Income Tax Taxation

All About Salary Income, Perquisites, and Allowances under the Income Tax Act

What is Salary Income?

Salary is the amount accrued and is payable to an individual periodically for the services rendered as per the express or implied contract between the employer and the employee. The existence of the employer-employee relationship defines the taxability of the receipt under the head “Salaries”.

For Example:

An amount received by a partner from a partnership firm for carrying out business and profession will not be treated as salary and treated under the head Salaries. It will be considered as Profits from Business or Profession.

Also, Salary received from MP or MLA is taxable as Income from Other Sources not as Income from Salaries. However, there is an exception if a person receives a salary as Minister of State or Central Government it will treat as salary and considered under the head Income from Salaries.

Hope you have got a brief about what is salary, now let us move forward and learn more about salary in detail.

What does Salary include as per the law?

Section 17(2) of the Income Tax Act,1961^[1] has given an inclusive and not exhaustive definition of salary which states that Salary includes:

• Wages
• Annuity or Pension
• Gratuity
• Fees or Commission, perquisites or profit in lieu of salary
• Advance Salary
• Any amount transferred from unrecognized provident fund to recognized provident fund.
• The contribution of the employer to Recognized Provident Fund in excess of the prescribed limit.
• Leave Encashment
• Compensation as a result of variation in the service contract
• The contribution made by the Central Government on account of the notified pension scheme in the account of an employee

Deduction under the head Salaries:

Deductions under the head salaries as provided under Section 16 of the Income Tax Act,1961

1. Professional Tax which is levied by State Government
2. Entertainment Allowance: This allowance is available to all government employees to the extent of Rs.5000 or 20% of his salary or the actual amount received whichever is less.

Also, note that no standard deduction is available from 01/04/2006. i.e. from A.Y.2006-2007 onwards.

What is a Prerequisite?

The term perquisite states extra benefits that employees will get in addition to the normal salary to the employees. These benefits are provided to the employees free of cost or at concessional rates.

As per Section 17(2) of the Income Tax Act, 1961 “Perquisites” includes:

• Value of rent-free or concessional rate of rental accommodation provided to the employee by the employer.
• Any sum paid by the employer in respect of an obligation which was actually payable to the employee
• Value of any benefit or enmity provided free of cost or at concessional rates to the employee
• Value of any specified security or sweat equity shares allotted or transferred directly or indirectly by the employer or former employer to the employee either free of cost or at concessional rates
• Amount of any contribution to an approved superannuation fund to the employee to the extent it exceeds one lakh rupees.
• C\Value of any fringe benefit or any other benefit as may be prescribed.

Looking at this perquisite few questions arise as:

• Whether such perquisites are taxable?
• If yes how to do the valuation?
• Are there any exemptions available?

Let us now discuss perquisites in details regarding its taxability, valuation, and exemptions

Taxability of Prerequisite:

• The perquisites can be provided in cash or in-kind
• Reimbursement of expenses on official duty is not treated as a prerequisite.
• Prerequisites are taxable only if they are legally provided which means the benefit provided by the employer’s sanction will be considered as a prerequisite.

Types of Perquisites and their valuation:

Perquisites are basically of two types:

• Perquisites taxable in case of all employees
• Perquisites exempt in cases of all employees

Read our article:Salaried? You need to file Income Tax Return!

Following perquisites are taxable in case of all employees:

• Rent-free accommodation or accommodation at concessional rates subject to certain restrictions
• Valuation of the motor car provided for personal use subject to certain restrictions
• Specified Security or Sweat Equity Shares issued.
• Providing a personal attendant to the employee
• Gas, water electricity provided to the employee by the employer
• Reimbursement of medical expenses above Rs.15000/- in a financial year
• Interest-free concessional loans except the loan provided for medical treatment of prescribed diseases the amount of which is exceeding Rs.20000
• Free or concessional education facility for children of the employee only if the value of the benefit exceeds Rs.1000 per month per child.
• Free or concessional food and non-alcoholic beverages provided above Rs. 50 per meal
• Gift Voucher or token in lieu of such gift only the value of which exceeds Rs.5000 in aggregate during the year.
• Travelling and accommodation facilities provided or expenses reimbursed by the employer
• Club expenditure incurred except in the case where the membership of the club and other facilities are provided to all the employees of the organization
• Credit Card Expenses
• Use of movable assets other than laptop or computer
• Transfer of movable assets in the name of the employee in relation to certain conditions.

