Taxability for Specified Employees: Any employee working in the government or private sector is liable to pay taxes under the Income Tax Act of 1961. Similarly, specified employees from these sectors are entitled to some benefits and responsible for paying taxes on them, which will be discussed below in this article.
- Who are the Specified Employees?
- What are the Perquisites?
- Valuation of Perquisites According to the Income Tax Rules of India
- Rent-free Unfurnished Accommodation Provided by the Employer
- Rent-free Furnished Accommodation Provided by the Employer
- Hotel Accommodation Sponsored by the Employer
- Household Requirements Such As Gas Supply, Electricity And Water Supply Perquisites
- Motor Car Perquisite Provided By The Employer
- Other Fringe Benefits Which Are Valued Under Perquisites
- Calculation of Value of Interest-Free Loan
- Perquisites that are Exempted from Income Tax
- What are Allowances?
- Allowance on House Rent or HRA
- Allowance for Leave Travel
- Exempted Allowances under Section 10(14)(ii) of the Income Tax Act
The employees working in the government or private sectors can be categorized as Specified Employees when –
- The employee is the director of the company.
- The employee has a substantial interest in the company, which means that he/she is a beneficial owner of the equity shares that carry 20% or more than 20% of voting power in the company.
- The employee has a salary that exceeds Rs. 50,000, which includes the basic pay and all other taxable allowances except for –
- Other all non-monetary benefits.
- All monetary payments are exempted under Section 10 of the Income Tax Act 1961.
- All other deductions made from the salary under Section 16 of the Income Tax Act.
Perquisites are provisions, facilities, or services provided to the employee by the employer and the cost of which is paid by the employer.
As per section 17(2) in the Income Tax Act, “perquisite” is defined as a benefit that includes the following services, provisions, benefits and amenities:
- The value of rent-free accommodation or accommodation at a concessional rate provided to the assessee by his/her employer as per section 17(2)(i) and section 17(2)(ii).
- Any amount of money paid by the employer due to any compulsion should be paid by the assessee as stated in section 17(2)(iv).
- Any amount of money payable by the employer, directly or through a fund other than a recognized or approved superannuation fund or a deposit-linked insurance fund, or provident fund or to effect a contract for an annuity as stated in section 17(2)(v).
- The value of any sweat equity shares or specified security allotted or transferred directly or indirectly by the employer or former employer to the assessee which is free of cost or at a concessional rate, as mentioned in section 17(2)(vi).
- Any amount of money contributed to an approved superannuation fund by the employer, to an extent where the amount exceeds Rs. 1,50,000 as per section 17(2)(vii).
- The value or cost of any other fringe benefit or amenity specified in section 17(2)(viii).
The taxable value or amount of all the perquisites is basically calculated on the cost that the employer bears. However, there are rules written in Rule 3 of the Income Tax Rules for India for the valuation of specific perquisites.
- For Central Government and State Government Employees – The amount for taxation for unfurnished accommodation of these employees is the license fee as determined by the central or state government reduced by the rent paid or payable by the employee if any.
- For Employees from the Private or Non-governmental Sector and Companies – The prerequisite for this category is based or determined on the population of the city or town in which the employee is working and living in. For this purpose, the census of 2001 is considered to get the population count. The perquisite value for unfurnished accommodation, when the employer owns the property, is then grouped in the following manner –
- For cities with a population of less than 10 lakh people – 5% of the employee’s salary is the perquisite value.
- For cities with a population between 10 to 25 lakh people – 10% of the employee’s salary is the perquisite value.
- For cities exceeding the population of 25 lakh people – 15% of the employee’s salary is the perquisite value.
If the accommodation is leased or rented by the employer, then the perquisite value is the actual amount of money which is the rent or lease amount paid or payable by the employer for the property or 15% of the employee’s salary whichever is lower. However, in all the scenarios mentioned above, if any amount of money is paid by the employee as rent, it gets deducted from the amount taken for taxation.
