Perquisites

Salary is not only what reaches the bank account. Where an employer provides a flat, a car, a driver, a soft loan, a club membership or shares at less than market value, the employee is better off by a measurable amount, and section 17 brings that amount into taxable salary as a perquisite.

The definition is wide. It covers the value of rent-free or concessional accommodation, any benefit granted free or at concession, obligations of the employee that the employer pays on their behalf, sums payable under a life insurance or annuity contract, shares allotted under a stock option plan, and employer contributions beyond a ceiling. What ties them together is that the employee receives something of value from the employment without paying full value for it.

Two things follow. Payroll cannot treat a benefit as invisible merely because no money moved, and the amount added to salary is the value the rules prescribe rather than the cost the employer incurred. Those two figures are often very far apart, in both directions.

Three categories are worth separating, because the treatment differs.

A specified employee means a director, an employee with a substantial interest in the company, or an employee whose salary from the employer exceeds the specified-employee threshold, computed after excluding non-monetary benefits. The clause carrying that threshold in the Income-tax Act, 2025 was not located and is not cited here. Confirm the current threshold, since it has not moved in a long time and now catches most salaried staff in any case.

Rule 3 sets out the valuation for each class, and these are the four that arise most often in payroll.

• Accommodation. For an employer other than the government, unfurnished accommodation owned by the employer is valued at a percentage of salary that varies with the population of the city, with a lower percentage for smaller places. The percentages were revised in 2023, so confirm the band and the rate in force. Where the accommodation is leased by the employer, the value is the lease rent or the prescribed percentage of salary, whichever is lower. Furniture is added at a prescribed rate of its cost, and anything the employee pays is subtracted.
• Motor car. Where the employer owns the car and it is used for both official and personal purposes, the perquisite is a fixed monthly amount that depends on engine capacity, with a further monthly amount if a driver is provided. Exclusively official use with proper records is not taxed, and exclusively personal use is valued on actual running and maintenance cost.
• Loans. An interest-free or concessional loan is valued at the interest that the State Bank of India charged on a comparable loan at the start of the year, less anything the employee actually paid. Small loans below the prescribed amount, and loans for specified medical treatment, are outside it.
• Stock options. The perquisite arises on allotment, and is the fair market value on the date the option is exercised, less the amount the employee paid. The employer deducts tax on that amount even though the employee has received no cash, which is what makes ESOP months painful on the payslip.

A worked case. An employee is provided a company-owned car above the engine capacity threshold, with a driver, used for both office and personal travel for the full year. At the prescribed rates of 2,400 a month for the car and 900 a month for the driver, the perquisite is 39,600 for the year, added to salary and taxed at the employee's slab. The employer's actual outlay on lease, fuel, maintenance and driver salary might be several times that figure, and it does not matter. Confirm both monthly rates before relying on them.

Employer contributions to a recognised provident fund, an approved superannuation fund and the National Pension System are ordinarily outside the employee's income. Section 17(2)(vii) changes that once the aggregate of the three in a year crosses the notified ceiling. The excess is a perquisite in the year of contribution.

The Act then goes a step further, taxing the annual accretion by way of interest, dividend or similar on the balance attributable to the excess contribution. The return earned on that excess, the annual accretion by way of interest or dividend attributable to it, is itself treated as a perquisite each year. The practical effect is that a high earner with generous retirement contributions has a perquisite that grows on its own, and computing it requires tracking the excess balance year on year rather than only the current contribution.

This is the perquisite most often missed in payroll, because nothing visible happens. No car arrives and no flat is allotted. Confirm the current aggregate ceiling and the prescribed formula for the accretion before implementing it.

Perquisites are part of salary, so the employer estimates their value, adds it to the employee's income for the year and deducts tax under Section 192 across the remaining months. There is no separate perquisite tax and no separate return.

Two mechanics are specific to perquisites. First, an employer may elect to pay the tax on non-monetary perquisites out of its own pocket rather than deducting it from the employee, and the tax so paid is not treated as further income of the employee. That is what makes it usable for relocation packages and one-off benefits where a deduction would swallow a month's pay. Second, where salary exceeds the prescribed limit, the details of non-monetary perquisites and their computed values are reported in Form 123, issued along with Form 130.

Timing is where this hurts. A benefit granted in February, valued and taxed in February and March, compresses the whole year's tax on it into two payslips. Valuing perquisites at the start of the year and reprojecting them at each proof checkpoint spreads the deduction instead of concentrating it.

The failures are usually failures of visibility rather than of arithmetic.

• Benefits granted outside payroll. A car allotted by administration, a loan sanctioned by finance or options granted by the company secretary never reach the payroll team, so nothing is valued and nothing is deducted.
• Cost used instead of prescribed value. The employer's lease rent is added to salary rather than the rule 15 figure, which usually overtaxes the employee and is just as wrong as undertaxing.
• The specified employee test skipped. Car and domestic help perquisites are added for everyone, or for no one, rather than tested per employee.
• Employer contributions above the ceiling ignored, and the annual accretion on the earlier excess never tracked at all.
• Reimbursements treated as perquisites, or the reverse. A reimbursement of actual expenditure incurred for the employer is not a benefit to the employee, and it is worth being clear which bucket each policy sits in before the year starts.