Section 17(2): Definition of 'Salary' Under the Income Tax Act, 1961

Section 17(2) of the Income Tax Act in India pertains to the definition of "Salary" for income tax computation. Section 17(2) enumerates various components that are included in the definition of salary.

Perquisites can be divided into the following three categories: 

1. Perquisites that are taxable in all cases 

2. Perquisites that are not taxable 

3. Perquisites that are not taxable for specified employees.

1. Perquisites That Are Taxable in All Cases

• Rent-Free Accommodation: The value of rent-free accommodation provided by the employer is generally taxable. However, there are specific exemptions for certain government employees and employees in specified cases.

• Concessional Rent Accommodation: If an employee receives accommodation from the employer at a rent lower than the specified rates, the difference between the actual rent paid by the employee and the specified rate is treated as a perquisite and is taxable.

• Motor Car Perquisites: The personal use of a motor car provided by the employer is generally taxable. The valuation is based on factors like the cubic capacity of the car and whether a chauffeur is provided.

• Interest-Free or Concessional Loans: The value of interest-free or concessional loans provided by the employer to the employee is taxable. The valuation is based on prescribed interest rates.

• Club Memberships Perquisites: The value of club memberships provided by the employer, whether free or at a concessional rate, is generally taxable.

• Education Perquisites: The value of free or concessional education facilities provided by the employer for the employee's children is taxable.

2. Perquisites That Are Not Taxable

• Conveyance Allowance: Conveyance allowance granted to meet the expenditure on conveyance in the performance of duties is exempt up to specified limits.

• Leave Travel Concession (LTC): Ltc for travel within India is exempt subject to certain conditions and limits.

• Medical Reimbursement: Reimbursement of medical expenses actually incurred by the employee for himself and his family is exempt up to specified limits.

• Telephone and Internet Expenses: Actual expenses incurred on the provision of a telephone and internet connection for official purposes are generally exempt.

• Refreshment and Snacks at Workplace: Refreshments provided to employees during working hours are generally not taxable.

The value of perquisites as per Section 17(2) about the employee is the cost that it has incurred to the organisation. However, there are rules for this valuation that have been mentioned in income tax rules for certain perquisites.

1. Valuation in case the employer provides unfurnished residential accommodation

• Non-government Employees:

The perquisite value is -

1.  15% of the salary in cities with a population of over 25 lakh people

2. 10% in case the population is over 10 lakh but not more than 25 lakh people

3. 7.5% if the population is lower than 10 lakh people

4. The perquisite value is the rent or lease payable/paid by the organisation or 15% of the salary, whichever is less, if housing is supplied and not owned

• Employees of State or Union Government:

The perquisite value is the licence fee as mentioned by the government of India as reduced by the rent that is paid by the individual. 

2. Valuation in case of accommodation in a hotel

The value of perquisite for hotel accommodation will be 24% of the salary or the charges payable/paid to the hotel, whichever is lesser. The valuation mentioned above will be reduced by any rent that is payable or paid by the employee.

Please note that the perquisite will not arise if the individual is provided accommodation if he/she transfers for some time of up to 15 days.

3. Valuation in case of accommodation that is furnished 

The value is the same as the valuation of accommodation that is unfurnished, increased by 10% per year of the furniture cost. If the furniture is rented from another party, the value of the unfurnished accommodation will be hiked by the charges payable/paid by the organisation.

4. Valuation of perquisite in case motor car is provided by the organisation

With effect from 1st April 2008, if an organisation provides a motor car facility to its employees, they are not required to pay fringe benefits tax. The perquisite valuation would be: 

 

a. If the motor car is leased or owned by the organisation

• Used only for official purposes: Not taxable in the hands of the employee irrespective of the cubic capacity of the engine

• Used for both personal and official purposes 

b. If running and maintenance cost is compensated by the organisation

• If the cubic capacity is within 1.6 litre: ₹1,800 per month + ₹900 per month (If the driver is provided)

• If the cubic capacity is over 1.6 litre: ₹2,400 per month + ₹900 per month (If the driver is provided) 

c. If maintenance and running cost is compensated by the employee

• If the cubic capacity is within 1.6 litre: ₹600 per month + ₹900 per month (If the driver is provided) 

• If the cubic capacity is over 1.6 litre: ₹900 per month + ₹900 per month (If the driver is provided) 

• Used only for personal purpose: Completely taxable in the hands of the employee irrespective of the cubic capacity of the engine

d. If the motor car is owned by the employee but maintenance, running and driver’s salary is reimbursed by organisation

• Used only for official purposes: Not taxable in the hands of the employee irrespective of the cubic capacity of the engine.

