WHAT ARE PERQUISITES ?

A perquisite is defined (in the Oxford English Dictionary) as any casual emolument, fee or profit, attached to an office or position in addition to the salary or wages.  In other words perquisites are benefits in addition to normal salary to which employee has a right by virtue of his employment.  To put it simply perquisites or ‘perks’ as they are called colloquially, are benefits generally in kind, received by an employee by virtue of his employment.

ARE PERQUISITES TAXABLE ?

Perquisites are taxable as a part of salary as per the India income tax laws.  Section 17 of the Income-tax Act 1961 provides that taxable salary includes perquisites.  As per this Section ‘perquisite’ includes:

(i)  the value of rent-free accommodation provided to the assessee by his employer;

(ii)  the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;

(iii)  the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:

(a)    by a company to an employee, who is a director thereof;

(b)   by a company to an employee being a person who has a substantial interest in the company;

(c)    by any employer (including a company) to an employee to who the provisions of clause (a) and (b) do not apply and whose income under the head Salaried (whether due from, or paid or allowed by, one or more employers), exclusive of the value of all benefits or amenities not provided for by way of monetary payment, exceeds Rs.50,000.

W.e.f. 2002-02, the Finance Act, 2000, has inserted a proviso to clause (iii) above to provide that the value of any benefit provided by a company free of cost of at a concessional rate to its employees by way of allotment of shares, debentures or warrants directly or indirectly under Employees Stock Option Plan or Scheme of the said company shall not be treated as a perquisite under section 17(2)(iii) only when these are offered to employees in accordance with the Guidelines issued in this behalf by the Central Government.

(iv)  any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assesssee; and

(v)    any sum payable by the employer whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund or deposit-linked insurance fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity.

(vi)  the value of any other fringe benefit or amenity as may be prescribed (W.e.f. assessment year 2002-03) – as such rent-free accommodation – perk for all employees Further no --  The method of valuation of perquisites is prescribed in Rule 3 of the Income tax Rule 1962.

WHEN ARE PERQUISITES TAXABLE ?

The Finance Act 2001 provided that perquisites would include ‘the value of any other fringe benefit or amenity as may be prescribed.’   Consequently a new Rule 3 was inserted to provide comprehensive methods for valuation of various perquisites.  While perquisites generally mean benefits in kind, the new rules include certain cash reimbursements.   While rent free or concessional accommodation is taxable for all categories of employee, other perquisites are taxable in case of specified employees i.e., directors, persons with substantial interest (i.e. --) and those with salary income other than all benefits & amenities exceeding Rs.50,000.

WHAT PERQUISITES ARE TAXABLE ?

The new rules for valuation of perquisites besides amending the existing rules of valuation of accommodation, cars, personal servants, household amenities, education of wards and free or concessional journeys, also includes new items like interest free or concessional loans, holiday expenses, use and transfer of assets. It also has a residual clause to cover any items left out.  It is pertinent to mention that benefits specifically exempt u/s 10(13A), 10(5), 10(14), 17 etc. would continue to be exempt.  These include benefits travel on tour and transfer, leave travel, daily allowance to meet tour expenses as prescribed, medical facilities subject to conditions.  However, administrative circulars and instructions relating to perquisites falling under the purview of Rule 3 issued before the adoption of the new rules shall stand superseded or modified, as the case may be.

WHEN DO THE NEW RULES APPLY ?

While this Rule shall come into force with effect from the 1^st day of April, 2001 it has been provided that the employee may, at his option, compute the value of perquisites made available to him or any member of his household for the period beginning on 1^st day of April, 2001 and ending on 30^th day of September, 2001 in accordance with the Rules as they stood prior to this amendment.  However, it should be noted that the option to the taxpayer of using the old or new rules for the period specified above shall be applied uniformly in respect of all perquisites, in case of a particular taxpayer.  In other words, one cannot selectively value a particular perquisite by the old rules and another one by the new rule.

ACCOMMODATION:

WHAT CONSTITUTES ACCOMMODATION ?

As per the new rules accommodation includes a house, flat, form house or part thereof, motel, service apartment, guesthouse, caravan, mobile home, ship or other floating structure.  Hotel includes an accommodation licensed by local authority to provide for boarding and lodging like a motel, service apartment or guest houses.

HOW IS PERQUISITE OF ACCOMMODATION VALUED ?

Under the old Rule 3 for purpose of valuation of the perquisite of unfurnished accommodation all employees are divided into three categories:  Central & State Government Employees, employees of Public Sector undertaking and Semi-government organisation and others i.e., private sector employees.  Under the new Rule 3, for purposes of valuation of perquisite of accommodation, employees are divided into just two categories instead: (i) Govt.  & State Govt. employees; (ii) Others.

