What is Section 17(2) of the Income Tax Act

As per Section 17(2) of the IT Act, 1961, ‘salary’ is a regular payment that is given to the employee by the employer. It is a composition of basic salary allowances. There are instances wherein the employee receives commissions in place of perquisites, salary, etc.

 

Let us try to understand how Section 17(2) of the Income Tax Act treats perquisites that come along with a job.

The Section 17(2) defines ‘perquisites’ as any benefit or any casual emolument that comes along with a position or office, in addition to wages or salary. These can be provided either in cash or kind. 

 

Kindly note that it is taxable under the head 'Salaries' only if they fulfil the following criteria:

• Allowed during the continuance of the employment

• Allowed by an employer to his employee

• Resulting into personal advantage to the employee

• Directly dependent upon the service

• Derived as a result of the employer's authority

 

Note: A perquisite does not necessarily have to be a regular or recurring receipt. A non-recurring receipt can also be termed as a perquisite, provided it fulfils the aforementioned conditions.

 

Here are a few additional propositions that must be considered while determining whether a certain income is a perquisite:

• Ensure that the perquisite is received from an employer. If it is received from anyone other than the employer, this perquisite will be taxable under the head 'Profits and gains of business' or 'Income from other sources'.

• Any benefit will be considered as a perquisite if it has a legal origin. An unauthorised advantage availed by an employee with the employer's authority would create a legal obligation to restore such an advantage. It won't amount to perquisite taxable under Section 17(2) of the Income Tax Act.

“Perquisite” is defined in the Section 17(2) as: 

• Any accommodation that is provided by the organisation. 

• Rent concession provided to the employee by his place of work. 

• Amount paid by the organisation to an obligation that was actually made by the employee. 

• Amenity or any benefit made available at a concessional rate or free to employees.

• Any sweat equity shares or specified security transferred or allotted, indirectly or directly, by the organisation, at a concessional rate or without charge to the employee. 

• Amount liable to the organisation, through a fund or directly to effect an life insurance of the employee,

• Amount contributed to a superannuation fund by the organisation with regard to the employee.

• Value of fringe benefits or amenities. 

 

Perquisites are bifurcated into non-monetary perquisites and monetary perquisites.

Perquisites can be divided in the following three categories: 

1. Perquisites that are taxable in all cases 

2. Perquisites that are not taxable 

3. Perquisites which are not taxable for  specified employees.

1. Perquisites that are taxable in all cases 

• Dearness Allowance:  It is a type of allowance that is paid to the employees as a living adjustment cost paid to cope with the rising inflation. DA that is paid to the employees is fully taxable. The Income Tax Act states that liability for tax liability under DA must be declared in the returns that are filed. 

• Entertainment Allowance:  Government employees are permitted the deduction of the whichever is the least in the following-

1. 1/5th of basic salary, amount received in the form of allowance or Rs. 5,000. This is provided to employees to compensate for the expenses that were incurred for customer hospitality. However, employees can claim tax exemption in the manner provided in section 16.

2. Every other employee has to pay tax for entertainment allowance. 

3. Overtime Allowance

 

The organisation can provide an allowance for overtime to employees who are working over the regular working hours. This is known as overtime and any amount that is given for this is completely taxable. 

• Interim Allowance: When an organisation gives this allowance in place of final allowance, it is fully taxable. 

• Project Allowance: If the organisation provides allowance to its employees to cover the expenses of a  project, this allowance is also entirely taxable. 

• City Compensatory Allowance: This is paid to employees who live in urban cities where rent and cost of living can get expensive and any allowance for this is fully taxable.

• Non-Practising Allowance: If physicians are linked to the Clinical Centres of institutes/laboratories, non-practising allowances that are paid to them is entirely taxable. 

• Cash Allowance: If the organisation provides cash allowance like, bereavement allowance, holiday allowance or marriage allowance, it is completely taxable.

• Meals/tiffin Allowance : Sometimes  the organisation  provides Meals/tiffin allowance to its employees. This is fully taxable. 

• Warden Allowance: If an organisation provides monetary compensation to an employee who is  working as a warden, that is, a keeper in an Institute, the allowance is completely taxable. 

• Fixed Medical Allowance: It is an allowance that is paid by the organisation to the employee at fixed rates irrespective of the treatment taken by the employee.

• Servant Allowance : If an organisation monetarily compensates an employee to engage as a servant, the allowance is taxable. 

2. Perquisites that are not taxable u/s Section 17(2)

• House Rent Allowance (HRA): If an organisation pays allowance for the employees stay/accommodation, then it is called House Rent Allowance or HRA.

Tax exemption 32 under section 10 can be reimbursed on whichever amount is lesser of the three: 

 

i) House Rent Allowance  as per actual received by the employee 

ii) Rent actually paid less 10% of the basic salary 

iii) In Metros i.e Mumbai, Delhi, Kolkata or Chennai, to the extent of 50% of basic salary or else 40% of it if the accommodation is at a non-metro place. Any amount of HRA that is given after claiming such deduction is taxable. 

• Special Allowance: This allowance is paid to employees who are covered under section 10(14)(i).It is mainly for performance of a duty that is not taxable to the extent to which it has been actually incurred.  

• Children education allowance: Exemption of up to Rs. 100 can be availed per month per child for a maximum of two children. Similarly, hostel subsidy of Rs. 300 per month can be availed per child for a maximum of two children. 

• Transport Allowance: Rs. 800/- ( Rs.1600/- for orthopedically handicapped with disability of lower limbs or blind) per month exempt for the purpose of commuting between place of duty and residence.

