The definition of the word perquisite is given in sec.17(2) of the Income-tax Act, 1961 (the Act). There are six items –

Rent free accommodation

Accommodation at concessional rent

Benefit or amenity to specified employees

Employee’s obligation paid by employer

Life insurance or annuity of the employee

Fringe benefit or amenity as may be prescribed

The proviso to sec. 17(2) grants exemption to the medical benefits under specified circumstances.

It will be noted that the benefit or amenity stated in sub-clause (iii) is taxable only in the hands of specified employees which are –

Director-employee

An employee having 20 per cent or more of voting power in the employer-company.

An employee drawing salary in excess of Rs. 50,000/- p.a. from A.Y.2002-2003. (earlier limit Rs.24,000/-).

The benefit or amenity is taxable only when it is provided either free of cost or at a concessional rate. It means a personal convenience or facility.

Employer’s contribution to certain specified funds are excluded from the definition of perquisite. These funds are Recognised Provident Fund, Approved Super Annuation Fund, Deposit Linked Insurance Fund etc.

There are two important benefits which are governed directly by Sec.17(2) and hence there are no rules for their valuation. These are medical facilities and Employees’ Stock Options.

Medical Facilities : In this regard there are following categories

Medical Treatment in India

Medical Treatment outside India

Medical Insurance Premium

The words family, hospital and treatment have been defined. The exemptions depend on various factors such as the hospital maintained by the employer, the hospital maintained by Govt. or Local authorities, other approved hospitals, approved diseases and so on. As regards treatment outside India, the relevant factors are the expenditure permitted by Reserve Bank of India, expenditure on the patient himself and accompanying person, salary of the employee (depending upon whether it exceeds Rupees Two lakhs or not) and so on. Medical Insurance Premium paid by the employer has been exempted by Circular No. 603 dtd. 6-6-91. This is over and above the expenditure on treatment.

Stock Options: This applies only to specified employees. Prior to 1-4-1999 it was governed by CBDT Circular No. 710 dtd. 24-7-1995.

For further details a readers may refer to the article by Rajesh Kothari.

Rule 3(1) Residential accommodation

The valuation of this perquisite is as under –

For the first time the word ‘accommodation’ has been expressly defined which includes a hotel, motel, service apartment, guest house, caravan, mobile home, ship or other floating structure. Thus it is not necessarily a house.

Accommodation situated in ‘remote areas’ does not attract any perquisite valuation. Remote area is defined as an area that is located at least 40 kms. away from a town having a population not exceeding 20,000. What is relevant is accommodation in remote area and not the place of work.

There is no separate rule for concessional rent. In all the cases, rent actually recovered from the employee is to be deducted from the value of perquisites.

If on a transfer of an employee, he is provided an accommodation at two places a relief is provided in the sense that for 90 days the value of only 1 house is taxable- obviously, the lower of the two.

Employees of public sector undertakings and private sector concerns are now on par with each other.

In case of hotel accommodation, the valuation is to be taken only when the stay in a hotel exceeds 15 days. If the period exceeds 15 days, there is no basic exemption for 15 days. Value for the entire stay is to be added. The expression ‘hotel charges’ may give rise to controversies as to whether it would include charges other than pure rent.

The word ‘salary’ for the purpose of this rule has been defined to include salary received from one or more employers. Salary includes pay, allowances, bonus or commission or any other monetary payment. Dearness allowance is included only if it enters the calculation of retirement benefits. The following points are to be noted as regards salary:

Salary is to be considered on ‘due basis’.

Salary relating to the relevant period is to be considered; i.e., the period for which the accommodation was provided.

Salary from all the employers is to be aggregated. CIT vs. Mohanlal Jalan (1989) 176 ITR 478(Bom.). This is understandable when tax planning is sought to be done within the group companies. However, if the employers are unrelated to each other, such aggregation is unfair.

If the tax payable by the employee is borne by the employer, it is obviously to be added to the salary.

Having determined the value of accommodation, the following addition is to be made if furniture is provided –

Other points –

In case, an employee has kept any interest-free deposit with the employer then notional interest based on the prevailing lending rates is to be treated as rent recovered so as to reduce the value of perquisite.

Since there is no valuation for concessional rent, the factor of actual rent vis-à-vis fair market rent is not relevant. Thus, if the employer pays actual rent of Rs.1,500/- per month, only this figure is relevant even if the fair market rent is Rs. 3,000/- p.m.