EXAMPLE – 1.  Mrs. Kumar is a Central Government employee on deputation with a Public Sector Undertaking.  She is provided with rent free furnished accommodation.  Her salary as per rule 3 – Rs.10,000 per month, licence fee for accommodation is Rs.300 per month, licence fee paid by her is Rs.300 per month.  Furniture provide costs Rs.20,000.  She is also provided with an Air conditioner hired at the rate of Rs.200 per month.  What would be the value of perquisites of furnished accommodation.

For all other, i.e., those salaried taxpayers not in employment of the Central Government and the State Government, the valuation of perquisite in respect of accommodation would be at prescribed rates.  Employees of public sector units who are not on deputation from Central or State Governments would also fall in this category.  The rate is 10% of ‘salary’ in cities having population exceeding four lakhs as per the 1991 census.  For other places, i.e., those with population upto 4 lakhs the perquisite value 7.5% of salary.

EXAMPLE 2.  Mr. Sundaram is an employee in a multinational bank.  He is provided with rent-free furnished accommodation.  His basic pay is Rs.15,000 per month.

ARE ANY TYPE OF ACCOMMODATION EXEMPT?

While the scope of the word “accommodation” has been widened by clarifying that it includes a house, flat, farm house, hotel accommodation, guest house, a caravan, mobile home, ship etc.   However, employees working in a “remote area” in certain sectors like an on-shore oil exploration site or mining site or project execution site or similar accommodation in an off-shore site in connection with their duties shall be exempt.  A remote area means one located at least 40 kilometres away from a town having a population not exceeding 20,000 as per the last published all India census.  It may be noted that the remote area exemption rule applies only to specific sectors and not all forms of employment.  The distance rule is specifically for onshore sites.  For example any offshore site for similar activity would be exempt irrespective distance from nearest town.

DEFINITION OF SALARY

The definition of “salary” for calculating perquisite value is the same as per earlier Rules, i.e. it includes pay, allowances, bonus or commission payable monthly r otherwise or any monetary payment whatever name called paid by one or more employers.  However, it does not include dearness allowance or dearness pay if the same is not accounted for in pension and other retirement benefits employee’s contribution to provident fund; exempt allowance, value of perquisites and medical allowance or reimbursement specifically exempt.  The only change is that, medical allowances and reimbursement for treatment of serious illnesses as prescribed in proviso below section 17(2) has now been excluded from the definition of salary for this purpose.  For furnished accommodation, the provision of valuation of perquisite of furnishings, fittings and furniture at 10% of original cost per annum or actual hire charges is continued.

HOW IS HOTEL STAY VALUED?

If an accommodation is provided by an employer in a hotel the value of the benefit in such a case shall be 24% of the annual salary or the actual charges paid or payable to such hotel, whichever is lower, for the period during which such accommodation is provided.  This is reduced by any rent actually paid or payable by the employee.  However where in cases the employee is provided such accommodation for a period not exceeding in aggregate fifteen days on the transfer from one place to another, no perquisite value for such accommodation provided in a hotel shall be charged. It may be clarified that while services provided as an integral part of the hotel facilities, need not be valued separately as perquisite, any other services over and above that for which the employer makes payment or reimburses the employee shall be valued as a perquisite as per the residual clause.

EXEMPTION ON RETENTION OR OLD ACCOMMODATION ON TRANSFER

Also, if on account of an employee’s transfer from one place to another, the employee 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 as per the table prescribed, for a period upto 90 days.  However, after that the value of perquisite shall be charged for both accommodations as prescribed.

Government employees – This category comprises employees of Central or State governments including those serving with any body or undertaking under control of such government on deputation.  For such employees the value of unfurnished accommodation shall be the license fee as per government rules as reduced by the rent actually paid by the employee.  Where the accommodation is furnished the value of perquisite as stated above is to be increased by 10% of the cost of such furniture provided or if the furniture is hired from a third party, the actual hire charges payable.  The charges paid or payable by the employee for the same during the previous year in reduced from the above amount.  For purposes of this computation furniture includes appliance like television sets, radio sets, refrigerators, air conditioners etc.

Motor Car:  Under the old rules the basis of valuation of perquisite of a motor car provided by the employer is the sum actually expended by the employer, including on maintenance, running cost, remuneration of chauffeur in case of exclusively personal use, and apportionment of the same in case of part personal & part official use.  However, for simplicity it is also provided that where determination of the above basis is difficult, the valuation would be as per prescribed rates.  The criterion for small and large cars has been revised on the basis of their engine capacity only.  These rates now been revised as follows:-

However where a second and subsequent cars are provided to the employee or any member of his or her household, such other cars shall be deemed to be for personal use and the value of perquisite computed accordingly.