3. Perquisites which are not taxable only in the hands of specified employees

Few allowances that are usually paid to judges, employees of UNO, and government servants are not taxable. 

• Allowances paid to the government servants abroad: : If servants of the Indian government are given an allowance while they serve abroad, such an income is completely exempt from taxes. 

• Sumptuary allowances: The allowances that are paid to judges of High Court and State Court are also not taxed. 

• Allowances paid by UNO: Any allowance that is received by employees of the UNO are completely exempt from tax. 

• Compensatory allowance for judges: Any compensatory allowance received by a judge is not taxable.

The value of perquisites as per Section 17(2) with regard to the employee is the cost that it has incurred to the organisation. However, there are rules for this valuation that have been mentioned  in the 3rd  Rule of the income tax rules for certain perquisites.

1. Valuation in case the employer provides unfurnished residential accommodation:- 

• 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. 

• Non Government Employees: The perquisite value is 15% of the salary in cities with a population over 25 lakh people, 10% in case the population is over 10 lakh but not more than 25 lakh people, and 7.5% if the population is lower than 10 lakh people). The perquisite value will be the rent or lease payable/paid by the organisation or 15% of the salary, whichever is less, if housing is supplied but is not owned by the organisation.

2. 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 cost of the furniture. If the furniture is rented from another party, then the value of the unfurnished accommodation will be hiked by the charges payable/paid by the organisation. 

3. Valuation in case of accommodation in a hotel

The value of perquisite under Section 17 of the 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 actually payable or paid by the employee. Keep in mind that the perquisite would not arise, if the individual is provided accommodation if he/she transfers for a time period up to 15 days.

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

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

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

• Used only for official purpose : If the car is only used for official purposes, it will not be 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 - Rs.1,800 per month + Rs 900 per month (If the driver is provided)

• If the cubic capacity is over 1.6 litre - Rs.2,400 per month + Rs 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 - Rs.600 per month + Rs 900 per month (If the driver is provided) 

• If the cubic capacity is over 1.6 litre - Rs.900 per month + Rs.900 per month (If the driver is provided) 

• Used only for personal purpose : If the car is only used for personal purposes, it will be completely taxable in the hands of the employee irrespective of the cubic capacity of the engine. The value taxed is mentioned below:

Actual cost of Maintenance and Running of motor car 

• Add: driver’s salary 
• Add: normal wear and tear @10% per year of the cost of the motor car 
• Minus: Any charges that is recovered from the employee 

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 purpose  : If the car is used only for official purposes, it will not be taxed 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 litre – Actual expenses  - Rs.2,700 per month.

• If the cubic capacity exceeds 1.6 litre – Actual expenses - Rs 3,300 per month. 

f) If the Employee owns an other vehicle but maintenance and running  is reimbursed by organisation

• Used only for official purposes: If the car is used only for official purposes, it will not be taxed 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

If the cubic capacity is within 1.6 litre – Actual expenses  - Rs.900 per month.

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 as per Section 17 will be 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 worth at which the benefit is offered to taxpayers as reduced by the amount, if any is retrieved from the employee but these benefits are not eligible to the individuals who work in railways or an airline. 

• Provision for gardener, personal attendant, watchman or sweeper

The value of perquisite under Section 17 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

• Concessional or interest-free loans

The perquisite valuation will be the difference between the interest actually paid by any member of the employee’s family or the employee himself and the amount of interest payable at the stipulated interest rate. The interest rate will be equal to the rate SBI charged on the first day of the applicable Previous Year for loans of the same nature and advanced to the general public for the same purposes. The maximum balance method monthly will be used to compute perquisites. However, as long as they are not covered by medical insurance, medical treatment loans and loans up to Rs. 20,000 listed in Rule 3A are excluded.

• Valuation for  meals that are free

The value of this perquisite for free beverages and food provided by an employer who is exempt from paying fringe benefit tax to an employee is equal to the employer's costs, excluding any money paid by the employee or reimbursed by them for such benefits or perks. However, 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.

• Valuation in case of gift, token, or voucher

The value of this perquisite in relation to any gift, certificate, or action taken instead of the present that the member of the employee’s household or the employee may receive from an employer that is 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 Rs. 5000, no perquisite value will be taken.

• An employer-issued credit card

The  value of perquisite as per Section 17 for expenses that are made by the member of the employee’s household or the employee that are charged to a employer provided credit card, which is not subject to fringe benefit tax, and which is reimbursed or paid to an employee by such organisation, shall be deemed to be such amount reimbursed or paid by the organisation. However, if certain requirements outlined in Rule 3(7)(v) are met and the expenses were paid entirely and only for official purposes, no perquisite value will be deducted.

• The employer provides club membership

In relation to costs incurred in a club by the employee's household or the employee, the amount reimbursed or paid by the employer to the employee who is exempt from paying fringe benefit tax will be taken to be the amount reimbursed or paid by the employer, less any amount paid to or recovered from the individual on such account. The valuation of perquisite will not be taken into consideration, nevertheless, if the spending is made fully or primarily for business-related reasons and specific criteria specified in Rule 3(7)(vi) are met.

 

The following formula must be used to estimate the market value of any sweat equity share or specified security, which is an equity stake, on the date the employee exercises the option:-

• If the company's stock is listed on a recognised 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.

• If the stock of the company is not listed on a recognised 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.

A lot of organisations offer leased accommodation to their employees. The cost of these accommodation is taxable and it is a perquisite that is provided by the company. However, the tax rate depends upon whether the place is leased, rented or owned by the employer/company.

 

This is how the tax will be levied for the cases listed above: