Salaries - 2 | Commerce & Accountancy Optional Notes for UPSC PDF Download

Introduction

• Perquisites are additional emoluments or benefits provided to employees beyond their regular salary or wages. They can be in the form of cash or facilities, typically provided as in-kind benefits. The key concept in taxing perquisites is that they confer a personal advantage on the recipient. Perquisites are considered a component of salary income, and therefore, an 'employer-employee relationship' must exist for a perquisite to be taxed as salary. If the advantage arises from a non-employment relationship, it would be taxed as 'income from other sources'. For instance, tips received by waiters from customers are considered income from other sources.
• It's important that the advantage to the employee has a legal basis. Unauthorized advantages taken by employees don't qualify as benefits or advantages. For example, if a company provides a bungalow to an employee, and the employee continues to live there even after resigning, the value of this accommodation could be considered a perquisite. However, without an employer-employee relationship, it's logical to treat this as 'income from other sources'.
• Sometimes, employees may choose to waive a perquisite instead of using it. In such cases, the value of the perquisite cannot be assessed in the hands of the employee.

Definition of Perquisites [Section 17(2)]

According to section 17(2) of the Income Tax Act, 1961, 'Perquisite includes':

• The value of rent-free accommodation provided to the assessee by his employer.
• The value of any concession in the matter of rent with respect to any accommodation provided to the assessee by his employer.
• The value of any benefit or amenity provided free of cost or at a concessional rate in specific cases, including:
  • By a company to an employee who is a director thereof.
  • By any employer to an employee who owns at least 20% equity shares in the employer's company or has substantial interest in the company.
  • By any employer to an employee whose salary under the head 'salaries' exceeds Rs. 50,000.
• Any sum paid by the employer in respect of any obligation that would have been payable by the assessee.
• Any sum payable by the employer, directly or through a fund, other than a recognized provident fund or an approved superannuation fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity.
• The value of any specified security or sweat equity shares allowed or transferred directly or indirectly by the employer or former employer free of cost or at a concessional rate to the assessee.
• The amount of any contribution to an approved superannuation fund by the employer in respect of the assessee to the extent that it exceeds Rs. 1,50,000.
• The value of any other fringe benefit or amenity as may be prescribed.

Types of Perquisites [Section 17(2)]

Based on taxability, perquisites can be classified into the following categories:

• Perquisites taxable for all employees (General Perquisites)
• Perquisites taxable for specified employees
• Tax-Free perquisites for all employees

Let's discuss the items included in each category:

These perquisites are provided by the employer to any type of employee (Government, semi-government, or employed in private undertakings) or to employees of any category. Examples of such perquisites include:

• Rent-Free house or accommodation: The value of rent-free accommodation provided to the assessee by his employer is a taxable perquisite in the hands of every employee. The house provided by the employer may be owned by him or may have been taken on rent for providing it to his employee.
• Concessional rent-free house or accommodation: The employer may provide accommodation to his employees by charging a lower amount of rent or deducting some rent from their salary. This is called concessional rent-free housing.
• Payment of employee's obligations by the employer: Any payment made by the employer on behalf of the employee, such as personal loans, hotel or club bills, education fees, income tax, salary to domestic servants, or legal expenses, is taxable perquisite in the hands of the employee.
• Payment of employee's life insurance and annuity premium: Any amount paid by the employer for the life insurance of an employee or to effect a contract of annuity is a taxable perquisite in the hands of the employee, except for payments made under the Employee's State Insurance Scheme.
• Specified security or sweat equity shares: The value of any specified security or sweat equity shares allotted or transferred by the employer or former employer to the employee is taxable perquisite.
• Employer's contribution to an approved superannuation fund: Any amount contributed by the employer in an employee's approved superannuation fund in excess of Rs. 7,50,000 is a taxable perquisite.
• Fringe Benefits: Various prescribed fringe benefits or amenities, such as interest-free loans, traveling expenses, free food, or non-alcoholic beverages, provided by the employer to the employee, are taxable perquisites.

Taxable Perquisites for specific employees [Section 17(2)(iii)]

Perquisites that are taxable only in the hands of specified employees are called specific perquisites. According to section 17(2)(iii), these include:

• Any benefit or amenity provided to a director of a company.
• Any benefit or amenity provided to an employee who owns at least 20% equity shares in the employer's company or has substantial interest in the company.
• Any benefit or amenity provided to an employee whose salary under the head 'salaries' exceeds Rs. 50,000.

