Perquisites: Meaning, Examples & Tax Rules

When you get a job the money you take home is not just what you see on your paycheck. Your employer often gives you things like a car, a house, a club membership, stock options and a lot of other benefits. These things are called perquisites. The Income Tax Act, 1961 says these perquisites are taxable like the money you earn. This can be a surprise for both the people who work for a company and the people who handle the payroll. The Income Tax Act, 1961 Section 17(2) has rules about these benefits. This article is going to tell you what perquisites are. It will also give you examples of perquisites. Explain the tax rules. The Income Tax Act, 1961 is very clear about perquisites. Perquisites are benefits that employees receive from their employer. These perquisites are taxable. So it is very important for employees and employers to understand what perquisites are and how they work. The Income Tax Act, 1961 has rules, about perquisites and employees and employers need to know these rules to follow the law. Perquisites are a part of your salary. You have to pay tax on them just like you do on the money you earn.

What Is a Perquisite?

The word perquisite (often shortened to "perk") derives from the Latin perquisitum — something acquired or sought after. In everyday English it simply means a privilege or benefit attached to a position. In Indian income tax law, the term has a precise statutory definition.

Section 17(2) of the Income Tax Act, 1961 defines a perquisite as any benefit or amenity granted or provided free of cost or at a concessional rate by an employer to an employee. It includes:

• The value of rent-free or concessional accommodation
• The value of any benefit or amenity provided by the employer
• Any sum paid by the employer in respect of an obligation of the employee
• Any sum payable by the employer to effect an assurance on the life of the employee or to effect a contract for an annuity
• The value of any specified security or sweat equity shares allotted or transferred
• The amount of any contribution made by the employer to an approved superannuation fund
• The value of any other fringe benefit or amenity

"A perquisite is, in essence, any economic benefit flowing from employment that is not salary — goods, services, rights, or entitlements provided because of the employer-employee relationship."

The Three Categories of Perquisites

For tax purposes, perquisites in India are divided into three broad categories. Understanding which bucket a benefit falls into determines whether it is taxable, who bears the tax, and how it is valued.

Category 1Taxable for all employees regardless of grade or roleCategory 2Taxable only for specified employees (directors or those with substantial interest)Category 3Exempt from tax — provided wholly for official duties

Common Examples of Perquisites

1. Rent-Free or Concessional Accommodation

One of the most significant perquisites in practice. Where an employer provides housing — whether owned, rented, or leased — the benefit is taxable. The valuation depends on whether the employer is a government entity or a private company, and on the population of the city.

Example

An IT company provides a flat in Chennai (population over 25 lakh) to its vice president. The taxable value of the accommodation is 15% of the employee's salary. If annual salary is ₹24 lakh, the perquisite value is ₹3.6 lakh, added to income for the year.

2. Company Car

Where a car is provided and used for both official and personal purposes, a prescribed monthly amount is deemed as perquisite value — varying by engine capacity. If a chauffeur is also provided, an additional ₹900 per month is added.

Prescribed valuation (Rule 3)

Car with engine capacity up to 1,600 cc: ₹1,800/month. Above 1,600 cc: ₹2,400/month. Personal use only: actual cost to employer is the perquisite value.

3. Interest-Free or Concessional Loans

If an employer grants a loan at a rate below the State Bank of India's prime lending rate, the difference in interest is taxable as a perquisite. Loans up to ₹20,000 in aggregate, and loans for medical treatment of specified diseases, are exempt.

4. ESOPs — Employee Stock Option Plans

Stock options attract tax at two stages. First, on exercise: the difference between the fair market value on the date of exercise and the exercise price is taxable as a perquisite. Second, on sale: the gain from sale of the shares is taxable as capital gains.

Example

An employee exercises options to buy 500 shares at ₹100 each. FMV on exercise date is ₹350 per share. Perquisite = (₹350 − ₹100) × 500 = ₹1,25,000, added to salary income for that year.

5. Free or Subsidised Education for Children

If an employer maintains a school and provides free or subsidised schooling to employees' children, the benefit is taxable. However, if the cost per child does not exceed ₹1,000 per month (₹12,000 per year), it is exempt.

6. Club Membership

The entire cost of club membership fees and annual subscriptions paid by the employer is taxable. Health club and sports facilities provided to all employees on employer's premises are, however, exempt.

7. Gifts and Vouchers

Gifts, vouchers, or tokens given by an employer are taxable as perquisites. An exemption applies for gifts up to ₹5,000 in a financial year — amounts in excess are fully taxable.

8. Medical Reimbursements

Since FY 2018-19, individual medical reimbursements no longer enjoy the old ₹15,000 exemption. Instead, a standard deduction of ₹50,000 (₹75,000 from FY 2025-26 under the new regime) has replaced it. Hospitalisation expenses in approved hospitals remain exempt.

Tax Treatment at a Glance

Who Pays the Tax — and When?

The tax on perquisites is the liability of the employee, and it forms part of the total taxable salary. The employer is, however, responsible for deducting tax at source (TDS) on the aggregate salary including the value of all perquisites — on a monthly basis across the financial year.

Employers must value each perquisite correctly at the start of the year, include the annual value in the projected salary, compute the applicable tax, and deduct it in equal monthly instalments. Any under-deduction can attract interest and penalties on the employer.

Perquisite Tax Under Old vs New Regime

The choice of tax regime does not exempt any perquisite from tax — taxable perquisites are taxable under both the old and new regimes. The difference lies only in the applicable slab rates and the availability of deductions. Under the new regime (Section 115BAC), most deductions and exemptions under Chapter VI-A are unavailable, which may make the effective tax on perquisites higher for many employees. for more details ledgers.cloud.