It has been clarified in Circular No. 9/2003 dt.18-11-2003 for A.Y. 2004-2005 that project site is a site up to the date of Commissioning and in case of hotel accommodation, services forming integral part of accommodation are to be valued under this sub-rule. If these services are not integral part, the same are to be valued under residual clause.

Rule 3(2) Use of Motor Car

The new Rule covers the provision of car etc., to the members of the household as well.

The criteria for classification of cars has been as follows:

Valuation:-

If car is used wholly and exclusively in the performance of his official duties, no value is to be added to the perquisite. If the use of car is exclusively for personal purposes, the actual amount of expenditure will be the value of perquisite. If it is for mixed purpose, the value of perquisite will be Rs. 1,200 in case of small car (Rs. 1,600 in case of big car) is Rs. 600/- is to be added to the above determination in all the above cases, if driver is provided by the employer.

The new Rule prescribes the valuation in respect of normal wear and tear at 10% per annum of actual cost, in case the car is owned by the employer.

When more than one car is provided for official as well as personal use, only one of them will be now regarded as for the mixed use. All the other cars will be treated as exclusively for personal use. In the old rule, perquisite for only one car was to be taken.

Valuation in respect of other conveyances –

The Rule is fairly simple. In case of a mixed use, a higher deduction (more than Rs. 600) can be claimed by the employee if proper documents are maintained.

The Rule is silent about the situation where the vehicle is owned by the employer. This lacuna needs to be corrected.

The Rule stipulates that the flat rates of valuation are per calendar month. Therefore fractions of a month are to be ignored and only completed months are to be taken.

The Rule is silent about the car that is owned by the employee and used only for personal purposes but the employer reimburses the maintenance and running expenses. This again would fall in sub-clause (iv) of sec. 17(2), and entirely taxable.

It has been clarified in the circular No.15/2001 dt. 12-12-2001 that where car is owned by the employee and a conveyance allowance is regularly paid to
the employee, the same is taxable/exempt as per section 10(14).

Rule 3(3) Services of Domestic Servant

Previously, the services of domestic servants provided by the employer viz., gardener, sweeper, watchman were to be valued at a flat rate of Rs.120 per month per person which was very nominal. There was no provision for other domestic servants. This was subject to the provisions of sec 17(2)(iv) where the servant was engaged by the employee.

New Rule –

In the category of servants, a ‘personal attendant’ has been added. It is to be noted that a ‘personal attendant’ is different from a ‘personal assistant’.

As against the flat rates, the new Rule now provides for the valuation at the actual cost incurred by the employer.

Similarly services or amenities provided to the members of the employee’s household are also covered.

Rule 3(4) Supply of gas, electric energy or water

New Rule –

The value of the benefit to the employee resulting from the supply of gas, electricity or water for his household consumption shall be the actual cost to the employer.

As far as supplies procured from outside agencies are concerned, the position remains the same; i.e., actual amount paid.

In the case of own production, it is to be calculated at the manufacturing cost (per unit?). This is an inadvertant lapse; as the intention obviously is applying the rate per unit to the units consumed.

No separate provision is made for mixed consumption. This then, may necessitate maintenance of records.

Other points –

New Rule -

This benefit has been classified as a ‘fringe benefit’ and thus falls u/s 17(2)(vi).

Under the new rule, loans given to any member of employee’s household are also covered.

The rule states that the loan should be ‘made available’. Thus the loan need not necessarily be granted or provided by the employer only.

In case of loan given for the purpose of medical treatment in respect of diseases specified in the new Rule 3A or where the amount of loans are petty, not exceeding in the aggregate Rs. 20,000/-, there would be no taxable perquisite. This does not mean that there is a basic exemption of Rs. 20,000/- Therefore if the aggregate of loans is say, Rs. 35,000/- , the whole amount will be considered for valuation of perquisite.

In case where the loan is taken for medical treatment and subsequently if some amount is reimbursed under any medical insurance scheme, the exemption would not be available for such reimbursed amount.

Unlike the old rule, the new rule specifically provides for the method of valuation of such perquisite as is elaborated below:

In case of interest free or concessional loan, a sum equal to the simple interest on the maximum outstanding monthly balance, reduced by the interest paid would be the value of perquisite. The prescribed interest rates for various types of loans are as follows:

As per Notification No. 8/2004 dt.12-1-2004 the 10% and 13% rates have been replaced by the interest computed at the rate charged per annum by the State Bank of India as on the 1st day of relevant previous year in respect of loans for the same purpose advanced by it.

Other points –

The benefit is a taxable perquisite in the hands of all employees.