Note: In case the monetary limits are specified in case of certain expenses then up to the monetary limit the perquisites will be exempt.

a. Exempted Perquisites for all employees:

• Telephone Facility
• Transport Facility
• Privilege passes and tickets
• Training to employees
• Leave Travel Concession
• Medical facilities subject to conditions
• Perquisites allowed by the government for rendering services outside India

As per the general rule, the perquisites are taxable in the hands of the employee which is, in turn, a cost to the employer. Rule 3 of the Income Tax Act^[1] defines the specific rules for valuation of perquisites:

1. Valuation of Rent Free Accommodation:

If the Accommodation is owned by the employer the valuation is done as per the population of the place in which the accommodation is provided:

Population in the place where the accommodation is provided	Value of perquisite taxable
Less than 10 lakhs	7.5% of Salary
10 to 25 lakhs	10% of Salary
More than 25 lakhs	15% of Salary

Salary is to be calculated on the basis of the period for which the employee had occupied the accommodation during the previous year

However, in case the accommodation is taken on lease or rent the valuation of perquisite shall be done on the basis of

1. Actual rent paid or payable by the employer
2. 15% of salary whichever is lower.

Notes:

The above rules are with regard to unfurnished accommodation. If the employee is provided with furnished accommodation, then in such a case value of furniture would be added separately the calculation of which shall be done as follows:

1. If the furniture is owned by the employer: 10% of the cost of the furniture every year
2. If the furniture is hired from the third person: Actual Hiring Charges payable.

In the case where accommodation is provided in a hotel:

The value of perquisite will be lower of Actual hotel charges paid or payable by the employer or 24% of salary.

The salary for the purpose of this calculation means Basic Salary + Dearness Allowance (if provided) + any bonus, commission or any other allowances

2. Valuation of Motor Car for personal use:

The valuation of the motor car can be categorized on the basis of the situations:

Situation A: Employers Car and expenses are borne by the employer

Situation B: Employers Car and expenses are borne by the employer

Situation C: Employers Car and expenses are borne by the employee

Valuation of taxable perquisite will be done as follows:

Scenario	Situation A	Situation B	Situation C
Usage of Motor Car for personal and official use	Actual Cost bore by the Employer Less: Rs 1800 per month if car is < than 1.6 c.c.Rs. 2400 per month if car > than 1.6 c.c.In addition to the above Rs.900 per month if the driver is provided to the employee will be reduced	The amount of the prerequisite shall be fixed as flows: Rs 1800 per month if the car is < than 1.6 c.c.Rs. 2400 per month if car > than 1.6 c.c.In addition to the above Rs.900 per month if the driver is provided to the employee will be added	The amount of the prerequisite shall be fixed as flows: Rs 1800 per month if the car is < than 1.6 c.c.Rs. 2400 per month if car > than 1.6 c.c.In addition to the above Rs.900 per month if the driver is provided to the employee will be added
Used fully for Personal use	The cost to the Employer	The cost to the Employer + 10% additional of the cost of the motor car for the routine wear and tear	The cost to the Employer + 10% additional of the cost of the motor car for the routine wear and tear

3. Use of Gas, Electricity, and Water:

The value of the perquisite shall be determined on the basis of the ownership of the services

1. If supplied from employers own resources: Manufacturing cost per unit incurred by the employer
2. If supplied from the third party: Actual amount paid to the supplying agency

Also, note that any amount received from the employee shall be deducted from the amount payable.

4. Free or Concessional Education facility:

The value of perquisite shall be determined by the employer on the basis of:

1. If educations institution is owned and maintained by the employer: Value of the prerequisite would be NIL if the cost of the benefit is less than Rs.1000 per month per child
2. If not owned by the employer: Reasonable cost of such education in the nearby locality but limited to Rs.1000 per month per child.

