Income from Salary (Part 2) View First Part >>
Perks are benefits received by an employee because of his position or responsibility with an employer. These are included in the taxable salary income. The perks are mostly paid to the employee in kind. They need to be converted into their worth of money for inclusion into taxable salary. This is called the valuation of perquisites. The employee must provide such a valuation to her employer for TDS purposes. The rules and procedures of valuation are specified in Income-tax Rules.
Most Common Perks are the following:
- Rent free accommodation
- Provision of motor car
- Free or concessional educational facility
- Supply of gas, electricity, and water
- Provision for sweeper, gardener, watchman or personal attendant
- Interest free or concessional loans
- Club membership provided by the employer
- Employee Stock Ownership Plan (ESOP)
The valuation of perks to convert them into their worth of money is given in Income tax Rules. The valuation for few prominent perks is as follows:
Rent free accommodation
|Facility||Government Employees||Other than Government Employees|
|Un-furnished accommodation||License Fees as determined minus rent paid by the employee||
|Furnished accommodation||License Fees as determined minus rent paid by the employee + 10% of the cost of furniture and if the furniture is hired from a third party, then hire charges for the furniture less any hire charges paid by an employee||Value as determined for unfurnished accommodation + 10% of the cost of furniture and if the furniture is hired from a third party, then hire charges for the furniture less any hire charges paid by an employee|
Provision of motor car
A very common perk. The value of this perk depends upon the ownership of the car and use of car either for official or private purposes by an employee and few other criteria. This is discussed below:
|Sl. No.||Circumstances||Where cubic capacity of engine does not exceed 1.6 litres||Where cubic capacity of engine exceeds 1.6 litres|
|1||Motor car is owned or hired by the employer|
|(a) Solely used for official purposes||No value:||No value:|
|(b) solely for private or personal use of employee||Actual amount of expenses incurred by an employer for running car and chauffeur and depreciation minus amount charged by employer to an employee’s account||Actual amount of expenses incurred by an employer for running car and chauffeur and depreciation minus amount charged by employer to an employee’s account|
|(c) Partly official and personal use|
|(i) Car running expenses are met by employer||₹1,800 (+ ₹900 for chauffeur)||₹2,400 (+ ₹900 for chauffeur)|
|(ii) Car running expenses are met by employee||₹600 (+ ₹900 for chauffeur)||₹900 (+ ₹900 for chauffeur)|
|2||Employee owns the car but car running expenses are met by the employer|
|(a) Solely used for official purposes||No value:||No value:|
|(b) Partly official and personal use||Actual amount of expenditure incurred by employee reduced by ₹1800 (+ ₹900 for chauffeur)||Actual amount of expenditure incurred by employee reduced by ₹2400 (+ ₹900 for chauffeur)|
Free or concessional educational facility:
|Sr. No.||Nature of facility||Value of perquisite|
|1||Educational facility owned and maintained by employer or employer can influence admission in such facility||Cost of such education in nearby locality minus the cost borne by the employee minus ₹12,000/-|
|2||Educational facility NOT maintained and owned by employer||The cost of such educational facilities in nearby locality minus the cost borne by the employee|
Interest-free or concessional loans
This perk is valued by computing the amount of interest that would have been paid by an employee in case she has obtained the loan from SBI. The amount so arrived is then reduced by the amount of interest paid by an employee to arrive at the taxable value of a perk.
Employee Stock Ownership Plan (ESOP)
An employee stock ownership plan (ESOP) is a qualified defined-contribution benefit plan designed to invest in the stock of the sponsoring employer. The ESOPs are beneficial to the employee, the selling shareholder, and the company since each of them may get some or the other benefits. These are deployed as a corporate strategy by employers to build partnerships and belongingness towards an organization. These are the components of the salary package of the employees. Hence, they form part of the income from salary. However, they need to be valued at their money’s worth for inclusion in taxable salary income. The value of such ESOPs is computed as per the Income-tax Rules. The value of ESOPs is determined as on the date of exercise of options and not on the date of allotment. However, the tax payment liability is relevant to the date of allotment shares. The second incidence of tax on ESOP arises when the allottee sells those shares. The taxability of an ESOP is dealt with extensively in a separate article, please read here https://blog.taxbuddy.com/taxation-of-esops-recent-changes/.
Profits in lieu of Salary
Sometimes, the employee is paid over an above his salary income for certain reasons like joining bonuses or compensation, etc. This income is called profit in lieu of salary. The prominent items under this head are as under:
- Termination compensation: In case an employee is terminated before his superannuation or contractual period, then he is paid compensation. This compensation is computed as salary income as profits in lieu of salary.
- Compensation on modification of terms of employment is also taxed as profits in lieu of salary
- Contributions of an employer to different funds like provident funds, superannuation funds, or other funds are likewise taxed as profits in lieu of salary. These include payment of Gratuity, payment of commuted pension, payment of retrenchment compensation, payment from the statutory provident fund and public provident fund, payment from the recognized provident fund, payment from an approved superannuation fund.
- Any payment received from a keyman insurance policy
- Joining bonus or joining pay is also taxed as income from profits in lieu of salary
What is the standard deduction?
From the assessment year 2019-20, the salaried taxpayers are provided with a deduction from their salary income known as the standard deduction. This amount of standard deduction is reduced from income from salary to arrive at net salary income. The maximum amount of deduction under this head is ₹50,000/-. There are no eligibility conditions for this claim. This cannot be claimed against any other income than income from salary and pension. This cannot be claimed against income from other sources.