• Used for both personal and official purposes 

e. If maintenance and running cost is reimbursed by the employer

• If the cubic capacity is within 1.6 liter: Actual expenses - ₹2,700 per month

• If the cubic capacity exceeds 1.6 liter: Actual expenses - ₹3,300 per month

f. If the employee owns another vehicle but maintenance and running is reimbursed by organisation

• Used only for official purposes: Not taxable in the hands of the employee if the cubic capacity of the engine is within 1.6 litres. 

• Used for both personal and official purposes: If maintenance and running cost is compensated by the organisation -

1. If the cubic capacity is within 1.6 litre: Actual expenses - ₹900 per month

2. If the cubic capacity exceeds 1.6 litre: NA

Supply of electric energy, water or gas perquisite

It is the amount that is paid by the organisation to the agency that supplies electric energy, water or gas.

• If the organisation supplies the same from its own resources, then the value of perquisites is the cost of manufacturing per unit that is payable by the organisation

• On the other hand, any payment that is received from the individual will be reduced from this amount.

Concessional/Free Educational Facility

• The value of this perquisite will be the expenses incurred by the organisation

• If the institution is owned and maintained by the organisation, then the value will not be applicable

Concessional/Free Journeys

• Value of this perquisite will be the cost at which the benefit is offered to taxpayers as reduced by the amount, if any is retrieved from the employee

• The benefits are not available to individuals who work in railways or an airline

Provision for gardener, personal attendant, watchman or sweeper

The value will be the cost that is covered for by the organisation, in which the amount that is covered for by the employee for the services is reduced.

5. Valuation in case of fringe benefits

a. Concessional or interest-free loans

The perquisite valuation will be the difference between the interest paid by any member of the employee’s family or the employee himself.

b. Valuation for free meals

• The value of this prerequisite for free beverages and food provided by an employer exempt from paying fringe benefit tax to an employee is equal to the employer's costs

• This excludes any amount paid by the employee or reimbursed by them for such benefits or perks

• If beverages and food are offered throughout working hours and these benefits meet certain requirements outlined in Rule 3(7)(iii), no perquisite value will be deducted

c. Valuation in case of gift, token, or voucher

• The value of this perquisite that the employee receives from an employer exempt from paying fringe benefit tax, shall be the amount specified on the gift, token or voucher.

• However, if the total value of such a voucher, gift or value taken throughout the prior years is less than ₹5000, no perquisite value will be taken

d. An employer-issued credit card

• The value of perquisite for expenses made by the employee that are charged to an employer-provided credit card, not subject to fringe benefit tax

• Also, if the amount is reimbursed/paid to an employee by such organisation, it shall be the amount reimbursed or paid by the organisation

• If certain requirements outlined in Rule 3(7)(v) are met and the expenses are paid entirely and only for official purposes, no perquisite value will be deducted

e. The employer provides club membership

• About costs incurred in a club by the employee, the amount reimbursed or paid by the employer to the employee who is exempt from paying fringe benefits tax will be taken to be the amount reimbursed or paid by the employer

• Also, any amount paid to or recovered from the individual on such an account is reduced. 

• The valuation will not be considered, nevertheless, if the amount is fully/primarily for business-related reasons and qualifies under specific criteria specified in Rule 3(7)(vi)

f. The employer provides stock options

• The stock is listed on the stock exchange on the date the option is exercised: The market value is determined by averaging the opening and closing prices of the shares on that day on the exchange.

• The stock is not listed on the stock exchange on the date the option is exercised: The market value will be that share's worth as determined by a banker on that date.

 

On the date the employee exercises the option, the market value of any specific security—other than an equity stake in a company—shall be the value established on that date by a merchant banker.