Taxation on Perks and Rewards

In today's corporate landscape, employees often receive more than just their salaries in the form of perks and rewards, known as perquisites. Perquisites refer to additional benefits an individual receives alongside their salary, based on their official position. These perks can be taxable or non-taxable depending on their nature, ensuring transparency in financial reporting. These additional benefits, ranging from housing and medical allowances to travel reimbursements and educational support, are crucial for attracting talent and enhancing job satisfaction. However, understanding the taxation rules surrounding these perks is essential for both employers and employees to ensure compliance with the Income-tax Act of 1961 and to manage financial responsibilities effectively.

Under Section 17(2) of the Income-tax Act, perquisites include various elements such as

1. The value of accommodation provided by the employer without charge or at a reduced rent.

2. Any payment made by the employer for an expense that should have been paid by the employee.

3. The value of any benefit or facility provided free of charge or at a reduced rate to specified employees.

4. The value of specified securities or sweat equity shares given by the employer, directly or indirectly, to the employee for free or at a reduced rate.

5. Any contribution made by the employer to an approved superannuation fund for the employee, exceeding 1 lakh rupees.

6. The value of any other fringe benefit or facility as determined by regulations

There are three main categories of perquisites: Taxable Perquisites, Exempt perquisites, and Perquisites taxable only by employees.

Taxable perquisites

It encompasses benefits like rent-free housing, utilities, professional tax reimbursements, medical expenses, and wages for personal servants. 

Exempt perquisites

It include non-taxable benefits such as travel reimbursements, company-provided computers, refreshments during business hours, medical assistance, access to health clubs, telephone services, interest-free loans, employer contributions to provident funds, and access to recreational and medical facilities.

Perquisites exclusively taxable by employees

It covers services such as domestic help, employer-owned cars used by employees, and educational benefits for employees' children.

Benefits of Perquisites:

• Enhance personnel productivity

• Foster greater staff loyalty

• Improve employee retention rates

• Attract top-tier talent

For example, employees who frequently travel for work may receive perquisites to cover expenses like transportation, meals, lodging, and vehicle maintenance, reducing their financial burden and ensuring focus on work responsibilities.

Taxation on perquisites under Income Tax Act 1961

According to the Finance Act of 2005, perquisites provided by employers to employees are subject to taxation. These benefits are added to the employee's income and taxed accordingly. The responsibility for paying taxes on perquisites lies with the employer, whether they are a company, corporation, partnership, or any other entity.

How are taxes on perquisites calculated?

Calculation of taxes on perquisites is based on the prevailing tax rates for the fiscal year, the income declared under salaries, and the tax amount paid by the employer specifically for the perquisites provided.

In essence, perquisites form a significant part of employee compensation, influencing both financial well-being and job satisfaction, while also ensuring compliance with tax regulations outlined in the Income-tax Act.

Here are the medical facilities that are exempt from tax:

1. Medical services provided to an employee or their family member in a hospital maintained by the employer.

2. Expenses incurred by the employee or their family for treatment of prescribed diseases in a government hospital.

3. Health insurance premiums paid by the employer for an employee.

4. Expenses incurred for medical treatment outside India.

In conclusion, understanding the taxation on perks and rewards is essential for both employers and employees. While these benefits can enhance employee satisfaction and retention, it's crucial to be aware of their tax implications to avoid unexpected liabilities. By staying informed about the latest tax regulations and working with tax professionals, individuals and businesses can optimise their financial planning and compliance. At JJ Tax, we simplify the complexities of tax regulations. Our expert team stays updated on the latest rules and offers personalised advice to optimise your benefits 🤝.