1. HR Glossary
2. Perquisites

Perquisites: Meaning, Examples, Types, & Taxability

Perquisites in income tax are benefits or privileges a company gives workers beyond the gross salary. They may be money-based inducements or contributions that do not involve direct payments and significantly affect a person's taxable income.

This blog post will help us learn more about aspects associated with perks, such as their definitions, types, and taxation policies under the Indian Income Tax Act.

What are the Perquisites in Salary?

Salary prerequisites mean extra benefits or privileges given to employees by their employers, such as bonuses, cash allowances, company cars, and accommodation. These advantages can be a valuable supplement to an employee's salary package, although they may also have tax implications. For example, if one of the employees receives a company car as a perquisite, it might be considered taxable income. The payroll software efficiently processes the Perquisites benefit payment in the salary, which consumes less time for its calculation.

Types of Perquisites or Perk

There are two types of Perk, which are as follows:

Monetary Perks

Bonuses

It refers to the payment given to an employee as a one-off performance incentive or where the employer wishes to reward an employee. This may also cover performance bonuses paid at the end of the year or certain holiday bonuses that increase employees’ morale.

Cash Allowances

This involves allowing a fixed amount as cash for purposes such as traveling or entertaining. To ease employees' expenditures, these allowances could also include meal allowances, phone allowances, and childcare allowances.

Share-Based Benefits

This involves allowing employees to receive company shares or stock options in return for their services. Not only does this help align employee objectives with the company’s goals, but it can also result in very substantial monetary rewards for the employee.

Profit Sharing

This is a system in which employees are paid according to the profits accrued by their company. This leads to ownership of organizational goals because the employees are part of the process.

Commissions

It's a compensation method that pays the employee a fixed percentage of the sales he or she makes. This is especially true in sales occupations, where remuneration has a positive relationship with performance.

Non-Monetary Perks

Company Car

This is an employer-provided car used specifically for business-related purposes but is also used for other purposes. It helps the employee in mobility and enhances convenience and shows that the company is concerned about their welfare.

Accommodation

This scheme includes houses and accommodation facilities that are provided by the employer for example during an expatriate assignment or when an organization is relocating its employees. This relieves the employees of some responsibilities when working for organizations that require them to move.

Medical Reimbursements

This means reimbursement of all the money used for health matters when one was employed. Many companies provide their workers with health insurance options, and the insurance company pays medical costs and costs incurred on health services to health service providers.

Leave Travel Concessions

For instance, this involves providing cash or other support when traveling during holidays. Some of these perks may motivate workers to take needed vacations, ultimately enhancing mental health and workers’ productivity.

Flexible Arrangement Schemes

These schemes permit employees to work from home or change their schedules to attend to their responsibilities. This is a current favorite and recognizes the need for corporate flexibility.

Promotion and other kinds of training

Offering courses or workshops to improve employee work experience or credentials and offering specialized certifications. Investing in the training and development of one’s employees is a good move for both the employee and the organization.

Wellness Programs

This includes fitness club membership, weight loss programs or yoga classes, stress management workshops, etc. These might result in healthier, happier employees and reduced demands on the company’s healthcare facilities.

Recognition Programs

These include minimal tangible rewards, such as employee of the month, employee recognition at meetings, or organization days, that result in an enhanced positive organizational environment.

5 Benefits of Perquisite

Apart from wages, there is nothing but employee perks or extra bonuses that are given to the employees. These can lead to increased job satisfaction and are good for workers' health. Common types of fringe benefits include:

1. Health Benefits

Most companies provide health insurance, organize events or personal training sessions for the physical and psychological health of the staff, and offer free gym memberships.

2. Transportation

Organizations can give company cars, transport, or subsidized public transport to reduce the stress associated with transport.

3. Workplace Amenities

This can include free meals, snacks or coffee, and all recreational facilities within the working environment, thus improving morale.

4. Flexible Work Arrangements

Flexible arrangements like teleworking, liberalized hours, or reduced working weeks provide workers with the tools to manage their home and work lives effectively.

5. Professional Development

Professional development is another way employers facilitate their employees, offering training sessions, seminars, and sponsorship for tuition.

