Benefit or Perquisite Obtained from a Company Under Income

Benefit or Perquisite Obtained from a Company Under Income Tax Act

In India, the Income Tax Act, 1961 governs the taxation of all income earned by individuals, businesses, and other entities. One important aspect of income tax law is the taxation of benefits or perquisites obtained from a company. These benefits can take various forms, such as company cars, housing accommodation, stock options, or any other fringe benefits provided by an employer. In this article, we will discuss the taxation of such benefits or perquisites under the Income Tax Act and the relevant legal provisions.

Definition of Benefit or Perquisite

The term “perquisite” is defined under section 17(2) of the Income Tax Act, 1961. According to this provision, a perquisite includes any benefit or amenity granted to employees by their employers. This can be in the form of free or concessional tickets, rent-free accommodation, interest-free or low-interest loans, free meals, club facilities, among others. In essence, any form of payment other than salary is considered a perquisite unless specifically exempted under the Act.

Tax Treatment of Benefits or Perquisites

The value of perquisites provided by an employer to an employee is taxable under the head “Salaries” as per section 17(2) of the Income Tax Act. The value of perquisites is included in the gross salary of the employee and is subject to tax at the applicable rate. The method of valuation of perquisites is prescribed under Rule 3 of the Income Tax Rules, which provides for the value of various perquisites such as accommodation, motor car, free or concessional education, and the like.

Valuation of Specific Perquisites

Accommodation

Where the accommodation is provided by the employer, the value of perquisite is determined based on the rent paid/ payable by the employer. If the accommodation is owned by the employer, the perquisite value is determined based on the population of the city or town. The valuation rules provide for specific rates based on the population of the city or town, which are used to determine the value of perquisite.

Motor Car

The perquisite value of a motor car is determined based on the cubic capacity of the engine, whether it is owned, hired, or provided by any other means, and the distance for which the vehicle is used for both official and personal purposes.

Stock Options

Stock options are a popular form of perquisite offered by companies to their employees. The value of perquisite arising from stock options is determined based on the fair market value of the shares on the date of vesting of the options.

Exemptions from Tax on Perquisites

While the value of perquisites is generally included in the salary and taxed accordingly, certain perquisites are exempt from tax under specific circumstances. Section 10(14) of the Income Tax Act provides for various exemptions from taxation for certain perquisites. For example, rent-free accommodation provided to an employee in a remote area for the performance of his duties is exempt from tax. Similarly, the value of perquisites such as free meals and refreshments provided during office hours or conveyance provided for official purposes are also exempt.

Reporting and Compliance Requirements

Employers are required to report the value of perquisites provided to their employees in the Form 16 issued at the end of the financial year. The value of perquisites must be accurately determined and reported to the tax authorities. It is the responsibility of the employer to ensure compliance with the valuation and reporting requirements under the Income Tax Act.

Penalties for Non-Compliance

Non-compliance with the valuation and reporting requirements for perquisites can result in penalties and interest charges. Employers who fail to accurately determine and report the value of perquisites can be subject to penalties under the Income Tax Act. It is important for employers to be aware of their obligations and ensure compliance to avoid penalties and legal repercussions.

Conclusion

The taxation of benefits or perquisites obtained from a company under the Income Tax Act is a critical aspect of income tax law in India. Employers and employees must be aware of the valuation, tax treatment, exemptions, reporting, and compliance requirements related to perquisites to ensure compliance with the law. By understanding the legal provisions governing the taxation of perquisites, both employers and employees can effectively manage their tax liabilities and avoid legal issues related to non-compliance. It is advisable to seek professional advice and guidance to ensure accurate determination and reporting of perquisites to the tax authorities.