Taxability of Perquisites: Meaning, Types & Tax Rules in India

Perquisites are additional benefits or privileges that an employee receives from an employer in addition to regular salary, often in kind or at concessional terms, and many of them are taxable under the Income Tax Act. These benefits, defined under Section 17(2) of the Income‑tax Act, form part of salary income and must be valued and included for tax purposes unless specific exemptions or limits apply. Understanding how perquisites are classified helps employees and employers correctly compute taxable income and claim any available relief.

What Are Perquisites

Perquisites (or perks) are non‑cash benefits provided by an employer to an employee over and above the regular salary or wages. They can be in the form of benefits, services or conveniences that have a monetary value, such as rent‑free accommodation, a company car, concessional loans or insurance paid by the employer. These are generally part of the employee’s total salary income for tax purposes under Section 17(2) of the Income‑tax Act.

Why Perquisites Are Taxable

Under Indian tax law, perquisites are treated as part of “Income from Salaries” and their monetary value is added to salary income when computing total taxable income. The employer or employee must value these benefits following rules prescribed in the Income‑tax Rules (e.g., Rule 3) and include them in the tax return.

How Perquisites Are Classified

Perquisites are broadly classified based on taxability and the category of employee receiving them:

1. Taxable Perquisites (for All Employees)

These are perquisites that are fully taxable in the hands of the employee, no matter who receives them. Examples include:

• Rent‑free or concessional accommodation provided by the employer.
• Use of company vehicles for personal purposes.
• Interest‑free or concessional loans where benefit arises.
• Club memberships, gym/sports facilities paid by the employer.
• Supply of utilities (gas, electricity, water) paid by the employer.
• Employer‑paid education or household staff services.

These perquisites are valued on a notional basis using specific rules under the Income‑tax Act and added to the employee’s salary for tax calculation.

2. Taxable Only for Specified Employees

Some perks may be taxable only in the hands of certain employees such as:

• Directors of companies
• Employees with substantial interest in the employer (generally >20% voting power)
• Employees whose gross salary (excluding perquisites) exceeds specified thresholds

These perquisites may be exempt for regular employees but taxable for specified employees to prevent misuse by higher‑paid or influential employees.

Recent law changes (Finance Act, 2025) have raised the income threshold defining “specified employees” for certain perquisites, lessening the tax burden on mid‑income taxpayers.

3. Non‑Taxable (Exempt) Perquisites

Certain perquisites are exempt from tax, either fully or up to limits, such as:

• Medical facilities provided at employer‑maintained hospitals or reimbursements under specified limits.
• Free refreshments or meals up to specified values or conditions.
• Mobile phone/telephone and laptops provided for official/work use.
• Employer’s contribution to statutory funds or approved insurance (within prescribed caps).
• Recreational facilities provided uniformly to all employees.
• Training expenses or scholarships for employee’s children (within limits).

Exempt perquisites must still meet specific conditions and documentation requirements to be treated as tax‑free.

4. Partially Taxable Perquisites

Some perks are partially taxable, only the excess over a threshold is included in income. Examples include:

• Education benefits for children up to specified caps.
• Gifts or vouchers from employers up to a small annual value (e.g., ₹5,000) may be exempt; amounts above this become taxable.

This category blends tax‑free and taxable treatment depending on the limits set by Income‑tax Rules.

Examples of Common Perquisites

Perquisite Type

Tax Treatment

Rent‑free accommodation

Taxable (valued under Rule 3)

Company car for personal use

Taxable

Interest‑free loan benefit

Taxable if above threshold

Employer‑paid medical facility

Exempt (conditions apply)

Free food/refreshments up to limits

Exempt

Laptop for official work

Exempt

Valuation of Perquisites

To compute tax on perquisites, the value of the benefit (e.g., cost to the employer or prescribed formula) is included in the employee’s taxable income. For example, rent‑free accommodation may be valued as a percentage of salary depending on city population and other factors.

Reporting and Compliance

• Employers must calculate perquisite values and report them in Form 16 or Form 12BA.
• Employees include the value of taxable perquisites when filing their income tax return under the salary head.

Conclusion

Perquisites are valuable additional benefits beyond basic salary that can significantly affect a taxpayer’s total taxable income. Under Section 17(2) of the Income‑tax Act, perquisites are classified mainly into taxable perquisites (for all employees), those taxable only for specified employees, non‑taxable perquisites, and partially taxable perks. Correct classification and valuation ensure accurate tax computation and compliance, while awareness of exemptions helps in effective tax planning.