Where fuel and upkeep cost of the employees’ car is borne or reimbursed by the employer, or the conveyance charges for official purposes is paid, the amount reasonably attributable to business use is not to the charged as perquisite.  For this user details in the form of log books, odometer readings etc. should be maintained.  Where such details are not available or not properly maintained, the amount paid for or reimbursed for non-official purposes less Rs.1200 per month for small car or Rs.1,600 per month for large car would be valued as a perquisite.  Where cost of chauffeur is also reimbursed or paid for on addition to Rs.600 may be deducted.  A higher amount may be deducted on basis of proper maintenance of details of official use.

Documentation:  For claiming higher amount of official use in respect of reimbursement of car expenses or wholly official use of car provided by employer the following details and documents need to be maintained:

(i) the employer has maintained complete details of journey undertaken for official purposes which may include date of journey, destination, mileage, and the amount of expenditure incurred thereon;

(ii) the employee gives a certificate that the expenditure was incurred wholly and exclusively for the performance of his official duty;

(iii) the supervising authority of the employee, wherever applicable, gives a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties.  Clearly this is not applicable to officials who are the senior-most of their respective organisations or have no supervisory authority.

It needs to be clarified that reimbursement of conveyance charges are distinct from a flat rate conveyance allowance.  The former assumes availability of the employees vehicle and charges for its non-official use.  The latter is a fixed amount paid to meet the employees’ travelling to and from workplace to home.  While the former is covered by this sub-rule the latter has an exemption upto Rs.800 u/s 100(14).

Personal Servants attendants etc.:  The old rules provides for valuation of perquisite of free services of sweeper, gardener & watchman at Rs.120 per month.  Under the new rules the value of free service of all personal attendants including sweeper, gardener, and watchman is to be at actual cost to the employer.  Where the attendant is provided at the residence, full cost will be taxed as perquisite in the hands of the employee irrespective of the degree of personal service rendered to him.  Any amount paid by the employee for such facilities or services shall be reduced from the above amount.

Gas, electricity & water:  For free supply of gas, electricity & water for household consumption the old rules already provide that the amount paid by the employer to the agency supplying the amenity shall be the value of perquisite.  However, where the supply is made from employer’s own resources value of perquisite is taken as Nil.  Finally in the new rules the separate provision in the old rules of valuation at 6&1/4% of salary for part official use in discontinued.  Further under the new rules even where the supply is made from the employer’s own resources the manufacturing cost per unit incurred by the employer would be the value of perquisite. Any amount paid by the employee for such facilities or services shall be reduced from the above amount.

Free or confessional education: The old rules already provide that value of free education facility would be the expenditure incurred by the employer.  Under the new rules free or concessional education shall be valued in a manner assuming that such expenses are borne by the employee, i.e., the amount of fee & other charges payable by the employee if he wee to pay for the education of the ward.  It would cover cases where an employer may be running, maintaining or directly or indirectly financing the educational institution.  They would include institution run by trusts, societies, etc. in which the employer has substantial financial or organisational influence.  Any amount paid by the employee for such facilities or services shall be reduced from the above amount.  However, to preserve staff welfare measures and the need for encouraging basic education facilities, where the employer maintains and runs such facilities and free education facilities are provided to the employees’ wards are and exemption is provided.  The exemption has been provided if the cost per month per child or value of benefit does not exceed Rs.1000 per child per month.

Free or concessional journeys:  Under the old rules where an employee avails of free or concessional journeys in conveyance owned by undertaking for purpose of transport of passengers or goods the value of perquisite is taken as Nil.  Under the new rules the value such perquisite availed by the employee or any member of his household shall now be taken as the value of the ticket reduced by any fare actually paid.  Such conveyance may be owned by the employer, lease or made available by any other arrangement.  However, journey tickets for leave travel, tours and transfers which are already exempt under sections 10(5) and 10(14) would continue to be exempt.

Interest free or concessional loans:  It is common practice particularly in financial institutions to provide interest free or concessional loans to employees.  The value of such perquisite would be the difference between interest payable at prescribed interest rate and interest if any actually paid.  Calculation would be on basis of maximum outstanding monthly balance by simple interest method.  The prescribed interest rate be 10% p.a. for loans for housing and conveyance and 13% p.a. for other loans.  Maximum outstanding balance the aggregate outstanding balance for each loan as on the last day of each month.  However, small loans not exceeding in aggregate Rs.20,000 and loans for medical treatment specified in Rule 3A are exempt, provided the amount is not reimbursed under any medical insurance scheme.  It is clarified that the above sub-rule shall also apply on loans outstanding as on 1^st April, 2001, (if the new rule is applied from that date) or 1^st October, 2001 (if the new rule is applied from that date).

