommodation provided by the employer
• Any sum paid by the employer toward an obligation that was actually payable by the employee
• Any benefit or amenity granted free or at a concessional rate to specified employees
• Specified securities or sweat equity shares allotted or transferred free of cost or at a concessional rate
• Any sum the employer pays toward a life assurance policy or annuity contract for the employee
• Employer contributions to an approved superannuation fund, once they cross ₹1 lakh
• Any other fringe benefit or amenity the government prescribes

Rule 3 then walks through each of these clause by clause and assigns a valuation method, which is what the rest of this guide covers in detail.

Types of Perquisites in Income Tax

Knowing that a benefit falls under Section 17(2) is only step one. The next question, and usually the one that actually decides tax outcome, is which of three buckets it lands in.

Taxable for every employee: Rent-free accommodation, a company car used personally, interest-free loans, and ESOPs. Tax applies regardless of role or pay grade.

• Taxable only for specified employees: Utilities like gas, electricity, and water, domestic help, subsidized education, and certain transport facilities. The same benefit can be tax-free for one employee and taxable for another, purely based on who’s receiving it.
• Fully exempt: Provident fund contributions within limits, medical insurance premiums the employer pays, laptops issued for work, and tea or snacks during office hours.

That middle category depends entirely on a status called “specified employee,” and since it decides tax outcomes for a wide range of everyday benefits, it’s worth knowing exactly who qualifies.

Who are Specified Employees Under Perquisite Rules

A specified employee is any one of the following:

• A director of the company
• Someone holding a substantial interest, defined as at least 20% of the voting rights
• An employee whose annual income exceeds ₹50,000.

Tip for payroll teams: That ₹50,000 figure is calculated on annual income, not monthly, and it’s arrived at after excluding non-monetary benefits, income exempt under Section 10, and deductions under Section 16. In practice, the threshold is low enough that most full-time employees clear it, which means the specified-employee category covers a much wider slice of the workforce than the name suggests, not just a senior tier.

To keep all three categories straight in one place, here’s how they map against common benefits.

Quick Snapshot of Taxability by Category

Valuation of Perquisites Under Section 17(2)

Classification only answers half the question, though. Once you know a benefit is taxable, the next question is what it’s actually worth for tax purposes, and that’s the job Rule 3 does.

It doesn’t treat every perquisite the same way; each benefit type gets its own formula, which is why the valuation rules deserve a section of their own before diving into any one benefit specifically.

General Principles of Perquisite Valuation

At its core, Rule 3 exists to compute the value of any perquisite an employer provides, directly or indirectly, to an employee or to a member of the employee’s household, by reason of their employment. That household clause matters more than it seems on first read, since it’s also what governs how family-use benefits get taxed later in this guide.

This is also the part that eventually shows up as an actual number on Form 16. Getting the classification right but the valuation wrong still produces an incorrect TDS deduction, and that’s the kind of error that surfaces months later as an employee grievance rather than getting caught upfront.

Population-Based Valuation Categories

A number of perquisites, rent-free accommodation being the clearest example, are valued using bands tied to a city’s population rather than a flat rate. Under the current, post-2023 version of Rule 3, those bands are:

• 10% of salary in cities with population above 40 lakh (2011 census)
• 7.5% of salary in cities between 15 and 40 lakh
• 5% of salary everywhere else

These bands replaced an older, higher set of figures, so if any internal documentation still references 15%/10%/7.5%, it’s worth updating.

Monetary Threshold Limits and Exemption Caps

Beyond percentage-based valuation, several perquisites are exempt entirely up to a defined monetary limit, and it helps to have these caps listed together rather than discovering them one at a time deep in a specific benefit’s rules.

• Employer loans: Exempt up to ₹20,000 under the current rule (rising to ₹2,00,000 from April 1, 2026, once confirmed applicable).
• Provident fund, NPS, and superannuation contributions: Exempt up to ₹7,50,000 combined; anything above that surplus becomes taxable under Section 17(2).
• Office meals: Exempt up to ₹50 per meal during working hours, under the old tax regime only.