Note: The value of any perquisite provided to an employee is taxable as 'income from other sources' if it does not arise from an employer-employee relationship.

Meaning of a Specified Employee

A person who meets any of the following conditions is considered a specific employee:

• If the employee is a director in the employer’s company, whether full time or part time.
• If the employee has acquired at least 20% or more equity shares in the employer’s company, or if the employee has substantial interest in the company.
• If the total monetary receipts of an employee exceed Rs. 50,000.

An employee (not covered under any of the above two categories) whose taxable ‘monetary income’ under the head ‘salary’ (excluding the value of non-monetary perquisites) exceeds Rs. 50,000 is a specified employee. If an employee receives salary from more than one employer, he will be treated as a specified employee if the aggregate monetary salaries from all the employers exceed Rs. 50,000.

‘Monetary salaries income’ includes all taxable cash receipts such as basic salary, dearness allowance, bonus, commission, taxable allowance, obligations paid by the employer on behalf of the employee (e.g., income tax, employment tax, payment of gas, electricity, and water). It also includes income received at the time of retirement, such as taxable gratuity, encashment of earned leave, or sums received from provident funds, etc.

Name of specific perquisites, taxable in the hands of specific employees:

• Facility of motor car.
• Facility of domestic servants (Sweeper, Gardener, Watchman, or Personal Attendant) for the personal works of an employee employed and engaged by the employer and paid by the employer.
• Facility of free gas, electricity, and water.
• Free education facility provided by the employer to the children of an employee in a school run by the employer or in some other school.
• Personal or private journey provided free of cost or at a concessional rate to an employee or member of his household.
• The value of any other benefit, amenity, service, right or privilege provided by the employer.

Tax-Free Perquisites for all employees:

• Medical benefits
• Tea or snacks provided in office or factory
• Transport facility or conveyance facility from residence to workplace and vice versa
• Employer’s contribution to staff group insurance scheme
• Use of laptop or computer of employer
• Interest free or concessional loan if the amount of loan in aggregate does not exceed 20,000 during the previous year
• Accommodation in remote area
• Perquisites provided outside India
• Facility of telephone
• Facility of refresher course or training
• Payment of accidental insurance premium
• Educational facility for children of the employee
• Tax paid by the employer on non-monetary perquisites
• Leave travel concession
• Free conveyance facility to employees by an undertaking engaged in transport business
• Facility of residence and conveyance to High Court/Supreme Court judges.
• Facility of rent-free accommodation to minister of parliament (including maintenance).

Valuation of Perquisites for All Employees

To calculate the income chargeable under the head 'Salaries', the value of perquisites, not provided as monetary payment to the assessee, will be determined according to Rule 3 of the Income Tax Rules, 1962.

Rent-Free Accommodation – Rule 3(1)

Under Rule 3(1), all employees are divided into two categories for valuing rent-free accommodation.

Government Employees:

This category includes:

• Employees of Central and State Governments.
• Government employees on deputation, presently serving with any body or undertaking under Government control. Foreign Government employees are not included here; they belong to the second category.

Other Than Government Employees:

All employees not covered under the first category are included here.

Types of Rent-Free Accommodation:

The employer may provide accommodation of two types:

• Unfurnished accommodation – Without any furniture or amenities.
• Furnished accommodation – Equipped with furniture, appliances, etc.

Further, such accommodation may be provided:

• Rent-free, or
• At a concessional rate

Accommodation Provided by the Government to Its Employees

• Unfurnished Accommodation: The value is the license fee determined by the Union or State Government, as per their rules, minus the rent actually paid by the employee.
  Valuation = License fee determined by Central or State Government - Rent actually paid by the employee.
• Furnished Accommodation: The value of perquisite is determined as if it were unfurnished (as above). This value is then increased by 10% of the cost of furniture (including appliances), or the actual hire charges paid or payable if the furniture is hired from a third party. The valuation of furniture is reduced by any charges paid or payable by the employee for the furniture during the previous year.
  Valuation = As unfurnished + 10% of the cost of furniture (if owned by the Government) or actual rent/hire charges of furniture (if hired) - Charges paid or payable by the employee for the furniture.