The value of the perquisite of furnished accommodation is calculated in the same process as that of the unfurnished accommodation separately for both government and private sector employees. Along with that, if the employer owns the furniture, its cost is added to the rent at a 10% per annum rate. In other circumstances, when the furniture is hired from any other third party, then the actual hire charges are levied. The furniture category of such accommodation includes refrigerator, television, air conditioner, radio and other household appliances. For any of the above expenditures, if any amount of money is paid or payable by the employee, it must be deducted from the actual amount.
Hotel accommodation will be considered a prerequisite only when the employee is accommodated in a hotel for 15 days or more. If the stay is less than 15 days and is on account of transfer from one place to another of the employee, then no prerequisite will be raised.
For furnished hotel accommodation, 24% of the employee’s salary or the charges paid or payable to the hotel, whichever is lower, will be considered for taxation. Any amount paid by the employee will be deducted from it. However, for unfurnished hotel accommodation, there is no tax levied on it.
According to Rule 3(4) of the Income Tax Act, this is determined based on the cost paid by the employer to the agency supplying these facilities minus any amount of money paid or recovered from the employee. Otherwise, if the employer provides these supplies from his own resources, the taxable amount is the manufacturing cost per unit of the employer’s supplies. Similarly, any payment paid or recovered from the employee should be deducted from the manufacturing cost per unit. However, other expenses such as mobile phone bill or telephone bill are exempted from this perquisite.
When an employee owns the motor car, but the maintenance and running expenses are reimbursed by the employer
- If the car is used entirely for official works: It will not be considered taxable regardless of the cubic capacity of the engine.
- If the car is used for both professional and private use: In this case, the amount will be the expenses that are incurred by the employer, reduced by the amount recovered from the employee and the specified amounts claimed when certain conditions are fulfilled.
When the motor car owned or hired by the employer and the maintenance and running expenses are reimbursed by the employer
- If the car is used exclusively for official works: It will not be considered for taxation if specified conditions are satisfied.
- If the car is used only for personal use: The taxable amount will be the actual expenses borne by the employer, which includes the hire charges and driver’s salary. Also, if the employer owns the car, then 10% per annum of the actual car cost is added to the taxable amount. However, any amount or charges recovered from the employee is deducted.
- If the car is used for official and personal uses both: In this case, the perquisite will be taxable under the specified conditions, and they are –
- If the employer reimburses running and maintenance cost: Cubic Capacity up to 1.6 liter – Rs 1,800 p.m. + Rs 900 p.m. (If chauffer is provided). Cubic Capacity more than 1.6 litre – Rs 2,400 p.m. + Rs 900 p.m. (If the chauffeur is provided).
- If the employee reimburses running and maintenance cost: Cubic Capacity up to 1.6 liter – Rs 600 p.m. + Rs 900 p.m. (If the driver is provided). Cubic Capacity more than 1.6 liter – Rs 900 p.m. + Rs 900 p.m. (If a chauffeur is provided).
When the employee owns any other automotive conveyance, but the maintenance and running expenses are reimbursed by the employer
- If the car is exclusively used for official purposes: It will not be considered for taxation if the engine’s cubic capacity is less than 1.6 liter.
- If the car is used for both of official and private uses: If the employer reimburses running and maintenance cost, then if –
- Cubic Capacity up to 1.6 liter – Actual expenses less than Rs 900 p.m.
- Cubic Capacity more than 1.6 liter – Not applicable.
The facility of house help, personal attendant, gardener, cook, watchman or sweeper
For the facility of domestic servant or personal attendant or other helpers such as gardener, sweeper or watchman, the salary of these provisions is paid by the employer, and any amount of money paid or payable by the employee is deducted from the taxable amount.
Education at no cost or concessional rates as a perquisite which the employer bears
If the employee’s child studies in the educational institute owned and maintained by the employer, then the taxable amount is zero if the benefit’s cost is less than Rs. 1,000 per month of each child. If the amount crosses the Rs. 1000 mark, then the whole amount is considered for taxation and not just the balance remaining between the cost of education and Rs. 1,000. Otherwise, the cost of similar education in a similar institution in the locality or in a similar area can be considered for taxation. However, any money recovered or paid by the employee is deducted in this case as well.