With the general valuation framework in place, the next few sections apply it to specific perquisites, starting with the one that generates the most payroll queries.

Rent-Free Accommodation Perquisite: Valuation and Calculation

Back to the employee from the opening example, the one relocated into a company flat.

Housing benefits like this are where most perquisite disputes and payroll errors originate, largely because the value depends on several variables at once: who owns the property, which city it’s in, whether it’s furnished, and whether the employer or a government body is providing it.

Each of those variables changes the formula, so it’s worth walking through them one at a time.

Private Sector, Employer-Owned, Unfurnished

Start with the most common scenario:

An employer owned, unfurnished flat. The current Rule 3 bands, applicable since the 2023 amendment are:

• 10% of salary in cities with population above 40 lakh
• 7.5% of salary in cities between 15 and 40 lakh
• 5% of salary everywhere else

This is based on 2011 census figures and replaced an older, higher set of bands, so if you’ve seen 15%/10%/7.5% quoted anywhere, that’s the outdated version worth correcting in any internal documentation.

Leased, Furnished, and Hotel Accommodation

The formula shifts again depending on how the accommodation is arranged and furnished:

• Employer-leased Accommodation: The lower of the actual lease rent paid by the employer or 10% of salary, reduced by whatever rent the employee pays out of pocket.
• Furnished accommodation: Take the unfurnished value above and add 10% per year of the furniture’s cost, or the actual hire charges if it’s rented, minus anything the employee pays toward it.
• Hotel accommodation: 24% of salary or the actual hotel charges, whichever is lower. A 15-day exemption applies if the stay is tied to a transfer between locations, which covers exactly the relocation scenario this section opened with.

Government Employees

One exception sits outside all of this. For Central and state government employees, valuation is based on the license fee for the residence, adjusted for whatever rent the employee pays, rather than a percentage of salary at all.

Putting these bands into an actual number makes the gap between cities clearer than the percentages alone.

Worked Example

Tip for payroll teams: A housing benefit in Mumbai and the identical benefit in a Tier 3 town can produce a taxable value twice as far apart, purely because of city classification. Assuming all housing perks are treated equally is a common misunderstanding worth heading off before appraisal conversations, especially for anyone relocating between offices.

Housing isn’t the only high-value perquisite that varies by ownership and usage pattern. The company car works on a similar logic, just with different variables.

Motor Car Perquisites: Complete Valuation Guide

If your organization runs a company car policy, you’ve likely already seen how many different scenarios it can produce. Motor car perquisites shift depending on who owns the vehicle, who pays running costs, and engine size, which makes company car policy a compliance question as much as a benefits one.

Employer-Owned Cars

The most common setup is an employer-owned car, and the value here depends on who’s covering running costs:

• Employer pays running costs, mixed use: ₹1,800/month for engines up to 1.6 litres, ₹2,400 for larger engines, plus ₹900 if a chauffeur is provided.
• Employee pays running costs: ₹600/month for smaller engines, ₹900 for larger ones, plus ₹900 for a chauffeur if the employer provides one.
• Wholly official use, properly documented: Nil, provided the employer maintains a journey log and certifies exclusively official use.

Ownership can also sit with the employee rather than the company, and reimbursement changes the calculation again.

Ownership and Reimbursement Scenarios

Where this is a problem: Manually tracking which car falls into which bucket across a large workforce, and re-verifying it every time someone changes roles or usage patterns. Teams running this in Keka typically set the valuation rule once against each car policy and let it apply automatically from there, rather than recalculating it by hand every cycle.

Note on Future Rates

A separate framework under the proposed Income Tax Act, 2025 (sometimes labeled “Rule 15”) suggests significantly higher figures, roughly ₹5,000 and ₹7,000 per month for two engine bands. Treat this as forward planning information only as it isn’t an applicable rule under current filings.

Cars and housing are the perquisites employees notice immediately. Loans tend to be quieter, but the math behind them works on a similar principle: the value isn’t the benefit itself, it’s what the employee saved by not paying market rate.