Travelling, touring, accommodation and other holiday expenses: It is increasingly common for employees to be provided with vacation and holiday facilities.  The value of such perquisite availed of by the employee or any member of his household shall be the expenditure incurred by employer.  These would also apply to official tours extended as a vacation and family members accompanying employees on official tours.  However leave travel as per section 10(5) and enjoyment of holiday home facilities available uniformly to all classes of employees would remain exempt.

Free Meals: The perquisite of free means vary widely from uniform canteen food, coupons etc. to lavish hotel meals.  The feature of free meals as a staff welfare measure has been recognised and is exempted upto Rs.35 for each meal by an earlier notification.  The new rule allows expenditure on food upto Rs.50/-.  Such free or subsidised meal should however be provided at office premises or through non transferable vouchers means for only meals during working hours.  These vouchers should be provided by employers encashable only at eating joints.  Tea and snacks during working hours are also not charged as perquisite.  Also arrangements for meals in ‘remote areas’ and offshore installations shall be exempt.  The definition of remote area shall be the same as that associated with the accommodation sub-rule one located at least 40 kilometres away from a town having a population not exceeding 20,000 as per the last published all India census.

Gift, voucher or token in lieu of gift: It is customary in India as it is in other parts of the world to provide presents directly or indirectly in the form of vouchers or token to employees on social and religious occasions like Diwali, Christmas, New Year and Founders Day etc.  Such gifts upto Rs.5000/- in the aggregate per annum would be exempt beyond which it would be taxed as a perquisite.  They should however not be cash or convertible into cash benefits.  Nor would such exemption cover customary festival bonuses, advances etc.

Credit card expenses:   Credit card expenses of employees both business and personal, are often borne by employers.  Such credit card payments would ordinarily chargeable to tax as perquisite.  However, these expenses are often incurred to entertain customers and clients for purposes of business.  Therefore where such expense son entertainment including meals are for purposes of business and proper records for the same are maintained, no perquisite would arise.

Club expenses:   Club expenses of employees borne by employers are already charged as perquisite by virtue of section 17(2)(iv).  To formalise the issue, it has been specified that annual and periodical club fees paid by the employer is chargeable as a perquisite.  However to ensure that basic facilities for the health and recreation of employees are not hit, health clubs, sports facilities etc. provided uniformly to call classes of employees by the employer at the employer’s premises are exempt.  The initial one time deposits or fees for corporate or institutional membership, where the benefit does not remain with a particular employee after cessation of employment, are also exempt.  Where such expenses on entertainment including meals are for purposes of business and proper records for the same are maintained, no perquisite would arise.  Entertainment includes hospitality of an kind & expenditure on business gifts other than free samples of the employer’s own products.

Documentation: For credit card and club expenses to be exempt for business purposes the following documentation needs to be maintained.

(a) complete details in respect of such expenditure maintained by the employer including the date of expenditure and the nature of expenditure;

(b) it is certified by the employee that such expenditure was incurred wholly and exclusively for the performance of official duty;

(c) the supervising authority of the employee gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties.

(d) where an employee incurs expenditure on entertainment and claims the same to have been incurred wholly and exclusively in the performance of his duties, details of such entertainment expenses including the nature and purpose of entertainment and persons entertained.

User of assets:  It is common practice for an asset owned by the employer to be used by the assessee.  It is proposed to charge this perquisite to tax at the rate of 10% of the original cost of the asset as reduced by any charges paid for such use.  Further, the value of perquisite for an asset used over 10 years would be taken as Nil.   However computers and laptops are exempt.

Transfer of assets:  In many cases an employee or member of his household benefits from the transfer of moveable asset (not being shares or securities) at no cost or less than its market value from the employer.  The difference between the original cost of the moveable asset (not being shares or securities) and the sum if any paid by the employee shall be taken as the value of perquisite.  To account for use of the moveable asset and consequent wear and tear, and any perquisite value due to such use that the employee may already have been charged with, the original cost shall be reduced by a sum of 10% of the original cost for every year of use of the asset for purposes of computing the value of perquisite.  However in case of computers and electronic gadgets the value of perquisite shall be reduced at the rate of 50% and for cars at the rate of 20% by the reducing balance method.  Electronic gadgets in this case means data storage and handling devices like laptops, calculators, digital diaries and printers.  They should not be household utility devices like washing machines, microwave oven, mixers etc.

Residual Clause:  A benefit or amenity not include in the rules shall be value at the cost to the employer where the employer pays for the benefit or amenity.  Otherwise, i.e. where the employee directly provides the benefit or service it would be valued at the amount the employee could reasonably be expected to pay under an arm’s length transaction.  To put it simply it would be valued at the price at which an equivalent item, benefit or service would be available to the employee from a third party at normal commercial rates or market prices.  However the benefit of conveyance to an form residence to place of work, periodicals and journals required for discharge of work and expenses on telephones including a cellular phone shall not be included in calculating perquisite value.