Section 17(2) of the Income Tax Act: Perquisites & Taxability

When calculating your total salary income, it's not just your basic pay that counts. The Income Tax Act, 1961 includes many components under 'Salary,' one of which is perquisites. These are benefits provided by the employer to the employee, either in cash or kind, in addition to regular salary. 

 

Whether you're a salaried professional, HR personnel, or a tax planner, understanding the scope and taxability of these perquisites is crucial for accurate tax reporting. In this article, you’ll learn what Section 17(2) covers, the types of perquisites, how they are taxed, which perquisites enjoy tax benefits, and more. 

According to Section 17(2) of the Income Tax Act, perquisites are benefits provided by an employer to an employee in addition to salary or wages. These can be monetary or non-monetary and are classified broadly into three types: 

1.Taxable Perquisites

These are fully taxable in the hands of the employee. For example, rent-free accommodation, the use of a company car for personal purposes, etc. 

2.Partly Taxable Perquisites

Some perquisites are partly exempt and partly taxable. Leave travel concession is one such example. 

3.Tax-Free Perquisites

Certain perquisites are completely exempt under specific conditions. For example, provision of laptops or mobile phones used for official purposes. 

 

Each of these categories affects your tax liability differently. Let’s explore them in detail.

The following perquisites are fully taxable under Section 17(2), unless otherwise specified: 

• Dearness Allowance (DA): Paid to government employees and pensioners to offset inflation

• Interim Allowance: Temporary allowance paid during ongoing negotiations or pending final settlement

• Entertainment Allowance: Provided for entertainment expenses

• Rent-free accommodation: Valued based on the rent or the cost to the employer

• Company Car for Personal Use: Valued based on actual usage or prescribed rules

• Domestic Help Wages: Salaries of servants, gardeners, or other household staff paid by the employer

• Holiday Expenses: Expenses for vacations arranged by the employer

• Free Meals: Food provided by the employer beyond the exemption limit of ₹50 per meal

• Gift Vouchers: Non-monetary gifts exceeding ₹5,000 in value during a financial year

For instance, Aditi, a 35-year-old senior manager in Bengaluru, earns a monthly salary of ₹1.2 Lakh. Her company offers her a rent-free apartment worth ₹40,000 per month and covers the salary of a domestic helper. She also receives a company car (₹1.8 Lakh engine) for personal and official use.

 

At first glance, Aditi feels well-compensated. But when it’s time to file her taxes, she realises these perks — though not credited as cash — significantly increase her taxable salary. Her rent-free accommodation and car usage are added to her income under Section 17(2), which raises her tax liability.

 

Now, imagine if she wasn’t aware these perks were taxable — she could’ve underreported her income and faced penalties.

 

Takeaway

Even if you're not pocketing extra money, perquisites affect your tax bill. Understanding how they’re taxed can help you plan better — whether it's negotiating a salary package or preparing for tax season.

These perquisites are exempt from tax under Section 17(2) if certain conditions are met. Some of the most common tax-free perks include: 

• Gratuity (subject to limits)

• Employer’s contribution to NPS (up to 10% of salary)

• Laptops or computers provided for office use

• Free meals during office hours

• Telephone or mobile bill reimbursements

• Leave Travel Allowance (LTA) (twice in four years, subject to conditions)

• Medical reimbursement up to ₹15,000 per year*

 

*Note: 

The Budget 2018 removed the tax exemptions of ₹15,000 for medical reimbursement and ₹19,200 for transport allowance. Instead, a ‘standard deduction’ tax benefit was introduced as follows: 

Valuation of Taxable Perquisites

The value of perquisites is determined as per the provisions of Rule 3 under the Income Tax Rules. The method of valuation depends on the type of perquisite. 

1.Rent-Free or Concessional Accommodation 

2.Company Vehicle

Taxable value depends on usage, engine capacity, and reimbursement: 

3.Interest-Free or Concessional Loans

The taxable value is the difference between the interest computed at the SBI rate on the maximum outstanding monthly balance and the interest actually paid by the employee.

The tax on perquisites is usually borne by the employee. These benefits are treated as part of salary and taxed accordingly under the head of ‘Income from Salaries’. 

 

However, employers have the option to bear this tax on behalf of the employee. If they do so, the tax paid by the employer is itself considered a perquisite and taxable in the employee’s hands as well (grossing up of income). 

 

Employers must report perquisite values in Form 16 and Form 12BA, making disclosure essential for accurate tax filing. 

Certain employees, especially those holding key positions or with significant holdings, are classified as specified employees. They are subject to special rules regarding the valuation and taxation of perquisites. This includes any individual who: 

1. is a director of the company

2. has substantial interest in the company (holds 20% or more voting power)

3. has a salary of more than ₹50,000 excluding perquisites

Examples of perquisites taxable only for specified employees

• Services of a domestic servant

• Free or concessional education

• Free meals beyond ₹50 per meal

• Use of motor car for both official and personal purposes (subject to certain conditions)

The Union Budget 2025 and the newly proposed Income Tax Bill 2025 have introduced significant clarifications and expansions in the scope of tax-free perquisites under Section 17(2) of the Income Tax Act, 1961. 

Expenditure Incurred by Employer for Employee Commute

Earlier, only vehicles provided by the employer for commuting between the employee’s residence and workplace qualified as tax-free perquisites. 

 

According to the changes proposed: 

• The scope of tax-free perquisites expands to include employer-provided vehicles, direct payments to transport service providers, and reimbursements for commuting expenses. However, lump-sum travel allowances or fixed travel stipends may not be covered under this exemption.

• This includes situations where the employer: 

  • Provides its own vehicle,

  • Pays directly to a transport service provider (such as a cab or bus service),

  • Reimburses the employee for travel expenses incurred using private or hired vehicles. 

Expenditure Incurred by Employer for Medical Treatment Travel Outside India

Previously, expenditure incurred by the employer for an employee’s medical treatment outside India was subject to tax as a perquisite.

 

The new provisions provide that: 

• Expenditure incurred by the employer for travel outside India for medical treatment of the employee or any member of their family will not be treated as a taxable perquisite, subject to prescribed income limits. 

• The Central Government now has the power to specify the salary limit below which such medical travel expenses will be exempt from tax as perquisites. Earlier, the limit was fixed at ₹2,00,000 per annum, but this can now be adjusted to reflect economic changes.

 

These amendments will be effective from 1st April 2026 (Assessment Year 2026-27 onwards). Employees should maintain proper documentation of reimbursements and employer-incurred expenses to claim these exemptions smoothly.