Private journeys free of cost or at a concessional rate to the employee and his/her family
The value of such perquisite is calculated on the amount at which a general public of the country would get such facilities and services. Also, like any other perquisite, if any amount is paid by the employee or recovered from him/her, it is deducted from the taxable amount. This perquisite is available for employees whose employer is engaged in the carriage of passengers or goods. However, this perquisite holds nil value for an employee of the railways or airlines.
Interest-free loans or loans at a reduced interest rate: The taxable amount will be the interest for each month of the previous year on the maximum outstanding monthly balance remaining as on the last date of each month as specified by the State Bank of India on the first day of the previous year as decreased by interest recovered from the employee. Nothing is taxable if the amount of such loans does not exceed the aggregate of Rs. 20,000.
Such loans are given for medical treatment regarding diseases specified in rule 3A of the Income Tax Act,1961. Still, this exemption shall not apply to the loan when the amount has been reimbursed under any medical insurance scheme to the employee.
The interest rate levied by SBI as on the 1st day of the previous year on loan for a similar purpose is considered for interest calculation. This amount is to be calculated on the maximum outstanding monthly balance.
- Provision of free meals: These include the provision of food and non-alcoholic beverages, which are provided to the employee by the employer and whose cost is borne by the employer. Thus, any amount paid or payable by the employee is deducted from the cost paid by the employer. But, the service or amenity of food and non-alcoholic beverages will not be considered as a perquisite if they are provided to the employee during working hours at office premises or through some non-transferable vouchers valid at selected places or some other specific conditions as stated in Rule 3(7)(iii) of the Income Tax Act of India.
- Credit card issued by the employer: The expenses made by the employee or any of his/her family or household members, which are made on the credit card that is provided to the employee by the employer, are to be paid by the employer or reimbursed by the employer to the employee if the employee has already paid it. However, the expenses made solely and exclusively for official and work purposes will not be considered a prerequisite. Other certain circumstances mentioned in Rule 3(7)(v) will not be taken as perquisite.
- Cost of gifts, vouchers or tokens: Perquisite value of the price of the gifts, vouchers or token instead of which such gift can be received by the employee or any of his/her household members on specific occasions, or else from the employer, which shall be determined as the amount of money equal to the amount of such gift, voucher or token. This perquisite value is considered taxable. However, if the aggregate of such amounts in the whole of the previous year is less than Rs. 5,000, no tax is charged on it, or the perquisite amount is taken as zero or nil.
- Memberships of clubs issued by the employer: The perquisite value regarding the amount paid or reimbursed to the employee by the employer for the expenses made in a club by such an employee or any of his/her family or household members will be considered. However, any amount paid or recovered from the employee for the same will be deducted from the cost incurred by the employer. Also, no perquisite value will be taken if the expenditure is incurred exclusively for work and business purposes and if certain other conditions mentioned in Rule 3(7)(vi) are fulfilled.
- The value of any other benefit or facility provided to the employee by the employer shall be determined based on the cost to the employer minus the employee’s contribution to the price.
- The fair market value of any sweat equity or specified security share, on a particular date, on which the employee exercises the option, shall be determined in the following ways –
- When on the date of exercising the option, the company’s share is listed on a recognized stock exchange, the value of the fair market will be the opening price and closing price average of the share on the date on the said stock exchange.
- If on the date of exercising the option, the share in the company is unlisted on a recognized or trustworthy stock exchange, the fair market value will be such value of the company’s share as determined or fixed by a merchant banker on the specified date.
- The fair market value for any specified security, not being an equity share in a company, on the date on which the employee makes use of the option will be the values as determined by a financer on the particular date.
The following cases of perquisites are exempted from income tax, and they are discussed below:
- Perquisites allowed outside of India by the government to a citizen of India for services used outside India as per section 10(7).
- No perquisite will be considered if interest-free loans or loans with concessional interest rates are provisioned for medical treatment of certain specified diseases in Rule 3A of the Income Tax Act or where the loan does not exceed the aggregate of Rs.20,000.
- Insurance policy premiums and accident policies are exempted from taxation. For the contributions made by the employee to the superannuation fund, the contributions will be spared from tax only if the amount of contribution is less than Rs. 1,50,000 per employee in a single year.
