Valuation of Perquisites

1 | P a g e

Introduction
What is a tax?
Tax is a fee charged by a government on a product, income or activity. There are two types of
taxes direct taxes and indirect taxes. If tax is levied directly on the income or wealth of a
person, then it is a direct tax e.g. income-tax. If tax is levied on the price of a good or service,
then it is called an indirect tax e.g. excise duty. In the case of indirect taxes, the person paying
the tax passes on the incidence to another person.
Why are taxes levied?
The reason for levy of taxes is that they constitute the basic source of revenue to the
government. Revenue so raised is utilized for meeting the expenses of government like
defence, provision of education, health-care, infrastructure facilities like roads, dams etc.
I ncome tax
Income-tax is the most significant direct tax. Income-tax is a tax levied on the total income of
the previous year of every person. A person includes an individual, Hindu Undivided Family
(HUF), Association of Persons (AOP), Body of Individuals (BOI), a firm, a company etc.

The concept of income
Income, in general, means a periodic monetary return which accrues or is expected to
accrue regularly from definite sources. However, under the Income-tax Act, 1961, even
certain income which do not arise regularly are treated as income for tax purposes e.g.
Winnings from lotteries, crossword puzzles.
Income normally refers to revenue receipts. Capital receipts are generally not included
within the scope of income. However, the Income-tax Act, 1961 has specifically included
certain capital receipts within the definition of income e.g. Capital gains i.e. gains on sale
of a capital asset like land.
Income means net receipts and not gross receipts. Net receipts are arrived at after
deducting the expenditure incurred in connection with earning such receipts. The
expenditure which can be deducted while computing income under each head.
Income is taxable either on due basis or receipt basis. For computing income under the
heads Profits and gains of business or profession and Income from other sources, the
method of accounting regularly employed by the assessee should be considered, which
can be either cash system or mercantile system.

Valuation of Perquisites
2 | P a g e

The Income Tax Act prescribes five heads of income. These are
1. Income from salaries
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources

Salary
The meaning of the term salary for purposes of income tax is much wider than what is
normally understood. Every payment made by an employer to his employee for service
rendered would be chargeable to tax as income from salaries. The term salary for the
purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary,
bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing
accommodation, medical facility, interest free loans etc).

Definition of Salary
The term salary has been defined differently for different purposes in the Act. The
definition as to what constitutes salary is very wide. It is an inclusive definition and includes
monetary as well as non-monetary items. Salary under section 17(1), includes:
i. wages,
ii. any annuity or pension,
iii. any gratuity,
iv. any fees, commission, perquisite or profits in lieu of or in addition to any salary or
wages
v. any advance of salary,
vi. any payment received in respect of any period of leave not availed by him i.e. leave salary
or leave encashment,
vii. the portion of the annual accretion in any previous year to the balance at the credit of a
employee participating in a recognised provident fund to the extent it is taxable and
transferred balance in recognized provident fund to the extent it is taxable,
viii. the contribution made by the Central Government or any other employer in the previous
year to the account of an employee under a pension scheme referred to in section
80CCD.
Valuation of Perquisites
3 | P a g e

PERQUI SI TE

I ntroduction
Perquisite may be defined as any casual emolument or benefit attached to an office or
position in addition to salary or wages. In essence, these are usually non-cash benefits given
by an employer to employees in addition to cash salary or wages. However, they may include
cases where the employer reimburses expenses or pays for obligations incurred by the
employee.
Perquisite may arise in the course of employment or in the course of profession. If it arises
from a relationship of employer-employee, then the value of the perquisite is taxable as
salary. However, if it arises during the course of profession, the value of such perquisite is
chargeable as profits and gains of business or profession. Perquisites are also referred to as
fringe benefits.
Broadly, perquisite is defined in the section 17(2) of the Income-tax Act as including:
1) Value of rent of such free accommodation provided to the employee by the employer.
2) Value of concession in the matter of rent in respect of accommodation provided to the
employee by his employer.
3) Value of any benefit or amenity granted free of cost or at a concessional rate in any of
the following cases:
by a company to an employee who is a director thereof
by a company to an employee who has substantial interest in the company
by any employer to an employee who is neither a director, nor has substantial
interest in the company, but his monetary emoluments under the head Salaries
exceeds Rs.50,000.
4) Any sum paid by the employer towards any obligation of the employee.
5) Any sum payable by employer to affect an assurance on the life of assessee.
6) The value of any other fringe benefit given to the employee as may be prescribed.

Perquisite will become taxable only if it has a legal origin. An unauthorised advantage taken
by an employee without his employers sanction cannot be considered as a perquisite under
the Act.