In case of loans made available at concessional rate (less than prescribed rate) and repayment is being done in monthly instalments it is advisable to adopt the EMI system.

Treatment of loan to a shareholder who is also an employee – In case it is treated as deemed dividend u/s 2(22)(e) provisions of sec. 17(2) will still be attracted and interest element will be taxed as perquisite. CIT vs. T.P.S.H Selva Saroja (2000) 244 ITR 671 (Mad.)

The following points have been clarified in Circular No. 15/2001 dt. 12-12-2001 –

Housing or conveyance loans must be for acquiring capital assets and not for repairs.

Where any medical insurance reimbursement is received, the perquisite value at normal rates shall be charged from the date of reimbursement on the amount reimbursed, but not repaid against the outstanding loan taken specifically for this purpose.

The sub-rule shall also apply to loans outstanding as on 1st April, 2001 (if the new rule is applied from that date) or 1st October, 2001 (if the new rule is applied from that date).

New Rule –

This benefit has been classified as a ‘fringe benefit’ and thus falls u/s 17(2)(vi).

According to the new rule if any holiday is availed of by the employee or any member of his household, other than leave travel concession covered under Rule 2B [exempt u/s 10(5)] and the expenses are met by the employer it would amount to a taxable perquisite.

The expenses covered are –

Value of travelling (ticket fare to the place of holiday)

Value of touring (expenses on local trips at the place of holiday)

Value of accommodation

And any other expenses.

The valuation will be as under –

The value of travelling, touring, accommodation and any other expenses paid, borne or reimbursed by the employer the amount actually incurred is the perquisite.

Where the facility is maintained by the employer and is not uniformly available to all the employees, the value of the benefit shall be taken to be the value at which such facilities are offered by other agencies to the public and actual cost incurred by the employer need not be computed.

All expenses, if borne by the employer, directly or indirectly on any household member of the employee accompanying him on an official tour will be taxed as a perquisite.

If official tour is extended as a vacation, the value of such fringe benefit will be limited to the expenses incurred in relation to such extended period of vacation. It is important to note that return fare of the employee will not form part of fringe benefit.

Other points –

It is a taxable perquisite in the hands of all employees.

In case where the employees of the same organisation travel in a group, the aggregate expenditure may be allocated on a pro rata basis.

New Rule –

If free meals are provided during office hours at the office or business premises or through prepaid non transferable vouchers usable at eating joints are not taxable if the cost per meal does not exceed Rs. 50. Meals will include both lunch and dinner.

As per the circular No. 15/2001 dt. 12-12-2001, it seems that Rs. 50/- is like a basic exemption and if cost per meal is Rs. 70/-, the value of perquisite may be Rs. 20/- only.

If the meals are provided beyond office hours or outside the office/business premises the exemption is not available.

The rule does not apply to the free meals provided in a remote area or at an off shore installation. The expression remote area has been defined in Explanation 5 to Rule 3.

Other points –

If the meals are provided in a canteen run and maintained by the employer the basis of valuation is cost to the employer. However, there are no clear guidelines for determining the cost per meal. The difficulties in calculating the cost are self-evident.

Tea or snacks provided during working hours are exempted. There is no mention of coffee and other beverages.

The rule applies to the meals provided only to the employee. It does not cover meals provided to the members of his household. This may be covered by clause (iv) of sec. 17(2).

As in the past the allowances would continue to be taxable.

When an employee incurs the expenditure on meals and gets reimbursed from the employer it might become taxable under sec 17(2)(iv) as discharge of obligation.

This is also a fringe benefit contemplated in sec. 17(2)(vi) and hence taxable for all employees.

New rule –

The gift may be in the form of a direct gift or a voucher or token in lieu of such gift. It is implied that it is received from the employer. Gift to any member of the household is also covered.

The rule covers gifts on ceremonial occasions or otherwise. Therefore the occasion is immaterial.

There is a monetary limit of Rs. 5,000/-. The value of gift ‘below Rs. 5,000/-‘ is exempt. This is not a basic exemption. Hence gift of Rs. 5,000 and above will be entirely taxable.

The basis of valuation is the value of the gift and not cost to the employer. Therefore expenses incidental to the gift may not be includible.

Rule 3(7)(v) Credit Card facilities

This is the next in the series of fringe benefits taxable in the hands of all employees – sec.17(2)(vi).

New Rule –

The value of the perquisite is the amount of expenditure incurred by the employee or any member of his household which is charged to a credit card provided by the employer or otherwise and paid or reimbursed by the employer. Add – on cards are also covered.

