Quick Overview
- It determines and regulates the taxation of the perquisites received by the employees.
- According to the Income Tax Act, 1961, perquisites are included in the category of salaries.
- It is applicable to both the employees who are privately employed and those who are employed by the government.
- The benefits include rent-free accommodation, company cars, concessional loans, and ESOPs.
- The rules and regulations of valuation of perquisites are provided by the Income Tax Rules, 1962.
- Some perquisites are fully taxable, some partially taxable, and some tax-exempt.
- Employers must include taxable perquisites while calculating TDS.
- Proper valuation is essential for accurate salary tax planning.
When you get a salary given to you by your employer, it might not be limited to your basic pay and allowances. Most employers offer their employees other benefits like accommodation, cars, loans or health insurance. Such benefits are called perquisites, and the tax liability of such benefits is governed by Section 17(2) of the Income Tax Act.
Knowledge of Section 17(2) of the Income Tax Act is essential to both employees and employers because it directly affects the taxable salary and TDS deductions.
Suggested read: Health Insurance 80D Tax Exemptions
What Is Section 17(2) of the Income Tax Act?
In order to gain a clear understanding of what section 17(2) of the Income Tax Act, it is important to first know its position in the law. Section 17 is a section of the Income Tax Act, 1961, under the heading Salaries. It determines what is meant by salary, perquisites, and profits in lieu of salary.
Meaning and Purpose of Section 17(2)
Section 17 (2) of the Income Tax Act establishes the concept of perquisites and explains what type of benefits an employer gives to an employee that must be considered as part of the taxable salary.
The purpose of this section is:
- To prevent tax avoidance through non-cash benefits
- To ensure fair taxation of salary components
- To standardise valuation rules for employer-provided benefits
In simple terms, if your employer provides you with a benefit that has monetary value, it may be taxed under section 17 2 of the Income Tax Act.
Applicability to Employees and Employers
Section 17(2) applies to:
- All salaried employees (government and private sector)
- Directors of companies
- Specified employees for certain perquisites
Employers are required to calculate the value of taxable perquisites and deduct TDS accordingly.
What are Perquisites Under Section 17(2) ofthe Income Tax Act?
Perquisites are benefits or amenities provided by an employer to an employee in addition to salary.
Meaning of Perquisites in Salary
Under section 17 (2) of the Income Tax Act, perquisites include:
- Benefits are provided free of cost
- Benefits provided at concessional rates
- Payments made by the employer on behalf of the employee
These are treated as part of salary income.
Common Examples of Perquisites
Some common perquisites include:
- Rent-free accommodation
- Company-provided car
- Interest-free or concessional loans
- Employer-paid insurance premium
- ESOPs (Employee Stock Option Plans)
- Free electricity, water, or gas supply
- Club membership fees paid by the employer
Rules for Valuation of Perquisites in Income Tax
The value of perquisites is determined according to Rule 3 of the Income Tax Rules, 1962.
- Valuation depends on the type of perquisite
- Different rules apply for government and private employees
- Fair market value may be considered in some cases
- Certain perquisites have fixed valuation formulas
Proper valuation ensures the correct calculation of taxable salary.
Valuation of Rent-Free Accommodation Provided by Employer
If an employer provides rent-free accommodation (RFA), its taxable value depends on:
- Whether the employer is government or private
- Whetherthe house is owned or leased
- Employee’s salary
- City population
For private employees:
- 15% of salary (in cities with a population above 25 lakh)
- 10% of salary (population between 10–25 lakh)
- 7.5% of salary (population below 10 lakh)
If the house is leased, the lower of the actual lease rent paid or a prescribed percentage of salary is considered.
Valuation of Furnished Accommodation
If accommodation is furnished:
- Add 10% per annum of the cost of furniture, or
- Actual hire charges paid by the employer
This value is added to the value of rent-free accommodation.
Valuation of Company-Provided Vehicle
For a car provided by the employer:
If used for official purposes only:
- Not taxable (with proper records)
If used for both official and personal use:
- Fixed taxable value per month depending on engine capacity
For example:
- Up to 1.6 litres: ₹1,800 per month
- Above 1.6 litres: ₹2,400 per month
- Additional ₹900 per month if the driver is provided
These prescribed values apply irrespective of actual expenses.
Tax Treatment of Interest-Free or Concessional Loans
If the employer provides a loan at concessional or zero interest:
- Taxable value = Interest charged by SBI (as on 1st April of the financial year) minus interest paid by the employee
However, loans up to ₹20,000 in total are not taxable.
Loans for medical treatment of specified diseases may also be exempt under certain conditions.