There is much to be said about fringe benefits. From increased employee satisfaction to increased loyalty, fringe benefits can even increase productivity due to a better working climate. They also form an environment that can make the organization more attractive in the workers’ marketplace, helping attract and adopt the best talents.

Differences Between Allowances and Perquisites

Even though both allowances and perquisites are additional forms of compensation that employees receive from their employers, they are effective in different ways within employee benefits.

Definition and Purpose

Often, allowances refer to a specified sum of money provided to employees for certain general purposes, such as transport, food, or accommodation. They are usually offered as part of an employee's compensation and are meant to cover expenses during his/her working activities. On the other hand, fringe benefits are non-cash, optional, and personalized employee bargains with the employer. For this reason, they tend to enrich the overall perception of employment and can even have no relation to employment incidence expenses.

Tax Implications

As for the second category, intensive and varied tax treatment can also be observed in allowances and perquisites. According to local laws, working expense allowances, such as travel allowances, may be considered taxable income. It commonly becomes subject to review at the time of taxation since they are viewed as payments made for business expenses in direct ratio to the employee’s work. In contrast, all the many categories of fringe benefits—especially those that boost the employees’ quality of living, such as club memberships or child care services—may not be taxable since most are non-monetary. Both employers and employees should be informed of these implications since they are part of the total compensation and benefits planning.

Nature and Availability

A standard practice is to make allowances reachable to all workers at a fixed price impelled by job descriptions or classification. For instance, there may be a provision whereby a given percentage of the salary is used for transport. Fringe benefits, however, differ with rank, individual bargaining, or organizational culture. For example, employers offer things such as a personal assistant or better parking space to executive-level employees rather than first-level employees.

It is worthwhile to state that allowances and fringe benefits are parts of an employee’s remuneration that aim to increase its value. Yet, they differ in definition, purpose, taxation, and availability. Knowledge of these differences is important for employers and employees to make informed decisions regarding compensation and benefits.

Key Provisions Under the Indian Income Tax Act

According to the Indian Income Tax Act, Section 17(2) defines taxable and exempt perks. An employer may give any benefits or privileges to his employee, which are called perquisites. Unless specifically exempted by law, these benefits will be treated as part of the employee's income. The overall objective of this section is that all employees should pay tax on their total income, including employer-related benefits.

Taxable and Exempt Perquisites

Indeed, only some perks are taxable. Under various provisions of the Indian Income Tax Act, certain benefits are tax-free. For instance:

Taxable Perquisites

Accommodation

Income from rental-free houses will be taxed since those amounts should be added to employees whose remuneration is paid by the company.

Company Asset Usage

If you are provided with office supplies such as vehicles or computers, they are considered part of your salary, and thus, you are liable to pay tax on them per the law.

Concession Loans

If an employer issues a loan at a rate lower than the current interest rate charged on such loans, that amount shall be deemed the employee's or worker's income subject to taxation.

Exempt Perquisites

Medical Reimbursements

Any reimbursements for medical expenses, including hospitalization, medicines, and general treatment, do not attract taxation.

Leave Travel Concessions

These concessions are tax-free, similar to travel expenses incurred on leave, such as air or rail tickets.

Gifts & Awards

Employers' gifts to their workers, such as bonuses or appreciation awards, are tax-exempt.

Valuation and Calculation of Perquisites with Examples

In Article 18 of the Income Tax Act, determining and assessing the perquisites in income tax are important aspects of an employee’s total income as granted by the employer. Some of the considerations involved in the taxability of the fringe benefit include the tax rates of the financial year in which the perk was given, overall salaries recognized in the income, and taxes paid by the employer on the fringe benefits.

The Calculation of Tax on Perquisites With Example

Let us assume that, under salaries for the given FY, Amit received and recorded a total income of Rs. 9,00,000/-. This figure also includes Rs. 1,00,000, which the employee received as non-reimbursable cash allowances to the employer in the nature of the perquisition.

Total income, including perks: The total recognized salaries amount to Rs. 9,00,000.

Income Tax Calculation:

The income tax calculated according to this total salary plus education and health cess, if applicable at 4%, can be counted up to Rupees eighty-five thousand seven hundred only.