Note:

• Salary includes various components but not certain items like dearness allowance not under the terms of employment, employer's contribution to the employee's Provident Fund, exempted allowances, and more.
• 'Accommodation' includes various types of living spaces.
• Rent-free official residences for judges of High Courts and the Supreme Court are exempt from tax.
• Rent-free accommodation for officials of parliament, union ministers, and the leader of the opposition in parliament is also exempt from tax.

Illustration 1: Mr. Y. is an I.A.S. Officer in the Ministry of Home Affairs, New Delhi. He draws a basic pay of Rs. 12,000 p.m. and dearness allowance of Rs. 1,200 p.m. He is provided a rent-free house at Jor Bagh, the fair market rent of which is Rs. 72,000 p.a., Bonus – 3 months’ basic pay; education allowance @ 6,000 p.m.; city compensatory allowance @ 6,000 p.m.; cost of furniture – Rs 50,000; license fee determined by the government – Rs 12,000 p.a. Determine the value of rent- free accommodation if the house is (i) unfurnished (ii) furnished and hire charges of furnishing are Rs. 2,000 p.a.
Solution:
Mr. Y (Government employee - unfurnished) Valuation for rent free house = License fee determined by the Government = Rs. 12,000.
Note:

• License fee determined by the Government is Rs. 12,000 p.a. Hence, Rs. 12,000 shall be the value of rent-free accommodation.
• Market rental value of the accommodation and the salary of the employee are irrelevant for valuation of rent-free accommodation of a Government employee, when license fee is given.

Mr. Y (Government employee - furnished) Valuation for rent free house = License fee determined by the Government + hire charges of furnishing. = Rs. 12,000 + 2,000 = Rs. 14,000

In case accommodation is provided by any other employer

Accommodation provided as rent free or at concessional rate may be owned by the employer or taken on lease or rent by the employer. It includes other employees like employees of Reserve bank of India, nationalized banks, educational institutions, universities, statutory corporations, companies of private sector, partnership firms and other industrial and trading institutions etc. The taxable value of this facility shall be determined as follows:

• Where the Accommodation is Unfurnished

Explanation:

• In case, the house is provided at concessional rate, the value determined as per (a) or (b) above shall be reduce by the rent, if any, actually paid by employee.
• Where the acommodation is furnished: The value of perquisite shall be determined as if it is an unfurnished accommodation (i.e. value determined as per chart given above. Such value shall be increased by 10% of the cost of furniture (including television, radio, refrigerators, other household appliance, air conditioning plants or equipment or other similar appliance or gadgets) or if such furniture is hired from a third party, the actual hire charges payable for the same. Such valuation of furniture shall be as reduced by any charges paid or payable for such furniture by the employee during the previous year.

Valuation = Valuation as unfurnished accommodation + 10% of the cost of furniture
Or
Valuation as unfurnished accommodation + actual rent or hire charge of the furniture paid by the employer (if furniture is taken on lease or hire) 

C) Where the accommodation is provided by the employer (Govt. or other employers) in a hotel The value of the accommodation shall be –

• 24% of salary paid or payable for the previous year, or
• The actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided. However, if the employee pays any rent, the value so determined shall be reduced by the rent actually paid or payable by the employee. There will be no perquisite value, if the accommodation is provided in a hotel if the following two conditions are fulfilled: 
  • Such accommodation is provided for a period not exceeding 15 days and
  • It has been provided on the transfer of the employee from one place to another.

Valuation = 24% of salary paid or payable for relevant period of the previous year 

Or
Actual charge paid or payable by the employer to such hotel, whichever is less. (Such accommodation is treated as furnished) 

Note: For the purpose of valuation of rent-free accommodation, the following should be understood clearly: 

Meaning of Salary – Salary for this purpose is to be taken as salary of the period for which rent free accommodation is given to the employee. Salary means and includes the following:

• Basic salary
• Dearness Allowance or Dearness Pay, if it is under the terms of employment, and all other allowances paid by the employer to the employee on a monthly or other basis, such as fees, bonus, commission, dearness allowance or dearness pay (if it is under the terms of employment), and all other taxable allowances (excluding the portion not taxable).
• Bonus
• Commission
• Any monetary payment (by whatever name called)

However, the following are not included in the salary:

• Dearness Allowance or Dearness Pay if it is not under the terms of employment.
• Employer’s contribution to the provident fund account of the employee.
• All allowances exempt from income tax.
• Value of any Perquisite under section 17(2).