Valuation of Perquisites
4 | P a g e

CLASSIFICATION OF PERQUISITES

Perquisites that are taxable in case of every employee, whether specified or not
Perquisites that are taxable in case of specified employees only
Perquisites that are exempt from tax for all employees

I . Perquisites Taxable in case of All Employee.
The following perquisites are taxable in case of every employee, whether specified or not:

1. Rent free house provided by employer
2. House provided at concessional rate
3. Any obligation of employee discharged by employer e.g. payment of club or hotel
bills of employee, salary to domestic servants engaged by employee, payment of
school fees of employees children etc.
4. Any sum paid by employer in respect of insurance premium on the life of employee
5. Notified fringe benefits (on which fringe benefit tax is not applicable) it includes
interest free or concessional loans to employees, use of movable assets, transfer of
moveable assets.

I I . Perquisites taxable in case of Specified Employees only.
The following perquisites are taxable in case of such employees:

1. Free supply of gas, electricity or water supply for household consumption
2. Free or concessional educational facilities to the members of employees household
3. Free or concessional transport facilities
4. Sweeper, watchman, gardener and personal attendant
5. Any other benefit or amenity

Specified employee is an employee who is either a director or has substantial interest in the
company where he is employed or is drawing monetary salary of more than Rs.50,000 during
the previous year.


Valuation of Perquisites
5 | P a g e

I I I . Perquisites which are tax free for all the employees
This category includes perquisites which are tax free for the employees and also other
perquisites on which employer has to pay a tax (called Fringe Benefit Tax) if they are given
to the employees and so are not taxable for them.

1. Medical benefits (provided within or out of India) subject to limits.
2. Value of Leave Travel Concession in India.
3. Free meals provided to the employees during working hours.
4. Amount spent by the employer as its contribution to staff welfare schemes.
5. Laptops and computers provided for personal use
6. Rent free official accommodation provided to a Judge of High Court or Supreme
Court or an official of Parliament including Minister and Leader of Opposition in
Parliament.
7. Health Insurance Premium of employee or member of household paid by the
employer.
8. All such facilities (like motor car, lunch refreshments, travelling, touring, gift,
credit cards, club etc.) provided by employer on which employer has to pay Fringe
Benefit Tax.


With effect from Assessment Year 2006-07, a Fringe Benefit Tax has been introduced, where
companies giving certain fringe benefits to its employees are required to pay Fringe Benefit
Tax on the expenditure incurred for the same. Hence, these benefits are tax free for the
employees









Valuation of Perquisites
6 | P a g e

VALUATION OF PERQUISITES

A. NON MONETARY PERQUISITES:
Non-monetary benefits are those that are not provided by way of monetary payments to the
employees.

a) Residential Accommodation provided by Employer:
Rent free unfurnished Accommodation

Following are added to salary as perquisites:
Population of city as per
census
Accommodation owned by the
employer
Accommodation is taken on
lease by the employer
Exceeding 25 lakhs 15% of salary in respect of period
during which the accommodation is
occupied by the employee
Amount of lease rent paid or
payable or 15% of salary,
whichever is lower
Exceeding 10 lakhs but
not 25 lakhs
10% of salary in respect of period
during which the accommodation is
occupied by the employee
Amount of lease rent paid or
payable or 15% of salary,
whichever is lower
Any other 7.5% of salary in respect of period
during which the accommodation is
occupied by the employee
Amount of lease rent paid or
payable or 15% of salary,
whichever is lower

Value of perquisite as derived above shall be reduced by the rent, if any actually paid by the
employee.








Valuation of Perquisites
7 | P a g e


Meaning of Salary for the purpose of calculation of perquisite in respect of Residential
Accommodation :

Basic Salary ;
Dearness Allowance, if terms of employment so provide ;
Bonus ;
Commission ;
Fees ;
All other taxable allowances (excluding the portion not taxable ) ; and
Any monetary payment which is chargeable to tax (by whatever name called)


a. Salary should be calculated on accrual basis. Advance salary shall not be taken into
consideration for this purpose.
b. Salary from all employers shall be taken into consideration in respect of the period
during which an accommodation is provided.
c. Where on account of the transfer of an employee from one place to another, he is
provided with accommodation at the new place of posting while retaining the
accommodation at the other place, the value of perquisite shall be determined with
reference to only one such accommodation which has the lower value for a period not
exceeding 90 days and thereafter the value of perquisite shall be charged for both such
accommodation.