Expenses on credit card will include membership fees and annual fees as well.

The expression ‘provided by the employer’ is to be construed in a wider sense. This is indicated by the use of the word ‘or otherwise’.

If the credit card is used exclusively for the purposes of office expenses, there is no perquisite. It may include expenses on ‘entertainment’. However, if the credit card is used for mixed purposes (official as well as personal), then the actual expenses are to be segregated. The membership and annual fee in this case will be regarded as a perquisite.

The basis of valuation is ‘cost to the employer’.

Maintenance of records – In respect of the expenses incurred wholly and exclusively for official purposes certain conditions are prescribed in the rule itself. Basically it requires maintenance of records and documents.

As per Explanation 2 to Rule 3 ‘entertainment’ includes hospitality of any kind and also business gifts.

Rule 3(7)(vi) Club facilities –

This is a ‘fringe benefit’ taxable in the hands of all employees.

New Rule

If the club membership is for the recreation of the employee or his family, it is his taxable perquisite. If on the other hand, the employee joins a club at the instance of employer for promoting the employer’s business, then there may not be any perquisite. This is a settled principle.

If the expenditure on the club paid or reimbursed by the employer results in the benefit to the employee or any member of his household, it is a perquisite. This will include annual or periodical fee to the club, its admission fee, membership fee, etc.

Value of the perquisite is actual expenditure paid or reimbursed by employer, except the following –

Initial fee paid by employer for acquiring corporate membership;

Amount recovered from the employee.

Other points –

As stated earlier, if the expenditure is wholly and exclusively for employer’s business, it is not a perk. But in that case, complete records and documents as stated in the sub rule are required to be maintained – such as date and nature of expenditure, its business expediency, employee’s certificate that it was wholly and exclusively for business, certificate from supervising authority to that effect, etc.

Similarly, if the expenditure pertains to entertainment, then the details will include nature and purpose of entertainment, persons entertained, business expediency, etc.

It is worth noting that expenditure on health club, sports and similar facilities provided uniformly to all employees by the employer is not to be regarded as perquisite. The word ‘provided’ means ‘made available’ and facilities need not be owned by the employer.

It has been clarified in the circular No. 15/2001 dt. 12-12-2001 that annual and periodical club fees are chargeable as perquisite and that initial one-time deposits or fees for corporate or institutional membership, where the benefit does not remain with a particular employee after cessation of employment, are exempt.

Rule 3(7)(vii) Use of employer’s movable assets

This is taxable in the hands of all employees. The sub rule 3(7)(vii) – is fairly simple. There was no corresponding provision earlier.

New Rule –

If any movable asset is allowed to be used by the employee or any member of his household, 10% per annum of the actual cost of such asset belonging to the employer shall be the perquisite value. In case the asset is hired by employer, then the rent paid will be the perquisite value.

This sub rule does not apply to the movable assets already covered (e.g. furniture and car) in this Rule; and also to the laptops and computers.

Other points –

It is implied that the word ‘use’ refers to personal use. It applies only to movable assets.

Asset 'belonging to employer’ will include asset owned or taken on lease or hire purchase by the employer.

It has been clarified in the circular No.15/2001 dt. 12-12-2001 that the value of perquisite for an asset used for
more than 10 years would be taken as Nil.

This is ‘fringe benefit’ taxable in the hands of all employees. There was no corresponding provision earlier.

Salient features of New Rule

If any movable asset belonging to the employer is directly or indirectly transferred to the employee or any member of his household, then the perquisite value is as follows –

Actual cost

Less 10% p.a (straight line method) towards wear and tear for each completed year

Less amount recoverable from employee.

In respect of computers and electronic items, the above said wear and tear is to be calculated @ 50% p.a on reducing balance;

whereas for motorcars, it is 20% p.a (w.d.v).

The amount capitalized in the intervening years, will also be duly considered.

Other points –

CBDT vide its Instruction No. 1145 dtd. 27-1-1978 had sought to tax this perquisite in the hands of specified employees. However, the Tribunal in the case of A.K.Chellani vs. ITO (1983) – 3 ITD 194 had held in the favour of the assessee that there was no perquisite.

Since we have to take completed years, parts of the financial years are to be ignored. This does not mean a financial year but the period commencing from the date of purchase of the asset.

In SLM, there is a possibility of asset value becoming nil; whereafter, there is no perquisite.