Interest-Free and Concessional Loans to Employees

The taxable amount on an employer loan isn’t the principal. It’s the notional interest the employee would have paid at market rates, minus whatever interest they actually paid. Working that out follows a fixed sequence.

How the Calculation Works

• Work out the outstanding loan balance at the end of each month.
• Apply the interest rate the State Bank of India charges on similar loans as of April 1st of that Financial Year.
• Subtract any interest the employee actually paid. The result is the taxable perquisite.

Worked Example:

SBI’s rate for housing loans is taken as 10% and the employer charges the employee 6%. The taxable spread is 4%.

Not every loan gets taxed this way, though. A couple of exemptions sit right outside the standard calculations.

Exemptions Worth Knowing

• Small loans: Loans up to ₹20,000 aren’t taxed as perquisites. If several small loans together exceed that amount, the aggregate is what matters, not each loan individually. This threshold is set to rise to ₹2,00,000 from April 1, 2026. Also confirm it applies to your filing year before relying on it.
• Medical treatment loans: Loans taken for treatment of diseases listed under Rule 3A are exempt entirely, unless the amount is later reimbursed by an insurer, in which case the reimbursement itself becomes taxable.

Loans are relatively rare compared to the next perquisite on this list. ESOPs, on the other hand, show up constantly once a company starts granting equity, and they’re the one most employees genuinely misunderstand.

Stock Options (ESOPs)

An employee exercises their vested options, gets excited about owning shares, and then asks payroll why their salary tax jumped that month even though they didn’t sell anything.

This confusion is common, and it comes down to one fact: ESOPs get taxed twice, at two different points, under two different heads.

Exercise: The First Tax Point

The first tax point is exercise itself, not the original grant. The taxable perquisite is the difference between the fair market value on the exercise date and whatever the employee paid for the shares. The FMV on the grant or allotment date isn’t relevant here; only the exercise-date value matters, and how that value gets determined depends on how the shares are traded.

The employer deducts TDS under Section 192 in the year of allotment, which makes ESOP taxation a payroll responsibility, not just something the employee sorts out at filing time.

Eligible startups get some breathing room here: tax can be deferred to the earliest of 48 months after allotment, the employee leaving the company, or the shares being sold.

Sale: The Second Tax Point

The second tax point only arrives later, when the shares are actually sold. That gain is taxed as capital gains, with the holding period starting from the allotment date and the exercise-date FMV used as the cost of acquisition.

Worked Example: 100 shares exercised at ₹500 each, with an FMV of ₹6,500 on the exercise date.

Perquisite value = (₹6,500 − ₹500) × 100 = ₹6,00,000.

For teams running frequent ESOP cycles: Employers usually recover this tax either by collecting cash from the employee or through a sell-to-cover arrangement, selling a portion of the allotted shares to fund TDS.Keeping allotment dates, FMVs, and TDS deadlines aligned across dozens of employees is exactly the kind of tracking that gets error-prone in spreadsheets, which is why several Keka customers running active ESOP programs handle this stage inside the platform instead of a separate tracker.

Not every perquisite carries this much complexity. Medical benefits, by contrast, are one of the more straightforward categories, though the exemption still depends on how the benefit is structured.

Medical Facilities and Reimbursements: Tax Treatment

Medical benefits are among the most useful tax-free perquisites in income tax, but the tax outcome depends on the type of support the employer provides. Some benefits are fully exempt, while others become taxable if they are structured as reimbursements outside the permitted limits.

Policy Update: The exemption for overseas medical travel is a relatively recent addition under Budget 2025, worth flagging if you’re updating an older HR policy document. An older ₹15,000 reimbursement exemption that used to apply is no longer the default reference point, so don’t lean on it without checking current guidance.

Beyond the major categories covered so far, a handful of smaller perquisites show up regularly in real compensation structures without getting much attention elsewhere.

