Understanding Perquisites and Tax Implications

Perquisites, often referred to as "perks," are benefits offered by employers on top of an employee's regular salary. These perks come in many forms, from a company car to free meals or a gym membership. While some perks are a welcome addition to an employee's compensation package, it's important to understand how they are taxed.

Taxable vs. Tax-Free Perquisites

Not all perks are created equal when it comes to taxes. Here's a breakdown of how perquisites are categorized for tax purposes:

• Taxable Perquisites: These perks are added to an employee's taxable income and taxed at their regular income tax rate. Common examples include rent-free accommodation (except in certain cases), club memberships, domestic help provided by the employer, and reimbursements for certain expenses beyond medical treatment. The tax paid on these perks is typically the responsibility of the employer.
• Tax-Free Perquisites: Fortunately, some perks are exempt from taxation. These perks don't get added to an employee's taxable income. Examples include medical and recreational facilities provided by the employer, a laptop or computer for work purposes, refreshments during office hours, and interest-free salary loans up to a certain amount. Additionally, the use of facilities like sports clubs, health clubs, and telephone lines for business purposes often fall under tax-free perks.
• Perquisites Taxed by Employees: In some cases, the employer provides a perk but the employee is responsible for paying the taxes on it. This might apply to company cars or educational opportunities for the employee's children. The employer typically calculates the tax value of the perk and withholds it from the employee's salary.

How are Taxes on Perquisites Calculated?

The tax on taxable perquisites is generally calculated as a percentage of the perk's value. The exact rate depends on the specific perk and the employee's income tax bracket. However, employers often calculate an average tax rate based on the employee's salary and the value of the perks provided. This average rate is then used to determine the amount of tax to withhold from the employee's salary.

Perquisite Tax Calculation Example

Let's consider an employee who earns a salary of Rs. 800,000 annually and receives Rs. 90,000 in non-monetary perks from their employer. These perks might include educational benefits or health club membership. Following the Income Tax Act, the employer would calculate the perquisite tax as follows:

• Salary: Rs. 800,000
• Tax on Salary (including cess): Rs. 75,400 (assuming a 4% rate)
• Average Tax Rate: (Rs. 75,400 / Rs. 800,000) x 100 = 9.4%
• Tax on Perks (Rs. 90,000 x 9.4%): Rs. 8,316

In this scenario, the employer would withhold Rs. 693 per month (Rs. 8,316 / 12) as tax on the employee's perks.

Understanding Tax-Exempt Perquisites

• Perquisites for Overseas Services: If an Indian citizen is employed outside of India, certain perks related to their work abroad may be exempt under Section 10(7) of the Income Tax Act.
• Rent-Free Accommodation for Officials: In specific cases, rent-free housing provided to certain officials, such as judges or government ministers, may be exempt from tax.
• Medical Treatment Loans: Interest-free or concessional loans provided for medical treatment of specific diseases (as per Rule 3A) or petty loans not exceeding Rs. 200,000 are generally tax-exempt.
• Telephone or Mobile Phone Expenses: Employers can cover the cost of phone bills for business purposes without incurring tax implications for the employee.

Conclusion

Perquisites can be a valuable part of an employee's compensation package. However, it's crucial to understand how these perks are taxed. By being aware of the tax implications of different perks, both employers and employees can make informed decisions and avoid any unexpected tax burdens.