In Circular No. 15/2001 dt. 12-12-2001, it is clarified that electronic gadgets in this case means data storage and handling devices like computer, digital diaries and printers. They do not include household appliances (i.e., white goods) like washing machines, microwave ovens, mixers, hot plates, ovens etc.

Rule 3(8) Other Benefits/Amenities

This is a residual clause. If any other benefit or amenity, service, right or privilege is provided by the employer under an arm’s length transaction, the cost to the employer shall be the value of perquisite.

However, this will not apply to expenses on telephones including a mobile phone actually incurred on behalf of the employee by the employer.

"Arm’s length transaction" means a transaction between independent parties based on commercial considerations, at fair market value.

It is not clear as to whether the expenditure on telephone will also include cost of telephone instrument.

Provision of motor car and other conveyances

When the car is used exclusively for official purposes and the maintenance/running charges of which are met by the employer, the value of perquisite will be taken as nil if the following records are maintained.

The employer must maintain complete details of journey undertaken for official purposes. Such details may include details regarding (i) date of journey, (ii) destination, (iii) mileage, and (iv) amount of expenditure incurred thereon.

The employee must give a certificate that the expenditure was incurred wholly and exclusively for the performance of his official duty.

The supervising authority of the employee, wherever applicable, must give a certificate to the effect that the expenditure was incurred wholly and exclusively for the performance of official duties.

It may be noted that the car can be owned by employer or employee or it may be hired by the employer.

The records have to be kept by the employer, but the certificate has to be given by the employee and his supervising authority.

Where the employer has provided a car to an employee and running/maintenance expenses are borne by the employee in that case no records are required to be kept.

In case of mixed use; i.e., for personal and official purposes of a car owned by the employer, no records need to be kept.

In case car is owned by the employee, a deduction of Rs. 1,600/Rs.1,200 (Big/small car) is made from the maintenance and running expenses incurred by the employer. In case of driver’s salary this amount is Rs. 600/-. If employee wants to claim higher deduction, he has to keep all the records mentioned above.

Department in its circular No. 15/2001 dt. 12-12-2001 has clarified that where fuel and upkeep cost of the employee’s car is borne or reimbursed by the employer, the amount reasonably attributed to business use is not to be charged as perquisite. For this, user details in the form of log books, odometer reading, etc., should be maintained.

Where such supply is made from the resources owned by the employer, the following records in respect of each of the employees are required to be kept:

Cost per unit to the employer

Number of units consumed by the employee

The maintenance of records in this case is laborious and the records have to be kept depending on the circumstances.

Educational facilities

In case of educational institution maintained and owned etc. by the employer cost per child is required to be computed to ascertain whether it is less than Rs. 1,000/-. Suitable records should be kept to ascertain the total cost incurred during the earlier year and thus cost per child can be computed by dividing number of children.

Credit Card facilities

In this case, where expenses are incurred wholly and exclusively for official purposes, the following records need to be kept.

Complete details in respect of such expenditure is maintained by the employer which may, inter alia, include the date of expenditure and the nature of expenditure.

It is certified by the employee that such expenditure was incurred wholly and exclusively for the performance of official duty;

The supervising authority of the employee gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties;

Where an employee incurs expenditure on entertainment and claims the same to have been incurred wholly and exclusively in the performance of his duties, details of such entertainment expenses, inter alia, include the nature and purpose of entertainment and persons entertained.

Thus, the onus is cast on both, employer and employee for maintenance of records.

Club facilities

In this case, where expenses are incurred wholly and exclusively for official purposes, the following records need to be kept:

complete details in respect of such expenditure is maintained by the employer which may, inter alia, include the date of expenditure, the nature of expenditure and its business expediency;

it is certified by the employee that such expenditure was incurred wholly and exclusively for the performance of official duty;

the supervising authority of the employee gives a certificate for such expenditure to the effect that the same was incurred wholly and exclusively for the performance of official duties;

where an employee incurs expenditure on entertainment and claims the same to have been incurred wholly and exclusively for the performance of his duties, details of such entertainment expenses, inter alia, include the nature and purpose of entertainment, persons entertained and business expediency for such entertainment. In this case also, the clarified department has that ‘entertainment ‘ will include meals also.

Thus, the onus is cast on both, employer and employee for maintenance of records.

Form 12BA

This form gives details of perquisites, other fringe benefits or amenities and profits in lieu of salary provided by the employer. These details are to be given in Form 12BA where salary paid or payable is more than one lakh and fifty thousand. In case salary paid/payable is not more than Rs. 1.5 lakhs, these details can be given Form No. 16 itself.

General