• Hence, the average tax rate amounts to Rs. 85,700/-
• Calculation of Tax Rate: To determine the extent of tax that can be imposed on Amit's income, we have to divide the figure from the total tax to Amit's salary.
• Average Tax Rate = Total Tax / Total Salary = 85800 / 900000 = 9.53
• Tax on Perks: Rs 1,00,000 of Amit’s gross income comes from perks; the tax on perks that the employer is supposed to pay can be calculated as follows.
• {Tax on Perks} = {Average Tax Rate } {Value of Perks } = % 9.53 × 1,00,000 = 9,533. Hence, the Tax on Perks amounts to Rs. 9,533.
• Monthly Tax Deduction: To ascertain the amount to be deducted from Amit’s wages every month as tax on the perks, the annual tax is divided by twelve.
• {Monthly TDS} = 9,533 / 12 = Rs. 794
• Hence, for all the perks issued, the employer will need to deduct Rs. 794 as TDS from Amit's wage structure.

It is pertinent to mention here that from F.Y. 2020-21, any employer contribution made to a retirement fund over and above Rs. 7.5 lakh in EPF, NPS, or any other superannuation fund is taxable in the hands of the employee as perquisite. This adjustment also emphasizes the enhanced call for proper identification and proper valuation of perks for tax purposes.

This is important for both the employee and the employer. By examining the general principles of tax and law, one can properly apply the valuation and taxation of fringe benefits to practical use.

Reporting and Compliance

Employers have several obligations when it comes to the income tax law, such as:

• Performing tax deductions at source (TDS) on perks offered to workers.
• Providing Form 12BA to an employer stating details of the benefits given to employees.
• Keeping records of additional payments made to staff members.

The law also places specific responsibilities on employees like:

• Including perks acquired in their income tax returns.
• Paying taxes on taxable perks.
• Maintaining records of perks received.

Tax Planning Strategies

Many strategies are available to employees for reducing taxes related to perks, including:

• Designing conversion functions that best suit tax needs.
• Utilizing non-taxed indemnities or reimbursements to cover expenditures.
• Deducing against costs incurred in respect of paid benefits subject to taxation.
• Channeling funds into stock/shares or equity purchases through different ESOPs available for employees, including those who work remotely from their homes, offices, etc.
• Engaging tax-deferred pension programs at best buy prices requires approval from government agencies; thus, taxes are not prominently featured on them.

Conclusion

To sum up, perquisites are an indispensable element of an employee's paycheck, providing additional benefits besides gross salary and access privileges. All parties must grasp how these Perquisites are valued and computed and the relevant disclosures and regulatory frameworks, even though the Indian Income Tax Act provides a perquisite taxation framework.

This way, top-notch employers can retain top talents by making knowledgeable decisions regarding these privileges to reduce taxes. This knowledge can also help employees understand what they gain from their salaries, enhancing the amount of money they take home.

Frequently Asked Questions

How Can Employees Ensure Compliance With Taxation Policies Related to Perquisites?

Employees must be aware of the perquisites under the Indian Income Tax Act that can be taxable or exempt, maintain their benefit records, and contact a tax professional if they are doubtful about the specific benefit tax implications.

How Can Employers Ensure Proper Tax Compliance When Providing Perquisites to Employees?

Employers should keep exact employee benefits records, enlighten them on tax connotations, and seek advice from taxation specialists to comply with tax requirements.

What Are the Consequences of Not Reporting Perquisites Accurately for Taxation Purposes?

Not accurately reporting perks for assessment purposes may result in penalties, fines, and possible legal consequences. Therefore, employers and employees must follow taxation policies concerning perks to avoid any trouble.

What is Perquisites in CTC?

When your employer gives you extra benefits along with your basic salary, these are called perquisites for income tax. However, reimbursements from your employer are not included as perquisites. These benefits are part of your pay structure and are included in the total cost to the company (CTC).

What are Perquisites Examples?

Employers often provide various perquisites to enhance their employee compensation packages. Common examples of these perks include company cars, rent-free housing, and stock options, all of which aim to improve employee satisfaction and attract talent.

• Previous Post Performance Planning
• Next Post Probationary Arrangement