“Accommodation” includes a house, flat, farmhouse, or part thereof, or accommodation in a hotel, motel, service apartment, guest house, caravan, mobile home, ship, or other floating structure. “Hotel” includes licensed accommodation in a motel, service apartment, or guest house. Salary is to be computed on a ‘due’ basis for the period for which the rent-free accommodation has been provided to the employee, for example, if the rent-free accommodation is provided for the period from 1.1.2023 to 31.3.2023, then only the salary due for the months of January, February, and March shall be taken. If the employee receives salary from more than one employer, the aggregate of the salary received from both employers, for the period for which the accommodation is provided, has to be taken into account for the valuation of rent-free accommodation, even though the accommodation has been provided by one employer.

Accommodation at Concessional Rent

• When an employee receives accommodation at a reduced rent, the value of this accommodation is calculated as if it were provided rent-free. From this value, the rent actually paid by the employee during the period of occupancy is deducted. The resulting amount is then added to the employee's salary as the value of the rent concession.
• Usually, employers deduct a fixed sum from an employee's salary for the rent of the accommodation provided. This sum is typically less than the fair rental value of the accommodation. If the employee pays the fair rent, no rent concession is considered. However, if the rent paid by the employee is less than the fair rental value, a rent concession is considered a perquisite.
• In general, 15%, 10%, or 7.5% of the salary is taken as the fair rent of the accommodation.

The accommodation provided at concessional rent may be furnished or unfurnished. Here's how the rent concession is valued:

• Unfurnished accommodation provided by an employer other than the Central or State Government:

If the accommodation is owned by the employer:

• Value of Concession in Rent = 15%, 10%, or 7.5% of salary (as applicable) - Rent paid by the employee

If the accommodation is leased or hired by the employer:

• Value of Concession in Rent = Actual lease or rent paid or 15% of salary (whichever is less) - Rent recovered from the employee

Unfurnished accommodation provided by the Central or State Government:

• Value of Concession in Rent = License fee determined - Rent recoverable from the employee

Furnished accommodation provided by the Central or State Government:

• Value of Concession in Rent = License fee determined + 10% of the cost of furniture - Rent (or charges for furniture) recovered from the employee

Furnished accommodation provided by an employer other than the Central or State Government:

If the accommodation is owned by the employer:

• Value of Concession in Rent = Value as unfurnished accommodation + 10% of the cost of furniture or rent (charges for furniture recoverable from the employee)

If the accommodation is leased or rented by the employer:

• Value of Concession in Rent = Value as unfurnished + 10% of the cost of furniture - Rent or charges for furniture recovered from the employee

Accommodation provided by the employer in a hotel:

• Value of Concession in Rent = 24% of salary or Actual hotel charge paid (whichever is less) - Rent recovered from the employee

Note:

• If accommodation in a hotel is provided for 15 days or less, its value is not taxable.
• The value of furniture in unfurnished accommodation is 10% of the cost of furniture or the actual hire charge if furniture is hired.

Valuation of Rent Free House

ringe Benefits

The prescribed fringe benefits or amenities are as follows:

Interest-Free or Concessional Loan to an Employee [Rule 3(7)(i)]

Key Points to Remember:

• The loan should be provided to the employee or a family member (spouse, children and their spouses, parents, servants, and dependents) by the employer or on behalf of the employer in the previous year.
• Interest shall be calculated on the maximum outstanding monthly balances.
• The taxable value of the loan is the sum equal to the interest calculated at the rate charged per annum by the State Bank of India on the 1st day of the previous year.
• No value is taxable if the loan is taken for the treatment of diseases specified in Rule 3A.
• If the total amount of the loan does not exceed Rs 20,000, it is not included in the employee’s salary.

Note:

• The rate of interest for such loans is provided by the State Bank of India for each financial year.
• Maximum outstanding monthly balance refers to the total outstanding balance for each loan as of the last day of each month.