Suggested Read: This Added Health Insurance Benefit Will Blow Your Mind!
Taxability of Perquisites Under Section 17(2)
The tax treatment varies depending on the nature of the benefit.
Fully Taxable Perquisites
Examples:
- Rent-free accommodation
- Company car for personal use
- Interest-free loans
- ESOPs (at time of allotment/exercise)
These are fully included in taxable salary.
Partially Taxable Perquisites
Examples:
- Employer-provided car (partly official use)
- Club membership (in certain cases)
Taxable value depends on usage and valuation rules.
Tax-Exempt Perquisites
Examples:
- Employer’s contribution to recognised provident fund (up to limits)
- Medical insurance premium paid bythe employer
- Laptop or computer provided for official use
- Tea/snacks during working hours
These are either fully or conditionally exempt.
Employees Eligible for Tax-Free Perquisites
Certain perquisites are tax-free for all employees, while some are exempt only for:
- Government employees
- Specified employees
- Employees below certain salary thresholds
For example, rent-free accommodation provided to judges, constitutional authorities, or certain government officials may have special valuation rules.
Calculation of Value of Perquisites as Per Section 17(2)
Understanding section 17 2 of the Income Tax Act becomes easier with examples.
Example 1: Rent-Free Accommodation
Mr A works in Mumbai. His annual salary (excluding perquisites) is ₹10,00,000.
Since the Mumbai population exceeds 25 lakh:
Taxable value = 15% of salary
= 15% of ₹10,00,000
= ₹1,50,000
This amount is added to the taxable salary.
Example 2: Company Car
Mr B is provided a 1.8-litre engine car for personal and official use, with the river.
Taxable value per month:
₹2,400 + ₹900 = ₹3,300
Annual taxable value:
₹3,300 × 12 = ₹39,600
This is added to salary income.
Example 3: Interest-Free Loan
Mr C takes a ₹5,00,000 loan from the employer at 0% interest.
SBI rate: 8%
Taxable value = 8% of ₹5,00,000
= ₹40,000 per year
This amount is taxable under salary.
Who Pays Tax on Perquisites?
Employee Responsibility
The employee is ultimately liable to pay tax on perquisites since they form part of salary income.
Perquisites must be declared in the income tax return.
Employer Role in Reporting Perquisites
Employers must:
- Calculate taxable value
- Include it in Form 16
- Deduct TDS accordingly
Failure to do so may attract penalties.
Common Examples of Perquisites Provided by Employers
Accommodation Provided by Employer
Includes:
- Rent-free house
- Concessional rent accommodation
- Furnished housing
Taxable under section 17 (2) of the Income Tax Act.
Employer-Provided Transportation
- Company car
- Free transport facility
- The driver's salary is paid by the employer
Taxability depends on usage.
Stock Options and ESOPs
ESOPs are taxed as perquisites at the time of exercise:
Taxable value = Fair Market Value – Exercise price
A later sale may attract capital gains tax.
Other Fringe Benefits
- Free meals beyond prescribed limits
- Club membership
- Education facility for children
- Gifts exceeding the prescribed limit
Benefits of Receiving Perquisites
Although taxable, perquisites offer:
- Convenience and lifestyle enhancement
- Reduced personal expenditure
- Tax planning opportunities
- Structured compensation packages
When structured properly, perquisites can improve overall financial efficiency.
Conclusion: Understanding Section 17(2) for Salary Tax Planning
Understanding what section 17(2) of the Income Tax Act is essential for effective salary structuring and tax planning. This section ensures that benefits provided by employers are fairly taxed and properly valued.
Both employees and employers must carefully evaluate the nature, valuation, and taxability of perquisites under Section 17 2 of the Income Tax Act. Proper planning can help optimise tax liability while complying with legal requirements.
Suggested Read: Why Your Financial Plan Should Include Health Insurance
Frequently Asked Questions
Are all perquisites taxable?
No. Some perquisites are fully taxable, some partially taxable, and some are fully exempt depending on conditions and prescribed limits.
Is employer-paid medical insurance taxable?
No. Premium paid by the employer for medical insurance under approved schemes is generally tax-exempt for employees.
What is the main purpose of Section 17(2)?
The main purpose of Section 17 2 of the Income Tax Act is to define and regulate the taxation of perquisites provided by employers.
How is the value of perquisites calculated for tax purposes?
The value is calculated as per Rule 3 of Income Tax Rules, using prescribed percentages, fixed amounts, or fair market value, depending on the type of perquisite.
Are allowances included under Section 17(2)?
No. Allowances are covered separately under Section 17(1). Section 17(2) specifically deals with perquisites, not regular allowances.