Rent free furnished Accommodation :

Step 1: Find out the value of the perquisite on the assumption that the accommodation is
unfurnished
Step 2: To the value so arrived at, add:
i. 10% p.a. of the original cost of furniture, if furniture is owned by the employer.
ii. Actual hire charges paid or payable, if furniture is hired by the employer.



Valuation of Perquisites
8 | P a g e

Furnished Accommodation in a Hotel :

The value of perquisite shall be determined on the basis of lower of the following two:

1. 24% of salary paid or payable in respect of period during which the accommodation
provided
2. Actual charges paid or payable by the employer to such hotel.

However, nothing shall be taxable if following two conditions are satisfied:
1. The hotel accommodation is provided for total period not exceeding in aggregate 15 days
in a previous year.
2. Such accommodation is provided on an employees transfer from one place to another
place.

NOTE: Perquisite in respect of Residential accommodation is not taxable if it is provided in a
remote area.

b) Water charges & Electricity charges:

Value of perquisite shall be determined at the amount paid or payable by the employer as
reduced by the amount recovered if any, from the employee. It is taxable in the hands of all
employees (whether specified or not) provided that the water supply or electric connection is
in the name of the employee and expenses are reimbursed by the employer. If, however,
water supply or electric connection is in the name of the employer and the expenses are borne
by the employer, perquisite is taxable only in the hands of employee.

Meaning of Specified Employee:
Director Employee.
An employee having substantial interest (Beneficial owner of equity shares carrying 20%
or more voting power).
An employee whose income chargeable under the head Salaries (exclusive of the value
of all benefits or amenities not provided by way of monetary payments) exceeds
Rs.50,000/-.
Valuation of Perquisites
9 | P a g e

c) Interest free loan/Loan at concessional rate of interest:

If a loan is given to an employee (or any member of his household), interest thereon is a
perquisite chargeable to tax.

It is taxable in hands of all employees (whether specified or not) on the following basis:

1. Find out the maximum outstanding monthly balance (i.e. the aggregate outstanding
balance of each loan as on the last day of each month)
2. Calculate interest on loans charged at the rate applicable to the similar loans as prescribed
by State Bank of India as on the 1st day of April of the relevant previous year on the
amount derived in step 1 XXX
3. Less: Interest on loans charged by Employer, if any XXX
4. Balance amount is the taxable non- monetary perquisite on concessional loans XXX

Note: Exemption is given to the above rule in case of following situations:

1) When the amount of the original loan in the aggregate does not exceed Rs. 20,000/-.
2) If a loan is taken for medical treatment in respect of diseases specified in Rule 3A.(the
exemption is not available to the amount of the loan that has been reimbursed to the
employee under any medical insurance scheme.)

d) Use of movable assets:

If a movable asset (except computer / laptops or car) is given for use to an employee (or any
member of his household), it is a perquisite chargeable to tax.

It is taxable in hands of all employees (whether specified or not) on the following basis:
1. 10% p.a. of actual cost if asset is owned by employer or rent
paid or payable if taken on hire by the employer XXX
2. Less: Amount recovered from the employee XXX
3. Balance amount is the taxable non- monetary perquisite on use of movable assets XXX

Valuation of Perquisites
10 | P a g e

e) Transfer of movable assets:

If a movable asset is transferred directly or indirectly to an employee (or any member of his
household), it is a perquisite chargeable to tax. It is taxable on the following basis :

1) Actual cost of the asset to the employer XXX
2) Less: Cost of normal wear and tear which shall be determined as under:
Sl.No. Asset type Rate Method of Depreciation
1. Motor Car 20% Written Down Value
Method
2. Computer and Electronic
gadget
50% Written Down Value
Method
3. Other Assets 10% Straight Line Method
XXX

3) Less: Amount recovered from the employee XXX

4) Balance amount is the taxable non- monetary perquisite on transfer XXX
of movable assets

f) Membership fees and Annual Fees Credit Card:

Any membership fees and annual fees incurred by the employee (or any member of his
household), which is charged to credit card (including any add-on-card) is taxable on the
following basis:

1. Amount of expenditure incurred by the employer XXX
2. Less: Expenditure on use for official purposes XXX
3. Less: Amount, if any, recovered from the employee XXX
4. Balance amount is the taxable non- monetary perquisite XXX



Valuation of Perquisites
11 | P a g e

g) Club Expenditure:

Any annual or periodical fees, on Club facility used by the employee (or any member of his
household), which is paid or reimbursed by the employer is taxable on the following basis :

1. Amount of expenditure incurred by the employer XXX
2. Less: Expenditure on use for official purposes XXX
3. Less: Amount, if any, recovered from the employee XXX
4. Balance amount is the taxable non- monetary perquisite XXX