5. Use of sweeper, gardener, watchman or personal attendant:

Value of perquisite shall be determined on the basis of actual amount borne by the employer reduced by any amount paid by the employee

6. Free or concessional traveling to the employee and its family:

The value of the perquisite shall be determined on the basis of benefit which is offered to general as reduced by the amount if any recovered from the employee.

7. Interest-free or Loan at concessional rates:

The value of perquisite shall be determined on the basis of an excess of interest payable at the prescribed rate over and above any interest is recovered from the employee.

In this case, the prescribed rate would be the rates prescribed by State Bank of India on the 1^st day of the relevant financial year in respect of the same type of loan in which it is provided to the general public.

Note: The value of the prerequisite is to be calculated on the maximum outstanding monthly balance method. Also, note that that loans up to Rs.20000/- for medical treatment specified in Rule 3Aare exempt provided the same is not reimbursed under medical insurance.

8. Value of Free Meals:

The value of perquisite in case of a free meal and nonalcoholic beverages provided by the employer shall be the expenditure incurred by the employer less any amount recovered from the employees.

However free meal or non-alcoholic beverages will not be treated as a prerequisite if they are provided during working hours and certain conditions are satisfied as per Rule 3(7)(iii).

9. Gift Voucher or Token:

The perquisite value shall be calculated in case of any gift voucher or token shall equal to the value of such gift, voucher or token. The gift can be received by the employee himself or any household member of his family from the employer.

Also, they are not liable to fringe benefits tax. However, no perquisite shall be taken into consideration if the same is provided for the official purpose and loss of certain conditions of Rule 3(7)(iii) are fulfilled.

10. Club membership provided by the employer:

The value of table perquisite shall be the amount paid by the employer as reduced by any expenses recovered from the employee. These perquisites are not liable to fringe benefits tax.

However, such expenses will be exempt if they are used for business purposes exclusively and also certain conditions of Rule3(7)(iii) are fulfilled.

11. Sweat equity shares or Specified Security:

In case of specified security or sweat equity shares the value of perquisite shall be calculated as follows:

• In the case of Listed shares: On the date of exercising the option the fair market value of the specified security listed on stock exchange reduced by any amount recovered from the employee.
• In the case of Non-Listed Shares: On the date of exercising the option the fair market value as determined of such company by a merchant banker as reduced by any amount recovered from the employee

It is pertinent to note that any facilities provided by the employer to the employee will be taxed as perquisites on the basis of arm’s length transactions reduced by any cost recovered from the employee

Perquisites that are exempt:

Here are some examples of perquisites which are exempt:

• Medical Facilities: As per proviso to Section 17(2) value of any medical treatment in any hospital maintained by the government or any local authority or approved by the Chief Commissioner of Income Tax shall be exempt up to a limit of Rs.15000/-
• Perquisites provided to an employee out of India for rendering services are exempt.
• Rent-free residences provided to Judge or High Court or Supreme Court^[1] or officer of Parliament is exempt.

What are Allowances?

Allowances are defined as a fixed amount paid to an employee in addition to the salary as per the requirements of the employee. As a Rule, all expenses are included while calculating salary income unless specific exemptions are provided. Following Allowances are exempt as per the criteria defined:

• House Rent Allowance
• Leave Travel Allowance
• Certain allowances are also exempt under Section 10(14)

Difference between Allowances and Perquisites:

Allowances are paid in cash as a fixed amount paid on a monthly basis to meet the particular requirements for performing the duties. The amount may or may not be borne by the employee. Allowance form part of your pay package

Perquisites, on the other hand, are the additional benefits provided to a specific employee in addition to its salary It may be in cash or kind. Perquisites may or may not be included in the employee’s pay package.

Conclusion:

Calculating the income from salary and other taxable income of the employee is a difficult task that can be efficiently done with the help of a professional expert. We at Enterslice help with the solution in file your Income Tax Return with availing maximum benefits.

Read our article:Deduction from Salary