Lesser Known Perquisites: Utilities, Staff, and Assets

These tend to surface at senior levels or in specific role types, and they’re easy to miss because they don’t look like “compensation” at first glance.

Gas, Electricity, and Water Supply

If the employer buys these from an outside agency, the taxable value is the amount paid minus whatever’s recovered from the employee. If the employer supplies them from its own source, it’s the manufacturing cost instead. Either way, this one applies only to specified employees.

Domestic Staff

Along similar lines, a sweeper, gardener, watchman, or personal attendant provided by the employer is valued at the salary paid to that person, minus any recovery from the employee. This is also restricted to specified employees.

Education Support

Education benefits vary based on how they’re delivered:

• Employer directly pays for education: Taxable value is the actual spend minus recovery.
• Provided through an employer-run institution: Value is the comparable local cost minus ₹1,000 per month per child minus recovery. That deduction only applies when the benefit covers the employee’s own children, not other household members.
• Discretionary scholarships, unconnected to employment terms, aren’t taxed at all.

Asset Transfer

The last one in this group covers physical assets. When an employer hands over a movable asset, like a laptop, the taxable value is the original cost minus depreciation for each completed year of use minus what the employee pays.

Example: An ₹80,000 laptop transferred after two years depreciates to ₹20,000. If the employee pays ₹5,000 for it, the taxable perquisite is ₹15,000.

Alongside these taxable items, there’s a separate list of benefits that stay entirely tax-free, and it’s worth having on hand for both policy design and employee communication.

Tax-Free Perquisites: Complete Exemption List

Tax-free perquisites in income tax are just as important as taxable ones because they help HR teams design attractive benefits without unnecessary tax friction. The key is knowing which benefits stay outside salary taxation and which ones need to be reported.

• Leave Travel Concession (LTC): Exempt for two journeys within a block of four calendar years. The current block runs 2026 to 2029. One unused journey can carry forward to the first year of the next block, but no more than one. LTC only covers domestic travel, and the exemption is capped by mode of travel (economy airfare, first-class AC rail, or first-class AC bus where rail isn’t available).
• Telephone, mobile, and internet: Employer-paid bills are exempt with no monetary cap in the standard framing.
• Laptops and office refreshments: Equipment issued for work and snacks during office hours are exempt. Free meals carry a narrower rule capped at ₹50 per meal, and this exemption doesn’t apply under the new tax regime, so regime choice matters here.

With the full range of taxable and exempt benefits covered, the remaining question is a practical one: whose responsibility is it to actually pay this tax, and how does it get reported.

Differences Between Allowances and Perquisites in Income Tax

Allowances and perquisites of income tax are both part of the salary structure, but they work very differently in tax terms. Allowances are usually fixed cash payments for specific expenses, while perquisites are benefits, facilities, or reimbursements linked to employment.

Where Each One Sits in Section 17

Section 17 splits salary income into three parts, and allowances and perquisites land in different ones:

• Section 17(1) covers salary and allowances, the cash components of compensation like HRA and DA.
• Section 17(2) covers perquisites, the non-cash benefits this entire guide has been walking through.
• Section 17(3) covers profits in lieu of salary, a separate category for compensation received on top of or in place of regular salary, such as certain termination payments.

Why This Distinction Matters

A benefit can look like an allowance in a compensation breakdown, get budgeted like one, and still end up taxed as a perquisite once its actual legal character is examined.

Within Section 17(2) itself, perquisites split further into the three categories this guide has already covered: perquisites taxable in all cases, perquisites that are fully exempt, and perquisites taxable only in the hands of specified employees.

Practical key takeaways: The label used internally for a benefit, whether it’s called an “allowance” in an offer letter or not, doesn’t decide its tax treatment. The legal character of the benefit does. Two components that look similar in a CTC breakdown can sit in entirely different sections of the law, and only one of them adds to take-home pay.

With the classification and valuation side fully covered, it helps to see a few of these rules applied together in complete, worked scenarios.

