Understanding Perquisites and Their Exemptions under Income Tax Laws (India)

In the ever-evolving landscape of income tax laws, the term “Perquisite” plays a significant role, especially for salaried individuals. As part of the comprehensive taxation structure, perquisites represent benefits or amenities provided by an employer to an employee in addition to salary or wages. These may be monetary or non-monetary in nature and are often used by companies to attract and retain talent.

Let’s explore the definition, types, and exemptions related to perquisites as per Indian Income Tax Laws.

What is a Perquisite?

The term ‘Perquisite’ is defined under Section 17(2) of the Income Tax Act, 1961. It includes any benefit, amenity, or facility provided by the employer to the employee in addition to the salary.

Examples of Perquisites:

Rent-free accommodation
Company car
Free or concessional education for children
Reimbursement of medical expenses
Employee Stock Option Plans (ESOPs)
Club memberships
Interest-free loans

Perquisites are taxable under the head “Salaries”, and the employer is liable to deduct TDS (Tax Deducted at Source) on the value of taxable perquisites.

Types of Perquisites

Perquisites can be categorized into three main types:

Taxable Perquisites – Fully taxable under “Income from Salaries”
Example: Rent-free accommodation, club membership fees paid by the employer
Tax-Free (Exempt) Perquisites – Fully exempt under specific provisions
Example: Free medical treatment in government hospitals
Partially Taxable Perquisites – Partially exempt based on limits or conditions
Example: Employer’s contribution to provident fund beyond ₹2.5 lakh is taxable

Perquisites Exempt from Income Tax

The Income Tax Act provides several exemptions for perquisites, either fully or conditionally. Here are the key tax-free perquisites available to employees:

1. Medical Facilities (Section 17 & Rule 3A)

Medical treatment in government hospitals, employer-maintained hospitals, or approved hospitals for prescribed diseases is exempt.
Reimbursement of medical expenses up to ₹15,000 (applicable until FY 2018–19) was exempt.
Medical insurance premium paid by the employer is also exempt.

2. Leave Travel Concession (LTC) – Section 10(5)

The value of LTC provided to the employee (and family) is exempt twice in a block of 4 years.
Exemption applies only for domestic travel expenses (rail, air, bus).
Food and accommodation expenses are not exempt.

3. Rent-Free Accommodation – Section 10(13A) & Rule 2A

Rent-free accommodation is exempt for government employees during service.
Accommodation in remote areas is also exempt.

4. Free or Subsidized Education

Education facility for children of employees is exempt if:
- Provided in an employer-run educational institution
- Value does not exceed ₹1,000 per month per child (max 2 children)

5. Employer’s Contribution to Provident Fund

Contribution to Recognized Provident Fund (RPF) is exempt up to 12% of salary.
Interest credited to RPF is exempt up to 9.5% per annum.

6. Use of Employer’s Car

If used wholly for official purposes and documentation is maintained, the perquisite is fully exempt.
Partial exemption is available if the car is used both for official and personal purposes.

7. Concessional Loans

Interest-free or concessional loans up to ₹20,000 are exempt.
Loans for medical treatment of specified diseases are also exempt, irrespective of the loan amount.

8. Scholarships to Children – Section 10(16)

Scholarship granted by the employer to the employee’s children is fully exempt, provided it is based on merit or need.

9. Perquisites to Government Employees Posted Abroad

Value of perquisites received by government employees posted outside India is fully exempt.

10. Accommodation in Remote Areas – Rule 3

Perquisite value of accommodation in a remote area (defined as beyond 40 km from town/city) is fully exempt.

11. ESOPs for Startups – Section 80-IAC & 17(2)(vi)

ESOPs allotted by eligible startups are not taxed at the time of exercise, but deferred to:
- 5 years from year of allotment
- or till employee leaves the company
- or till they sell the shares — whichever is earlier

Key Legal References

Section 17(2) – Defines perquisites
Section 10 (Various clauses) – Provides exemption provisions
Rule 3 – Valuation of perquisites
Rule 3A – Medical perquisite valuation
Section 192 – TDS on salary (including perquisites)

These provisions are supported by notifications, circulars, and case law interpretation by CBDT and courts.

Mnemonic :

Mnemonic to Remember Tax-Free Perquisites: “SMART HELP ME”

Here’s a simple mnemonic to recall the major tax-free perquisites:

S – Scholarships to children
M – Medical facilities (Govt/approved hospitals)
A – Accommodation in remote areas
R – RPF Contributions (within limits)
T – Travel (LTC exemptions)

H – Health insurance paid by employer
E – Education (₹1,000 per child in employer school)
L – Loans for medical treatment
P – Perks to government staff abroad
M – Motor vehicle used for official purpose
E – ESOPs in eligible startups (deferred tax)