- The judiciary judges, which includes the Supreme Court and the High Courts, union minister or leader of opposition in Parliament or an official of Parliament are provided with rent-free furnished official residences.
- Also, expenses on telephones, including a mobile phone incurred on behalf of the employee by the employer, will not be considered for perquisite.
Allowance is a specified amount or sum of money given besides salary regularly by employers for certain specific requirements of their employees. The allowances are usually included in the total income of an employee if not is exempted. The allowances are given over and above the basic salary and taxable according to the guidelines set by the Income Tax Act, 1961.
HRA is the house rent allowance in income tax. It implies that the salary component received towards the rent payment and is allowed to deduct from taxable salary under section 10-13A. The exemption is allowed the least for the following discussed below:
- Actual HRA received by the employee.
- 40 % of salary for non-metro cities or 50 % of salary if the rented property is in metro cities (like Mumbai, Delhi, Kolkata and Chennai).
- Actual rent paid less than 10% of salary.
The salary would include basic pay, dearness allowance (DA) and a fixed commission percentage for the above calculations.
The amount incurred on the travel on leave to any place in India by the shortest route to that place is exempt. However, this is for a maximum of the air economy fare or AC 1st Class fare (if the employee travels by any mode other than air) by such route, provided that the exemption will be available only for two trips completed in a time of 4 years.
Specific allowances given to the employee by the employer are exempt under section 10(14). All these exempt allowances are detailed in Rule 2BB of Income Tax Rules and are discussed below:
As per Section 10(14)(i), the following allowances are exempt regarding actual expenses incurred:
- Allowance granted for conveyance expenses incurred while performing duty, only if no free conveyance is arranged.
- Allowance granted for the cost of travel on tour or transfer purposes.
- Allowance given on tour or journey in connection with the transfer for the daily charges made by the employee.
- Academic, training or research allowance given in educational or research institutions.
- Allowance is given for expenditure on purchase/ maintenance of uniform for the performance of official duty.
- Allowance is provided for expenses incurred on a helper engaged for an official assignment.
The following are the exempted allowances under Section 10(14)(ii) of the Income Tax Act, 1961.
- Climatic allowance: The compensation given for working in high altitude or hilly areas.
- For Himachal Pradesh, Uttar Pradesh, Jammu & Kashmir, and various North East areas up to Rs. 800.
- Up to Rs. 7,000 p.m. for Siachen in Jammu and Kashmir.
- Deductions Up to Rs.300 for other high-altitude places at the height of 1000 meters or more, leaving the areas mentioned above.
- Border area allowance: As per Rule 2BB of Section 10 (14)(ii), Armed Forces personnel serving in the border area, remote places, or any disturbed areas are given allowance ranging from ₹200 to ₹1,300 per month.
- Tribal area allowance: A sum of ₹200 for those working in Tribal, Schedule or Agency areas such as Karnataka, Tamil Nadu, West Bengal, Orissa, Bihar, Madhya Pradesh, Assam, Tripura and Uttar Pradesh.
- Compensatory field allowance: A grant of ₹2,600 per month is granted under Section 10 (14)(ii), provided it is given to an individual for working in specified fields such as Nagaland, Manipur, Sikkim, Jammu & Kashmir, Himachal Pradesh, Uttar Pradesh, and Andhra Pradesh.
- Children education fund: The Section 10 (14)(ii) exemption is given to an allowance of ₹100 per child maximum of up to two children. Also, a hostel allowance can be claimed for ₹300/month for each child up to two children.
- Counterinsurgency allowance: A grant of ₹3,900/month in Section 10 (14)(ii) is directed for the employees in Armed Forces for counterinsurgency.
- Island duty allowance: An exemption of ₹3,250/month is for members of the Armed Forces serving in the Lakshadweep Group of Islands or the Andaman and the Nicobar Islands.
- Other allowances under section 10(14)(ii) of the Income Tax Act include:
- 800/month for underground mine workers.
- 4,200/month for employees in highly active areas.
- 1,000/month for workers in specified modified field areas.
- 1,600/month as transport allowance to physically disabled employees.
- 1,600/month as transport allowance for the employees to commute between homes and the office.