Note:
1) Health club, sport facilities etc. provided uniformly to all classes of employees by the
employer at the employers premises and expenditure incurred on them are exempt.
2) The initial one-time deposits or fees for corporate or institutional membership, where
benefit does not remain with a particular employee after cessation of employment are exempt.
Initial fees deposits, in such case, is not included.

h) Value of Subsidized / Free Lunch provided by employer to an employee:

1) Value of taxable perquisite is calculated as under:
Expenditure incurred by the employer on the value of food / non-alcoholic
including paid vouchers which are not transferable and usable
only at eating joints XXX
2) Less: Fixed value of a sum of Rs. 50/- per meal XXX

3) Less: Amount recovered from the employee XXX

4) Balance amount is the taxable non- monetary perquisites on value of
food provided to the employees XXX



Valuation of Perquisites
12 | P a g e

Note: Exemption is given in following situations :
Tea / snacks provided in working hours.
Food & non alcoholic beverages provided in working hours in remote area or in an
offshore installation.

i) Holiday Facility maintained by employer

If a Holiday facility is maintained by the employer and is available uniformly to all
employees, the value of such benefit would be exempted
























Valuation of Perquisites
13 | P a g e

B. MONETARY PERQUISITES:
Monetary benefits are those that are provided by way of monetary payments to the
employees.

a) Vehicle maintenance reimbursement:

1. Use of any vehicle provided by the employer to an employee for journey by him from his
residence to office or from office to his residence shall not be chargeable to tax.
2. Where the car is owned by the employee or employer and maintenance & running
expenses including driver salary, are met by the employer and if the car is used wholly for
official purposes, no value shall be taken as perquisite provided :
The employer has maintained complete details of the journey undertaken for
official purposes;
The employer gives a certificate that the expenditure was incurred wholly for
official duties.
Vehicle maintenance reimbursement falls within the purview of sec. 17(2). Hence, this
exemption is not available to the employees claiming vehicle reimbursement for official
purposes. Conveyance allowance to the extent of Rs 800/- p.m. or Rs1600 p.m (for a blind
person) is allowable to all employees other than those claiming Vehicle reimbursement to
meet the expenditure for the purpose of commuting between place of residence and place of
office.

b) House cleaning reimbursement:

The value of benefit to the employee (or any member of the household), shall be the
actual cost to the employer as reduced by the amount if any recovered from the employee.
If a domestic servant is engaged by the employee, the perquisite is taxable in the hands of
all employees (Whether specified or not).
If a domestic servant is engaged by the employer, the perquisite is taxable in the hands of
only specified employees.
If Domestic Servant allowance is given to the employee, it is chargeable to tax as
perquisite even if the allowance is used for engaging a domestic servant.

Valuation of Perquisites
14 | P a g e

c) Book Grant reimbursement:

If actual bills are provided it forms nature of reimbursement which is not taxable if it can be
proved that acquisition of books is necessary for the purpose of the business.

d) Medical Reimbursement:

Medical reimbursements shall be treated as monetary perquisite since it falls in the purview
of sec.17 (2) and any amount paid by the employer to the employee in excess of Rs15000/-
p.a. is taxable as perquisite. Following is the extract of the proviso (v) to Section 17 (2) (vi).
As per the proviso (v) to sec.17(2)(vi), a sum up to Rs.15,000/- per annum paid by the
employer in respect of any expenditure actually incurred by the employee on his medical
treatment or treatment of any member of his family is exempt.

Family for this purpose, means:-
a. the spouse & children of the individual; and
b. the parents, brothers and sisters of the individual or any of them wholly or mainly
dependent on the individual.

e) Staff Furnishing Scheme:

It is business expenditure if it can be proved that incurring such expense is necessary for the
purpose of the business.

f) Brief Case reimbursement:

It is business expenditure if it can be proved that incurring such expense is necessary for the
purpose of the business.

g) Entertainment allowance:

Any entertainment allowances paid to non-government employees are taxable.

Valuation of Perquisites
15 | P a g e

h) Gifts / Awards:

If made in cash or convertible into money (like gift cheques), they are taxable as
perquisites
If made in kind up to Rs. 5,000 in aggregate per annum would be exempt, beyond which
it would be taxable

i) Transfer Grant Allowance:

In this connection it is to be noted that as per sec.10(14) read with rule 2BB any allowance
granted to meet the cost of travel on tour or on transfer includes any sum paid in connection
with transfer, packing and transportation of personal effects on such transfer shall be exempt.
Also any allowance, whether, granted for the period of journey in connection with transfer, to
meet the ordinary daily charges incurred by an employee on account of absence from his
normal place of duty shall be exempt.

j) Holiday Expenditure reimbursement:

It is not taxable. It is an allowable expenditure u/s 37 provided the holiday (picnic) is
organized by the employer.
However, any Expenditure paid or reimbursed by the employer for any holiday (one day
picnic) availed of by the employee or any member of his household is to be considered as
taxable perquisite.