Examples of Perquisites: Real World Calculation Scenarios

A few worked examples have already come up while walking through housing, cars, and ESOPs individually. It’s worth pulling those together here alongside one more calculation that hasn’t yet come up: how perquisite tax actually flows into an employee’s monthly TDS.

Example: Housing, Car, and ESOP

• Rent-free accommodation: An employee earning ₹12,00,000 a year, housed in an employer-owned, unfurnished flat in Mumbai, generates a perquisite value of ₹1,20,000 a year (10% of salary, Tier 1 city).
• Company car: The same employer-owned car, above 1,600cc, with a driver, used for both official and personal purposes, comes to ₹2,400 + ₹900 = ₹3,300 a month, or ₹39,600 a year.
• ESOP exercise: 100 shares exercised at ₹500 each against an FMV of ₹6,500 on the exercise date works out to a perquisite value of ₹6,00,000.

How Perquisite Value Flows Into Monthly TDS

Here’s the piece that usually isn’t obvious until it’s laid out step by step: a perquisite’s value doesn’t get taxed as one lump sum. It gets folded into the employee’s total salary, taxed at their average rate, and spread across the year through monthly TDS.

Take an employee whose income under “Salaries” is ₹10,00,000, of which ₹1,00,000 is non-monetary perquisites:

• Tax on the full ₹10,00,000, including cess, works out to ₹54,600 under the new regime.
• That gives an average tax rate of (₹54,600 / ₹10,00,000) × 100 = 5.46%.
• Applying that rate to the ₹1,00,000 perquisite value gives ₹5,460 as the tax attributable to the perquisite.
• Spread over 12 months, that’s ₹455 deducted from the employee’s salary each month as TDS.

Who Pays Tax on Perquisites: Employer or Employee?

The tax liability sits with the employee, but the employer handles deduction and reporting. Since perquisites count as salary under Section 17(2), the tax shows up through payroll TDS rather than as something the employee settles separately at filing time, in exactly the way the last example just walked through. There’s one situation where the employer can step in more directly.

Key Exception: Under Section 192(1A), an employer can choose to pay the tax on a non-monetary perquisite directly. When that happens, the tax the employer pays isn’t itself treated as an additional perquisite for the employee, and it gets reported separately in Form 12BA. This option is common for large non-cash benefits, since the employee has no cash inflow to fund the tax from.

That reporting obligation flows into two specific forms, and which one applies depends on salary level.

Perquisite Reporting: Form 16 and Form 12BA

Perquisite values need to show up somewhere official, and the form used depends on how much the employee earns:

• Form 12BA is issued as an annexure to Form 16 when annual salary exceeds ₹1.5 lakh, and it must be issued even if the employee received no perquisites that year, with the employer simply noting “nil.”
• Below that salary threshold, perquisite details go directly into Form 16.

Note before documentation: Newer Income Tax Rules reference Form 12BA being replaced by a form numbered 122. As with the Rule 15 figures mentioned earlier, this isn’t confirmed as applicable yet, so keep using Form 12BA until the change is formally in effect for your filing year.

Perquisites in CTC

It’s worth closing the loop on something mentioned in passing earlier: perquisites are a genuine part of an employee’s CTC, even though they never show up as cash in hand.

When an employer provides an amenity or benefit free of cost or at a concessional rate, that value is still part of the overall pay structure the company is bearing. For compensation communication, that means a CTC breakup should account for perquisites as a real cost component, separate from the cash salary line, even when the employee’s take-home figure doesn’t move.

Beyond the standard rules, a few situations sit slightly outside the usual framework and deserve a separate mention.

Clubbing Provisions and Special Cases in Perquisite Taxation

Some perquisite rules go beyond standard salary benefits and cover special situations such as family use, government accommodation, and post-employment payouts. These edge cases matter because they help HR teams avoid misclassifying benefits under section 17(2) of the Income Tax Act.

