Working during the Covid-19 pandemic has come with its perks, such as working from home and not having to commute to office. But there are also many perks that you might have already been getting as part of your salary.
These are referred to as perquisites under the Income Tax Act and include salary reimbursements, stock options, accommodation, etc.
In addition, now companies are giving employees additional perks such as refund of expenses to buy table, chair and even high-speed broadband connections to enable them to work from home.
Let us delve deeper into the key points employees should be aware about some common salary perks and how they are taxed.
Basic principle
The basic principle for treating any facility as a perquisite or salary reimbursement lies in finding out whose obligation it is to pay for a particular expense.
If any expense is incurred by the employee in the course of performance of official duty, reimbursement of the cost is not taxable.
This could be for a car used for official work for which the maintenance and upkeep is done by the employee.
Telephone and mobile bills could also be included in this if the expense is for official purposes.
The value of a perquisite will be calculated by your employer and tax will be deducted at source.
In case the employer has not deducted the tax, the payment of tax will be your responsibility.
Most common perks
Accommodation
The law looks at taxation on a house as a perk through three lenses: Are you a Central/State government; are you a private sector employee; is the house provided owned by the employer or rented by the employer for you to use.
For unfurnished houses owned by Central or State governments, employees’ perquisite, which will be chargeable to tax under the head ‘Salaries’, is calculated as the licence fee determined by the government.
For non-government employees, the value of the perquisite for a house owned by the employer is calculated based on a proportion of salary. It is calculated as a percentage of the salary income based on the city in which you live in (see table).
Any rent recoverable or payable by the employee is deducted from the value of the perquisite of the house, irrespective of whether the house is owned by the employer or the employer rents out a house for the employee. The rent concession given to the employee is taxable as perquisite.
For example, if the rent payable or the licence fee (for government employees) or the value of house is ₹2 lakh, and the employee has paid a rent of ₹50,000. the value of perquisite from the concession in rent will be ₹1,50,000. For the purpose of calculating the value of the perquisite, salary includes the basic, all allowances, bonus/commission (if any) and any other monetary payment. Dearness allowance which goes into the calculation of retirement benefits will also be added to calculate salary.
However, the employer’s contribution to the Employees’ Provident Fund and exempt allowances will not be part of the salary used to calculate the value of perquisite of the house.
Furniture
The value of the perquisite for a furnished house will be calculated based on the cost of the furniture, fixtures and appliances given with the house.
The value for a financial year is calculated at 10 per cent of the total cost of the furniture, fixture and appliances paid by the employer, less any amount payable by the employee.
In case the furniture, fixtures and appliances have been rented, the rental amount paid by the employer, less any amount payable by the employee, is the value of the perquisite.
During the pandemic, many employers have given special allowances to their employees to buy furniture to enable them to work from home. Some employers have reimbursed the cost of such furniture fully or partly.
Any such sum paid to the employee is chargeable to tax as perquisite under the head ‘Salaries’.
Car
In case an employee gets a car from the employer and it is exclusively used for the purpose of employment, irrespective of whether the car is owned by the company or leased/rented, or owned by the employee, there is no perquisite chargeable to tax.
If the car provided by the employer (owned or hired) is used exclusively for the private use of the employee, the amount of expenses incurred by the employerto run and maintain the vehicle, and any remuneration paid to a driver by the employer are chargeable to tax as perquisite.
Any amount recovered from the employee on both counts will be reduced from the value of the perquisite.
In case the car provided by the employer (owned or hired) is used for personal as well as official purposes, then based on the cubic capacity of the car, a specified amount (see table) is chargeable to tax as the perquisite for the car.
There is a similar tax treatment (see table) for a car owned by the employee which is used for official and private needs.
ESOPs, Sweat equity shares
Many employers use employee stock option plans (ESOPs) as a means to reward their employees for their services.
For ESOPs or sweat equity shares, the value of perquisite is calculated based on the fair value of the shares on the date they are allotted to the employee.
If the employee exercises the right under the company’s ESOP policy, the value of the perquisite will be the difference between the fair value of the shares and the exercise price paid by the employee. In the case of sweat equity shares, the fair value of the shares is considered to be the value of the perquisite.
Usually, in the case of listed companies, the fair value is considered to be the average of the opening and closing market price of the shares of the company as on the date of exercising the stock option by the employee.
For unlisted companies, the fair value will be determined by the merchant banker for the purpose of calculating the perquisite.
This fair market value is used to calculate the capital gains on sale of the shares by the employee at a future date, where the cost of acquisition is the fair market value.
In Budget 2020, an exception was carved out for employees of eligible start-ups on taxation of ESOPs.
These start-ups should be eligible for deduction on profits under Section 80-IAC of the Income Tax Act.
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Employees of such start-ups who get ESOPs need to pay tax on perquisites either four years after the end of the assessment year (pertaining to the financial year) in which the ESOP was exercised by the employee; or at the time of sale of the shares; or when the person ceases to be the employee of the company, whichever is earlier.
In the case of employees of the eligible start-ups, either the employer has to deduct the tax or the person who got the ESOP has to pay the tax.
This has to be done within 14 days of any of the three events mentioned above.
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Employer contribution to EPF, Superannuation funds, NPS
In Budget 2020, the Centre made a few amendments to cap the tax-free element of employer contribution to the EPF, the National Pension System and approved superannuation funds.
If the cumulative employer contribution to these funds in a financial year is more than ₹7.5 lakh, the amount exceeding ₹7.5 lakh is taxable as perquisite.
In addition to this, any return in the form of dividend or interest on the portion of the employer contribution exceeding ₹7.5 lakh is also taxable.
Food
Free food provided by the employer at office is taxable as a perquisite, irrespective of whether it is through food coupons or otherwise. If the employer recovers some amount for this purpose from the employee, the value of the free food taxable as perquisite will be reduced by that amount. However, if the value of the free food provided by employer at office, or through paid vouchers usable only at eating joints is up to ₹50 per meal, it is tax-exempt if one opts for the old tax regime.
Medical and health insurance
Value of medical treatment provided to an employee or his/her family member in any hospital maintained by the employer is exempt from tax.
Any amount paid by the employer in respect of any expenditure incurred by the employee on his/her medical treatment or his/her family member is also exempt.
This treatment may be done in any hospital maintained by the government or any local authority.
If the employer pays an amount as health insurance premium which covers the employee (typically under a group insurance policy), this amount is not taxable in the hands of the employee. Even if the employer pays an amount as health insurance premium (on a policy taken by the employee on himself/herself and family), this amount is also not treated as a perquisite.