Taxation is a crucial aspect of financial management. One important component of income tax is perquisites in income tax, often referred to as perks or fringe benefits. These are additional benefits an employer provides to an employee over their regular salary.
These benefits can be monetary or non-monetary and are crucial to an employee’s compensation package. Read on to discover the meaning and types of perquisites in income tax.
What are the perquisites in income tax?
These perks include rent-free accommodation, company-provided cars, loans at concessional rates and health insurance.
Some perquisites are taxable, while others may be tax-exempt, depending on their classification under the Income Tax Act. The taxability of these benefits depends on their nature and the conditions under which they are provided.
Types of perquisites in income tax
The types of perquisites in income tax can be classified into the following key categories:
-
Taxable perquisites
These are benefits provided by the employer that are fully taxable as part of an employee’s income, including:
- Rent-free accommodation provided to an employee: If an employer provides accommodation, the value of the benefit is added to the employee’s taxable income.
- Loan to employees at a concessional rate: If an employer provides a loan at a lower interest rate than the market rate, the difference in interest is considered a taxable perquisite.
- Medical allowance: The amount is taxable if an employer reimburses medical expenses without following the exemption rules.
- Monetary perquisites: These include allowances or reimbursements for personal expenses such as travel, entertainment or club memberships.
-
Perquisites taxable only by employees
These perquisites are added to the taxable income of employees but are not taxed at the employer’s end. Examples include:
- Insurance premium paid by the employer: If an employer pays for an employee’s individual health insurance, it may be considered a taxable benefit unless it qualifies for exemption.
- Fringe benefits: Certain employer-provided benefits, such as stock options or bonuses, may be taxable only in the hands of employees.
Conclusion
Understanding the perquisites types in income tax is crucial for employees and employers. While some perquisites provide tax exemptions, others may increase an employee’s taxable income. Maintaining proper documentation and understanding tax regulations ensure accurate reporting, help avoid unnecessary tax burdens and enable more effective compensation structuring.
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.