What Is Perquisites

What Are Perquisites?

Perquisites, commonly referred to as fringe benefits, are non-monetary compensation benefits that employers provide to employees in addition to their basic salary. These perks can include rent-free accommodation, employer-funded health insurance, employee stock options (ESOPs), interest-free loans, club memberships, and provident fund contributions.

Employers incorporate perquisites in salary structures to enhance overall compensation, improving employee retention and satisfaction. Since these benefits hold financial value, they are often subject to taxation under Section 17(2) of the Income Tax Act. The tax implications depend on the nature of the perquisite, with certain exemptions available for tax optimization.

By effectively leveraging tax-free perquisites, both employers and employees can maximise financial benefits while ensuring compliance with legal frameworks.
 

Why Are Perquisites Used?: Key Benefits in Salary Structuring

Perquisites are not merely additional perks; they are a strategic component of corporate compensation packages. Employers integrate them into salary structures for multiple reasons, including attracting skilled professionals, optimizing employee tax liabilities, improving work-life balance, and reducing overall payroll expenses.

1. Attract and Retain Top Talent with Competitive Salary Packages
Companies operating in competitive industries must offer more than just a high salary to attract and retain top talent. A well-structured compensation plan with tax-efficient perquisites makes job offers more appealing. Key perks that attract employees include,

• Rent-free accommodation for executives and senior professionals.
• Employer-paid medical insurance to cover hospitalization and medical expenses.
• Stock options (ESOPs) that offer long-term financial benefits and align employees with company growth.

By incorporating these employee-centric benefits, organizations can improve job satisfaction, workforce loyalty, and talent retention rates.

2. Tax Efficiency for Employees: Maximizing Take-Home Salary
One of the major advantages of perquisites is their potential to reduce taxable income, helping employees legally lower their tax liability. Various tax-free perquisites in India allow professionals to optimise their salary, including,

• House Rent Allowance (HRA) is an allowance, not a perquisite. It remains partially exempt from tax under Section 10(13A). However, rent-free accommodation provided by an employer is considered a perquisite and is taxed based on salary and city classification.
• Medical reimbursement benefits are exempt up to a specified limit under income tax laws.
• The transport allowance exemption was removed in Budget 2018, except for disabled employees, for whom it remains fully exempt. Other employees must include it as part of taxable income.

With smart financial planning, employees can optimise tax-saving perquisites to increase their net salary and overall savings.

3. Enhancing Employee Satisfaction & Work-Life Balance
Providing non-monetary benefits under CTC (Cost to Company) salary structures significantly improves employee well-being. Perks such as employer-paid insurance, subsidised meals, and wellness programs create a positive workplace environment. Other benefits that enhance work-life balance include,

• Company-leased vehicles or transportation allowances, reducing commuting stress.
• Paid vacation benefits and holiday reimbursements, encouraging work-life balance.
• Subsidised education programs or skill development initiatives, enhancing career growth.

By offering these lifestyle-enhancing perks, organizations can boost employee engagement, productivity, and overall job satisfaction.

4. Cost Optimization for Employers: Balancing Salary Components Efficiently
For businesses, providing perquisites is a cost-effective strategy that helps manage payroll expenses without increasing the direct salary payout. Many non-monetary benefits are tax-deductible, reducing the company's overall tax burden. Employers can balance monetary and non-monetary components effectively by,

• Offering tax-exempt perquisites instead of direct salary hikes.
• Structuring compensation packages to reduce taxable salary components while maintaining employee satisfaction.
• Ensuring compliance with income tax regulations to avoid unnecessary financial liabilities.

By implementing cost-effective perquisite structures, organizations can maintain a competitive salary framework while controlling HR expenses.

By understanding the significance of perquisites in salary structuring, both employers and employees can leverage them strategically to optimise financial benefits, improve workplace satisfaction, and achieve tax efficiency.
 

Types of Perquisites in Income Tax

Perquisites can be categorised based on their taxability and nature. Understanding these classifications helps employees and employers optimise tax savings and structure salaries effectively.

1. Taxable Perquisites
Taxable perquisites are fully subject to income tax and must be included in an employee’s salary for tax calculations. The employer is responsible for deducting TDS (Tax Deducted at Source) on these benefits.

Common Examples of Taxable Perquisites:

• Rent-free accommodation – The employer-provided house is taxed based on city classification and rental value.
• Company-provided car – If used for personal purposes, the monetary equivalent of its usage is taxable.
• Interest-free or concessional loans – The difference between the loan’s market interest rate and the employer’s offered rate is taxable.
• Free club memberships or luxury perks – Any club membership, holiday package, or premium lifestyle perks provided by the employer are taxable.
• Education expenses – If an employer covers children’s school or college fees, it may be taxable beyond a certain limit.