• Benefits used by family members: If a perquisite, say a company car, is used by an employee’s spouse or another household member, it isn’t taxed separately in that person’s name. Rule 3 explicitly covers benefits provided “directly or indirectly to the assessee or to any member of his household,” so the value gets clubbed into the employee’s own salary income.
• Government employees: As covered earlier, accommodation is valued using license fees rather than the population-based percentage bands that apply to private-sector employees.
• Post-employment payouts: Gratuity, leave encashment, severance pay, and pension commutation received at termination or retirement fall outside the usual perquisite framework and belong to a separate tax treatment entirely. Keep these out of your in-service perquisite calculations.

Wrapping it Up

Perquisites are an integral part of employee compensation, even if they never appear as cash in an employee’s bank account. From rent-free accommodation and company cars to ESOPs and concessional loans, every benefit must be correctly classified, valued under Rule 3, and reported through payroll to ensure accurate TDS and compliance.

For HR and payroll teams, the challenge isn’t understanding the rules but applying them consistently across every employee, every payroll cycle, and every benefit. Manual calculations, changing tax provisions, and multiple valuation methods increase the risk of errors that often surface only during payroll processing or year-end reconciliations.

Keka helps simplify perquisite management by automating benefit valuation, TDS calculations, payroll processing, and compliance reporting, so your team spends less time on spreadsheets and more time delivering a seamless payroll experience.

Simplify payroll compliance and manage perquisites with confidence. Schedule a Demo

Frequently Asked Questions (FAQs)

Q1. What are the perquisites in income tax?

• Perquisites are benefits or amenities an employer provides in addition to salary. Defined under Section 17(2) of the Income Tax Act, they include benefits such as rent-free accommodation, company cars, concessional loans, and ESOPs. Depending on the benefit, they may be taxable, exempt, or partly taxable.

Q2. What are perquisites in income tax with an example?

• A common example is rent-free accommodation provided by an employer. If an employee receives company housing, its value is calculated under Rule 3 and added to taxable salary, even though no additional cash is paid to the employee.

Q3. How is the value of perquisite calculated?

• Perquisite valuation depends on the benefit provided. Rule 3 prescribes different methods for housing, company cars, loans, ESOPs, and other benefits. The calculated value is added to salary and taxed through TDS based on the employee’s applicable tax slab.

Q4. What is the difference between allowance and perquisites?

• Allowances are cash payments, such as HRA or DA, made to cover specific expenses. Perquisites are non-cash benefits, such as accommodation or company vehicles. While both form part of compensation, they are governed by different provisions under Section 17 of the Income Tax Act.

Q5. What do you mean by perquisites in income tax?

• Perquisites are benefits, facilities, or privileges an employer provides because of employment. They may include housing, vehicles, concessional loans, medical benefits, or stock options. Depending on the applicable tax rules, they can be fully taxable, partly taxable, or exempt.

Q7. Who are specified employees under perquisites taxation rules?

• Specified employees include company directors, employees with substantial interest (20% or more voting rights), and employees meeting the prescribed salary conditions under the Income Tax Act. Certain perquisites are taxable only when provided to employees in this category.

Q8. How is rent-free accommodation valued for tax in metro vs non-metro cities?

• Rent-free accommodation is valued under Rule 3 based on factors such as city population, salary, ownership of the property, and whether it is furnished or leased. The resulting value is treated as a taxable perquisite and included in salary.

Q9. Which medical benefits are exempt from perquisite taxation?

• Employer-paid medical insurance premiums, treatment in employer or approved government hospitals, and certain overseas medical treatments are generally exempt, subject to prescribed conditions. Medical reimbursements outside these rules may still be taxable.

Q10. How are ESOPs taxed as perquisites?

• ESOPs become taxable when employees exercise their stock options. The taxable perquisite equals the difference between the fair market value on the exercise date and the exercise price. Any gain from selling the shares later is taxed separately as capital gains.

Q11. What does Section 17(2) of the Income Tax Act cover?

• Section 17(2) defines perquisites and specifies which employer-provided benefits form part of salary. Rule 3 of the Income Tax Rules prescribes how these benefits should be valued for payroll, TDS, and income tax purposes.