When discussing employee compensation, two common terms often arise: perquisites vs allowance. While both provide benefits to employees, they serve different purposes and have distinct characteristics.
Understanding the difference between perquisites and allowances is crucial for employers and employees to ensure proper financial planning and compliance with tax regulations.
This article explores allowance vs perquisites and highlights their key differences.
Definition of allowances
Allowances are fixed monetary benefits employers provide to employees at regular intervals in addition to their basic salary. These are typically meant to cover specific expenses incurred while performing job-related duties.
Allowances are monetary and are usually paid regularly, such as monthly or annually. Common examples include:
- House Rent Allowance (HRA)
- Travel Allowance
- Dearness Allowance
- Medical Allowance
Definition of perquisites
Perquisites, commonly referred to as perks, are additional benefits or facilities employers provide to employees beyond their salary. Unlike allowances, perquisites are often provided in kind rather than in cash.
These benefits are usually meant to improve the employees’ standard of living and job satisfaction. Examples of perquisites include:
- Company-provided housing or car
- Free or subsidized meals
- Club memberships
- Stock options
- Employer-sponsored health insurance plans
Difference between allowances and perquisites
While both allowances and perquisites serve as financial benefits, they differ in several key aspects:
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Feature
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Allowance
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Perquisites
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Nature
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Monetary
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Can be monetary or non-monetary
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Frequency
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Paid regularly (monthly or yearly)
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Provided as needed or as a one-time benefit
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Purpose
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Covers work-related expenses
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Enhances employee lifestyle
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Taxability
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Some allowances are taxable, others are partially exempt
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Mostly taxable unless specifically exempt under tax laws
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Examples
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HRA, travel allowance, medical allowance
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Company car, subsidised housing, free meals
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In terms of perquisites and allowances in income tax, perquisites are generally considered a taxable benefit, whereas allowances may have partial exemptions based on specific conditions.
Conclusion
Both allowances and perquisites are pivotal in employee compensation, but they serve different functions. While allowances provide a fixed monetary sum for job-related expenses, perquisites typically offer non-monetary lifestyle benefits to improve employee well-being.
Employers must understand these differences to design effective compensation packages, and employees should be aware of the tax implications of these benefits.
Whether travel expenses, free meals or health insurance plans, each component adds value to the overall salary structure, ensuring a well-rounded employment experience. You can choose from a variety of plans, including individual health insurance, senior citizen health insurance and more, based on your specific needs.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It may contain outdated data and information regarding the Insurance industry and products. It is advised to verify the currency and relevance of the data and information before taking any major steps. ICICI Lombard is not liable for any inaccuracies or consequences resulting from the use of this outdated information.