2. Non-Taxable Perquisites
Certain perquisites are exempt from tax, provided they meet specific conditions set by the Income Tax Act.
Common Examples of Non-Taxable Perquisites:

• Medical benefits such as Medical reimbursements by employers are tax-free up to a prescribed limit.
• The employer’s contribution to the provident fund (EPF) is exempt up to 12% of basic salary. However, as per Budget 2020, if the combined employer contribution to EPF, NPS, and superannuation fund exceeds ₹7.5 lakh in a financial year, the excess amount is taxable as a perquisite.
• Gratuity upon retirement is exempt up to ₹20 lakh for non-government employees (as notified under the Payment of Gratuity Act, 1972).
• Transport allowance for disabled employees is fully exempt from taxation.
• Mobile and internet reimbursements, if provided for official purposes, are non-taxable.

3. Monetary vs. Non-Monetary Perquisites
Perquisites can also be divided into monetary and non-monetary categories,

• Monetary Perquisites – These involve direct financial benefits such as bonuses, commissions, or performance-linked incentives.
• Non-Monetary Perquisites – These are benefits provided in kind, including rent-free accommodation, health benefits, stock options (ESOPs), and official vehicles.

4. Perquisites for Specified Employees
Some perquisites apply only to high-ranking employees, such as directors, senior executives, and key managerial personnel (KMPs). These perquisites often include,

• Company-provided accommodation is taxable based on the type of housing and location.
• Stock options (ESOPs) are taxable at two stages. First, as a perquisite at the time of exercise, based on the difference between the Fair Market Value (FMV) and the exercise price. Second, at the time of sale, the gains are taxed as capital gains depending on the holding period.
• Exclusive club memberships such as premium memberships offered to directors and executives are taxable unless proven for official use.
   

Taxability of Perquisites in India

Understanding the taxability of perquisites is essential for both employers and employees. These rules help determine how much tax an employee must pay on non-cash benefits.

1. Taxable Perquisites Under Section 17(2) of the Income Tax Act
The employer must deduct TDS on perquisites before crediting an employee’s salary. The taxable amount is determined based on valuation rules prescribed by the Income Tax Department.

Examples of Taxable Perquisites,

• Rent-free accommodation – Taxed based on salary percentage and city classification.
• Company-provided car – If used for personal purposes, its value is added to taxable income.
• Interest-free loans – The difference between the market lending rate (as per RBI guidelines) and the employer’s concessional rate is taxable.

2. Non-Taxable or Partially Exempt Perquisites
Some perquisites enjoy partial or full tax exemptions to provide tax relief to employees.

Examples of Non-Taxable Perquisites,

• Medical reimbursements are no longer tax-exempt. The ₹15,000 exemption was removed in Budget 2018, and it has been replaced by the standard deduction.
• Gratuity and superannuation benefits are partially exempt based on service tenure.
• Employers’ provident fund contributions are exempt up to 12% of basic salary.

3. Valuation of Perquisites
The valuation of perquisites determines how much taxable income is added to an employee’s salary. Some benefits have a fixed taxable value, while others are calculated based on fair market value.

Examples of Perquisite Valuation,

• Housing perquisites – Taxed based on city type, rental value, and salary slab.
• Interest-free loans – Valued based on prevailing RBI lending rates.

Difference Between Perquisites and Allowances

Many employees confuse perquisites with allowances, but they are distinct salary components.

Employers often structure perquisites within CTC (Cost to Company) to maximise tax efficiency and employee benefits.

Optimizing Perquisites for Tax Benefits

Both employers and employees can strategically utilise perquisites to reduce tax liability and enhance overall compensation.

For Employers:

• Offer non-taxable perquisites like medical benefits and provident fund contributions.
• Balance taxable and non-taxable perquisites to make compensation attractive.
• Use ESOPs (Employee Stock Option Plans) as long-term incentives.

For Employees:

• Take advantage of tax-exempt perquisites to lower overall taxable income.
• Maintain proper documentation for claiming tax exemptions.
• Consult a tax professional to structure salary efficiently and reduce tax burden.
   

Conclusion: Maximise Your Perquisites for Tax Savings

Understanding perquisites in salary structure is essential for maximizing earnings while staying compliant with tax laws. Whether you're an employee looking to optimise salary taxability or an employer designing efficient compensation plans, leveraging perquisites smartly can result in significant financial benefits.

Now that you know the taxable and non-taxable perquisites, review your salary structure and make informed financial decisions. 

Do you want to save more on taxes? Start by evaluating the perquisites offered by your employer and use them effectively!