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Taxation of Your Perks & Rewards
Benefits that an individual receives which are supplementary to their income or salary and are related to their official position are known as perquisites. Certain perks or perquisites may or may not be taxed depending on their nature.
Fringe benefits or perks are a broad category of benefits and perks that are provided in addition to a person's pay. These components are taxed separately from the employer's account to preserve transparency and accountability.
“Perquisite” is defined in the section 17(2) of the Income-tax Act as including:
Value of rent-free/concessional rent accommodation provided by the employer.
Any sum paid by the employer in respect of an obligation which was actually payable by the employee.
Value of any benefit/amenity granted free or at concessional rate to specified employees etc.
The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer or former employer, free of cost or at concessional rate to the employee.
The amount of any contribution to an approved superannuation fund by the employer in respect of the employee, to the extent it exceeds one lakh rupees; and
The value of any other fringe benefit or amenity as may be prescribed.
Types of perquisites
There are three types of perquisites - Taxable Perquisites, Perquisites taxable only by employees and Exempt perquisites.
Rent-free housing, the provision of gas, water, and electricity, the professional tax of the employee, the reimbursement of medical expenses, and the income of a servant employed by the employee are a few perquisites that are taxable in nature.
Non-taxable fringe benefits include travel reimbursement, company-provided computers or laptops for business use, employer-provided refreshments during business hours, provision of medical assistance, access to health clubs and sports facilities, telephone service, interest-free salary loans to employees, employer contributions to provident funds, free access to recreational and medical facilities, and others.
Perquisites taxable only by employees:
Benefits that are exclusively taxable to workers include services such as domestic help, a car that is owned by the employer but is used by the employee, and educational opportunities for kids.
Taxable perquisites also include any other fringe benefit offered to employees by their employers, such as free meals, presents valued at more than Rs. 5000, access to clubs and gyms, etc.
Benefits of perquisites
Perquisites benefit both the employer and the employee -
Boost personnel productivity
Raise the level of staff loyalty
Increase retention of employees
Draw in elite talent
For instance, a sales profile worker must perform a lot of fieldwork. It translates into frequent travel for work purposes, which means that the employee must pay a lot of expenditures. These costs include things like gas, meals, auto upkeep, lodging, etc. The company often provides perquisites above and above the wage to cover these costs in order to guarantee that the employee is not burdened.
Taxation on perquisites under Income Tax Act
The Finance Act of 2005 states that perquisites given to employees or assumed to be given to them by employers are subject to taxation by the government. Perquisites are added to the income of the employee and taxed accordingly.
The employer that provides these fringe benefits to employees is responsible for paying the perquisite tax. It might be a business, a corporation, a group of people or an organization of people.
How are taxes on perquisites calculated?
As per the Income Tax Act, taxation on perquisites is calculated based on the following:
The tax rate for the given fiscal year
Income recognized under salaries
Tax paid by the employer for the perquisites