Chapter I: Introduction
The heads of income under which the income of an assessee is classified for charging and computation of income tax are listed in Section 14 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). One of these heads of classification is income from salaries. Section 15 of the Act is the charging section, and sets out which incomes shall be chargeable under the head of income from salaries. Section 17 of the Act defines salary, profits in lieu of salary and perquisites, while Section 16 deals with the permitted deductions from salary.
Section 17(1)(iv) states that perquisites shall be included within the definition of salary. Perquisites are further defined under Section 17(2) of the Act. It includes benefits, amenities and other additions provided by the employer in addition to salaries and wages. Perquisites may be either in cash, or in kind, which can be converted into cash.
Section 192 of the Act, which deals with the deduction of tax at source for salary is also relevant to refer to here.
“(1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.
(1A) Without prejudice to the provisions contained in sub-section (1), the person responsible for paying any income in the nature of a perquisite which is not provided for by way of monetary payment, referred to in clause (2) of section 17, may pay, at his option, tax on the whole or part of such income without making any deduction therefrom at the time when such tax was otherwise deductible under the provisions of sub-section (1).”
Thus, we see that perquisites will be deducted at source by the employer, except when the perquisite is not provided for by way of monetary payment, in which case it shall not be payable by the employer.
The primary focus of this paper shall be on one component of income from salaries, i.e. perquisites. The paper shall aim to look into the manner in which perquisites are defined under the Act, and understand the taxation scheme for this class of benefits. The paper shall begin with a chapter on understanding the meaning and legal nature of perquisites.
Research Questions
• Whether every benefit provided by the employer will amount to a perquisite under the Income Tax Act, 1961?
• Whether the scope of the term ‘perquisite’ has been limited or redefined through judicial interpretation by the courts?
Research Objectives
• To understand the nature and scope of the term ‘perquisite’ under the Indian Income Tax Act
• To understand the method for valuation of perquisites for taxation purposes
Research methodology
This project will adopt the doctrinal mode of research. In order to obtain a thorough understanding of the subject matter, various primary and secondary sources such as cases, commentaries, reports and journal articles will be used. Apart from Indian judicial interpretations, he researcher has referred to cases from English law as well to gain a holistic understanding of the concepts.
Chapter II: Understanding the Meaning & Scope of ‘Perquisites’
Meaning of Perquisites
To understand the meaning of the term ‘perquisite’, we may begin with the meaning set out in the dictionary – “a gain or profit incidentally made from employment in addition to regular salary or wages, especially one of a kind expected or promised”. The ordinary understanding of the term is one of a personal advantage. In terms of Section 17(2), perquisite is given an inclusive definition. This includes rent, concessions in respect of residential accommodation or any other sum payable by the employer to the employee for effecting life insurance, or any sum paid in respect of any obligation taken up by the employer in respect of employee’s expenses, etc. The perquisite may be either in cash, or in kind, or in money, or money’s worth, or in the form of amenities which are not convertible into money. It is important to note that the scope of the term perquisite is not limited to the items listed in Section 17(2), since it is an inclusive definition, but may well extend to many other situations and things not mentioned in the section. This position has been upheld by the courts in India as well.
Scope of Perquisites
Upon reading Section 17(2) with Section 15, it is evident that for a benefit or payment to be called a perquisite, a right must be conferred on the employee in respect of that perquisite, and such right must entitle the employee to receive the said perquisite from his employer. If an employee does not have a right to a perquisite, an employer cannot be said to have conferred the same upon him. The term ‘perquisite’ does not apply to contingent payments, where the employee has no actual right to receive a payment until the occurrence of the contingency. In short, the employee must have a vested right in the perquisite. It is only when a payment or concession provided arises out of the employee’s vested right that the payment or concession can be called a perquisite. For the perquisite to arise out of a vested right, the payment or concession must be in pursuance of the contract of service between the employer and employee. Thus we see that the existence of the employer-employee relationship is essential when deciding whether a payment can be classed a perquisite.
For example, in a case where contributions were made by the employer to provide pensionary or deferred annuity benefits to the employees, the court held that it would not fall within the scope of perquisites, since there was no interest in the sum contributed by the employer under the scheme, and it was only a contingent interest depending upon the employee reaching the age of superannuation.
In all other situations, the payment will be considered gratuitous, in which case it shall not fall within the meaning of a perquisite. Such other payments may, however, count as a gift made by the employer to the employee.
Courts have interpreted perquisites to include dearness allowance, city compensatory allowance, house rent allowance, running and night allowance. In another case, colonial allowance given in order for the employee to meet the increased cost of living abroad was also held to be an instance of perquisite. Clothing allowance given to detectives in order for them to make the specific uniform required for their role was also held to be a perquisite in another case.
In a case where a doctor was engaged by a hospital for stand-by duties to deal with emergency cases for the hospital, as and when he was informed over the phone, and the hospital paid the doctor’s travelling expenses, it was held that the payment of travelling expenses was a reimbursement for actual expenditure and not in the nature of an emolument or perquisite.
Chapter III: Benefits constituting Perquisites under the Income Tax Act
3.1 Rent free accommodation or rent concession
Sub-clauses (i) and (ii) of Section 17(2) deal with rent-free accommodation provided to the employee by the employer and concession in respect of rent provided by the employer. The value of rent-free accommodation and rent concession are both included in the definition of perquisite under Section 17. The valuation of such accommodation or concession is to be made according to the provisions laid down under Rule 3 of the Income Tax Rules, 1962. It has been held that neither Rule 3 nor Section 17 lay down that the assessing officer must take into account the Rent Act or any other similar legislation while valuing this. Section 17 and Rule 3 are the sole criteria to be taken into account when arriving at such a valuation.
3.2 Benefit or amenity to certain employees
Sub-clause (iii) of Section 17(2) includes the value of any benefit or amenity granted by the employer, free of cost or at a concessional rate, within the definition of perquisites. This only applies in cases where such benefit/amenity is granted (a) by a company to an employee who is a director of the company; (b) by a company to an employee who has a substantial interest in the company; or (c) by any employer to an employee whose income from salary, excluding benefits or amenities by way of monetary payment, exceeds fifty thousand rupees. The Explanation to the sub-clause clarifies that the use of vehicles for the transportation of the employee assesse from his residence to the place of work is not included within this sub-clause.
The words “any benefit or amenity” are broad in their scope, and require further clarification and interpretation to fully understand. For example, in a case before the Supreme Court, a company had advanced interest-free loans to its employee-directors. It was held that the non-charging of interest could not be considered a perquisite in the hands of the directors, just as non-charging of interest on the debit balance of directors would not constitute a perquisite.
3.3 Other payments by employer
Sub-clause (iv) of Section 17(2) is an ancillary clause which includes within the definition of perquisites any sum paid by the employer for an obligation which would otherwise have been payable by the assessee. This section will not, however, cover reimbursements made by the employer to the employee for amounts expended by the employee where there is no direct payment by the employer. Such reimbursements would be covered under Section 17(3).
3.4 Sums paid by the employer towards life insurance, etc.
Sub-clause (v) of Section 17(2) refers to sums payable by the employer, either directly or through a fund, towards an assurance on the life of the assessee, are eligible to tax. However, such sums are required to be paid to the employee, or due to him, by the employer. The employee must have a vested interest therein.
3.5 Securities & sweat equity shares
Sub-clause (vi) of Section 17(2) includes the value of any security or sweat equity share allotted or transferred by the employer, directly or indirectly, to the employee either free, or at a concessional rate. The definition includes within it any security/sweat equity share allotted by a former employer as well. For the purposes of this sub-clause, the value referred to shall be the fair market value, less the actual amount recovered or paid by the assessee from such shares/securities.
The explanation to the sub-clause clarifies that employee stock options provided under a scheme will also be included within the definition of security for the purposes of the sub-clause. Sweat equity shares are also defined as “equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions”.
Taxation of employee stock options (ESOPs) occurs in various stages. The grant of ESOPs to the employee does not in itself give rise to a taxable event in the hands of the assessee, and neither is the subsequent vesting of the options a taxable event. The first stage of taxation is the exercise of options by the assessee, which is calculated as the difference between the fair market value (calculated according to the Income Tax Rules, 1962) and the exercise price as on the date of exercise of options. The subsequent sale of the shares by the assessee will be subject to capital gains tax.
The manner in which the fair market value of any security or sweat equity share is computed differs based on whether the shares are listed on a recognized stock exchange or unlisted. Where the share in the company is listed on a recognized stock exchange on the date of exercising of the option, the FMV shall be calculated as the average of the opening and closing prices of the share on the stock exchange on that date. When the share in the company is unlisted, the FMV shall be determined by a merchant banker on the specified date. In cases where the security is not an equity share in the company, a merchant banker will determine the FMV on the specified date.
3.6 Contribution to superannuation fund
The amount of contribution of the employer to any approved superannuation fund in excess of one lakh fifty thousand rupees is included within the definition of perquisites under sub-clause (vii) of Section 17(2).
Sub-clause (viii) of Section 17(2) includes the value of any other fringe benefit or amenities as may be prescribed.
3.7 Tax-free perquisites
Certain perquisites are expressly excluded from the scope of the definition under Section 17(2)(viii). These include the value of medical facilities availed of by an employee or their family member in a hospital, clinic run by the employer; reimbursement of medical treatment expenditure incurred by the employee for himself/family members in certain government specified hospitals and dispensaries; group medical insurance bought for the employees/their family by the employee. Further, perquisites allowed to an Indian citizen outside India by the Government for rendering services outside India are perquisites which are exempt from tax.
Chapter IV: Valuation of Perquisites
The valuation of perquisites is based on their value to the employee, without regard to the cost incurred by the employer in providing the said perquisite. The value of the perquisite is counted as being towards part of the salary income of the assessee only if the perquisite is actually provided to the employee. An employee may not be taxed for a benefit that is not actually enjoyed by him in reality, although the terms of employment have provided for it. Therefore, once the employee has waived their right to the perquisite, they cannot be taxed on it. The scheme for valuing perquisites is provided for under Rule 3 of the Income Tax Rules, 1962.
4.1 Valuation of residential accommodation provided by an employer
The method in which perquisites are valued will differ based on whether the employee is a government employee or otherwise, and whether the accommodation is furnished or unfurnished. Where the accommodation is furnished:
i. Government employees: The value of the perquisite is the license fee determined by the government in accordance with any government rules on the same, as reduced by the rent actually paid by the employee.
ii. Other employees: Where the accommodation is owned by the employer, the value of the perquisite is 15% of the salary in cities having population more than 25 lakh, 10% where the population is 10-25 lakh, and 7.5% where the population is less than or equal to 10 lakh. Where the accommodation provided is taken on lease or rent by the employer, the value of the perquisite will be the actual amount of lease rental paid or payable by the employer or 15% of salary, whichever is lower. In the aforementioned instances, the value of rent, if any, actually paid by the employee, will be reduced when calculating the perquisite value.
Where the accommodation is unfurnished:
The value of the perquisite would be the same value as computed above, increased by 10% per annum of the cost of furniture (including television, refrigerator, air conditioner, radio, other household appliances). Where the furniture has been hired, instead of by 10%, the value of unfurnished accommodation must be increased by the actual hire charges paid or payable by the employer.
4.2 Valuation of hotel accommodation given by an employer
The value of any hotel accommodation given by the employer to the employee will be calculated as 24% of the employee’s salary, or the actual charges paid or payable to the hotel, whichever amount is lower. From this amount, any rent actually paid, or payable by, the employee, must be deducted.