Valuation of Perquisites
16 | P a g e

k) Leave Fare Concession (LFC):

The following are the important points, to be taken into consideration, for claiming
exemption u/s 10 (5) of the Income Tax Act, 1961 read with Rule 2B of the Income Tax
Rules, 1962:

I. Definition - Value of LFC received by or due to an individual from his present or
previous employer, as the case may be, for himself and his family in connection with his
proceeding on leave to any place in India.
The exemption shall be available either if the employee is travelling alone or
accompanying his family in connection with his proceeding on leave to any place in
India. But, exemption shall not be available if the family members are travelling
separately without the employee who is not on leave.
II. Number of Trips The exemption shall be available in respect of 2 journeys performed
in the block of 4 calendar years. Some important points to be considered are as under:
It is uniform for all employees
Where an employee does not avail LFC, either one or on both the occasions, during the
block of 4 calendar years, the value of LFC first availed during the first calendar year
of the immediately succeeding block shall be eligible for exemption in lieu of
exemption not availed during the preceding block Only one trip can be carried forward
to be availed in the immediately succeeding block.

III. Quantum of Exemption The basic rule is that quantum of exemption will be limited to
the actual expense incurred on the journey. They are explained as under:
On declaration basis - Without performing any journey and incurring expenses thereon,
no exemption can be claimed.
On Non-declaration basis The quantum of exemption will be subject to the following
maximum limits for journeys performed on or after 01.10.1997:




Valuation of Perquisites
17 | P a g e

Journey performed by Exemption limit
Air Air economy fare of the national carrier ( Air
India) by the shortest route to the place of
destination
Places connected by rail or any other mode
other than air
First class air conditioned rail fare by the
shortest route to the place of destination
Places or origin and destination or part thereof
not connected by rail
a) Where public transport system exists, first
class or deluxe class fare on such transport
by the shortest route to the place of
destination.
b) Where no public transport system exists,
first class A/C rail fare for the distance of
the journey by the shortest route, as if the
journey has been performed by rail.

is limited to the actual expenses incurred on the journey which in turn is strictly limited to
expenses on air fare, rail fare and bus fare only. No other expenses like local conveyance,
sightseeing expense etc., shall qualify for exemption.
Where the journey is performed in a circuitous route, the exemption is limited to what is
admissible by the shortest route. Likewise, where the journey is performed in a circular
form touching different places, the exemption is limited to what is admissible for the
journey from the place of origin to the farthest point reached in India, by the shortest
route.

4. Restriction on children The exemption will not be available to more than 2 surviving
children of an individual born after 01.10.1998. This restriction shall not apply in respect of
children born before 01.10.1998 and also in case of multiple births after one child. It may be
noted that section 2 (15B) of the Act defines a child as includes a step child and an adopted
child of the individual.




Valuation of Perquisites
18 | P a g e

5. Definition of Family As per the provisions of Income Tax Rules,
Family means:
Spouse and children of the individual.
Parents, brothers and sisters who are wholly or mainly dependent on the individual.

6. Foreign Travel As per the provisions of Income Tax Rules, exemption is not allowable
in case of travel abroad.

7. Obligation of the employer As per a previously decided case law C.E.S.C. Ltd. Vs
ITO (TDS) 2003 Tax LR 401 (Cal.), the employer has to satisfy the obligation that leave
travel (fare) concession is not taxable in view of section 10 (5), the employer is not only
required to be satisfied about the ingredients of the said clause but also to keep and preserve
evidence in support thereof.




















Valuation of Perquisites
19 | P a g e

FINDINGS
SALARY
Payment made by employer to employee for services rendered. The term salary for the
purposes of Income-tax Act includes both monetary payments and non-monetary facilities.


Perquisites are fringe benefits that arise in the course of employment. They are
taxable only if they have a legal origin.



Residential accomodation
Water and electricity charges
Interest free loan
Club expenditure
Holiday facility
Use and transfer of moveable assets
Annual credit card and membership fees
Free lunch
PERQUISITES
Exempt
from tax
Taxable
ony for
specific
employees
Taxable
for all
employees
Non-Monetary perquisites Monetary perquisites
Vehicle maintenance
House cleaning
Medical reimbursement
Gifts/awards
Holiday expenditure
Leave fare concession
Staff furnishing scheme
Book grant reimbursement