4.3 Value of motor car
The Rules also provide for valuation of a perquisite by way of use of a motor car by an employer to the employee. If the motor car is used by the employee wholly and exclusively in the performance of his official duties, the value of the perquisite shall be taken to be nil, regardless of whether the motor car is owned by the employer or employee. If the motor car is owned or hired by the employer, and is used for the employee’s personal purposes and the expenses are met/reimbursed by the employer, the value shall be the actual expenditure incurred by the employer for the running and maintenance, including remuneration to chauffeur.
4.4 Value of gas, energy or water supply
The value of any supply of gas, water or energy by the employer shall be calculated as the amount paid by the employer to the agency supplying the facility. Where the supply is made by the employer from his own resources, the value will be calculated as the actual cost incurred by the employer in manufacturing every unit.
4.5 Value of Free/Concessional Educational Facility
The value of any free or concessional education provided by the employer to the employee’s children would be the expenditure incurred by the employer. If the educational institution imparting the education is owned and maintained by the employer, the value will be nil if the value of the benefit per child is below one thousand rupees per month. In cases where it exceeds one thousand rupees, the reasonable cost of such education in a similar institution in the vicinity would be considered to compute the value.
4.6 Value of facilities provided by gardener, sweeper, personal attendant, watchman
Where the employer provides the employee with the services of a gardener, sweeper, personal attendant or watchman, the value of such perquisite shall be the actual cost borne by the employer in this respect, for which due regard shall be had to the salary paid or payable to such service providers.
4.7 Valuation of Other Perquisites
i. Interest-free/concessional loans – The value of the benefit of any interest-free or concessional loan for any purpose to the employee shall be the interest charged by State Bank of India on the first day of the previous year in respect of loans advanced by the State Bank for the same purpose, charged on the maximum outstanding monthly balance.
ii. Free food – The value of free food and non-alcoholic beverages provided by the employer shall be the expenditure incurred by the employer in providing such items. This, however, does not apply to food and beverages provided by the employer during working hours at office premises.
iii. Gift, voucher or token – The value of any gift, or voucher, or token in lieu of which such gift is received by an employee or his household from the employer, shall be the sum equal to the amount of such gift, voucher or token. However, where the value of such gifts, vouchers or tokens in the previous year is less than five thousand rupees, it shall be considered to be nil.
iv. Credit card – The expenses incurred by an employee on a credit card, including any add-on card, given to him by his employer, which are paid or reimbursed by the employer, will be the amount paid by the employer. This shall not apply if the expenses incurred are solely for official purposes.
v. Club membership – For calculating the amount paid or reimbursed by an employer for expenditure incurred in a club by the employee or his household members, including any annual or periodic fee, the actual amount paid by the employer shall be taken into account. This shall not apply if the expenditure, however, is solely for official purposes.
4.10 The value of any other benefit or amenity
For calculating the value of any other benefit or amenity not discussed above, the valuation shall be determined on the basis of what the cost would be to the employer in an arms’ length transaction, and from this figure the employee’s contribution will be reduced.
Conclusion
Thus, we have seen that perquisites are essentially benefits or emoluments provided by the employer to the employee, other than the salary, and that they may be either in cash or kind. Perquisites are given an inclusive definition under the Act, and the scope had been appropriately broadened by courts in cases that have appeared before them. The value of the perquisites, once calculated in accordance with the relevant provisions, is considered to be part of the income from salary of the assessee, and adds to the total taxable income of the assessee. The prevailing rate of taxation is then applied to the taxable income.
From a policy perspective, perquisites are important since they form part of the compensation provided to the employee, and in some ways, a perquisite is a salary in a different form. Hence, it is important to tax perquisites to ensure that businesses do not disguise a salary in the form of a perquisite to avoid tax.