Section 17(2) is part of India's tax law, focusing on perquisites benefits employees get from employers, like free housing or company cars. These components can be taxed and the provision outlines how to value them for tax purposes. It is important for understanding taxable income along with the recent updates for example, new amendments or budgets. This article provides a comprehensive examination of Section 17(2) of the Income Tax Act 1961, focusing on its definition, scope, and implications for taxable perquisites. It aims to cover all aspects relevant to understanding how perquisites are treated under Indian tax law, with updates as of April 15, 2025, and includes detailed valuation rules and examples.
Elevate your career with our Advanced Certification Program in Mergers & Acquisitions designed to transform your professional journey in just six months. This high- engagement course emphasizes real-world applications and features master classes from NLU and industry partners led by expert faculty.
Detailed Analysis of Section 17(2) of the Income Tax Act 1961
Section 17(2) is a critical provision within the Income Tax Act 1961, which defines "perquisites" as any casual emolument or benefit attached to an office or position, provided in addition to salary or wages, either in cash or kind. This section is pivotal for determining the taxable income under the head "Salaries," ensuring that benefits provided by employers are appropriately taxed when they meet specific criteria: provided during employment, for personal benefit, service-dependent, from the employer, and legally obtained.
Types of Perquisites and Taxability
Perquisites under Section 17(2) are categorized into taxable, non-taxable, and those taxable only for specified employees (e.g., directors, employees with over 20% voting power, or those with gross salary exceeding ₹50,000). The Budget 2025 update clarified that employer expenditure on medical treatment travel outside India for the employee or family is not treated as a prerequisite, simplifying tax calculations in this area.
Taxable Perquisites
These include:
Rent-free or concessional accommodation
Company cars for personal use
Interest-free or concessional loans
Club memberships (free or at concessional rates)
Free or concessional education facilities
Gifts or vouchers exceeding ₹5,000 in value
Non-Taxable Perquisites
Certain benefits are exempt from tax, including:
Conveyance allowance, exempt up to specified limits (e.g., ₹3,200/month for handicapped employees)
Leave Travel Concession (LTC) for travel within India, subject to conditions
Medical reimbursement, exempt up to ₹15,000 per year
Telephone and internet expenses for official purposes, generally not taxable
Refreshments and snacks provided at the workplace, typically exempt
Perquisites Taxable for Specified Employees
For directors, employees with significant voting power, or those earning above ₹50,000 gross salary, additional perquisites may be taxable, ensuring compliance with tax laws for high-income individuals.
Taxable v. Non-Taxable Perquisites
Taxable perquisites include rent-free accommodation, company cars, and interest-free loans.
Non-Taxable perquisite covers conveyance allowances (up to limits) and medical reimbursements (up to ₹15,000/year).
Valuation Rules for Perquisites
The valuation of perquisites is crucial for tax computation, with specific rules outlined for different types. Valuation depends on the perk type. For instance, rent-free accommodation might be 15% of salary in big cities, while company cars have fixed monthly values like ₹1,800 for smaller engines. Below is a detailed breakdown, including exact percentages and conditions as of the latest updates
Accommodation Perquisites
Following are the perquisites of the accommodation as per Section 17 of Income Tax Act, 1961:
Unfurnished Accommodation:
For non-government employees:
15% of salary for cities with population >25 lakh
10% for cities with population 10-25 lakh
7.5% for cities with population <10 lakh
Or the rent/lease payable/paid by the organization, whichever is lower, if housing is leased and not owned.
For government employees: The taxable value is the license fee as per government rates, reduced by the rent paid by the employee.
Furnished Accommodation: The value of unfurnished accommodation plus 10% per year of the cost of furniture, or actual hire charges if furniture is rented from a third party.
Hotel Accommodation: 24% of salary or charges payable/paid to the hotel, whichever is lesser, reduced by rent paid by the employee. No perquisite if provided for up to 15 days on transfer.
Motor Car Perquisites
From April 1, 2008, valuation rules for company cars include:
Official use only: Not taxable
Personal and official use, with organization bearing costs:
up to 1.6L cubic capacity: ₹1,800/month + ₹900/month if driver provided
above 1.6L cubic capacity: ₹2,400/month + ₹900/month if driver provided
Employee bears costs:
up to 1.6L: ₹600/month + ₹900/month if driver provided
above 1.6L: ₹900/month + ₹900/month if driver provided
Personal use only: Completely taxable
Reimbursed maintenance/running:
up to 1.6L: Actual expenses - ₹2,700/month
above 1.6L: Actual expenses - ₹3,300/month
Read to learn more about Merger and Acquisition Process
Other Perquisites
Apart from the essential perquisites, there are other considerable ones and these are:
Electric Energy/Water/Gas: Cost paid by the organization or manufacturing cost per unit, reduced by employee payment.
Concessional/Free Education: Expenses incurred by the organization; no value if the institution is owned/maintained by the organization.
Concessional/Free Journeys: Cost at which benefit offered, reduced by employee payment; not available to railway/airline employees.
Gardener/Attendant/Watchman/Sweeper: Cost covered by the organization, reduced by employee payment.
Interest-Free/Concessional Loans: Difference between interest paid and prescribed rates under Income Tax Rules.
Free Meals: Employer's cost, exempt if during working hours per Rule 3(7)(iii), exclude employee payment.
Gifts/Vouchers: Value specified, no perquisite if total < ₹5,000.
Employer Credit Card: Amount reimbursed/paid, exempt if for official purposes per Rule 3(7)(v).
Club Membership: Amount reimbursed/paid, exempt if primarily for business per Rule 3(7)(vi).
Stock Options: Market value on exercise date (average opening/closing prices if listed, banker value if unlisted).
Also, Get to Know About Kotak Mahindra Bank's Acquisition of Sonata Finance Case Study
Examples of Perquisite Valuation
To illustrate, consider:
Leased accommodation: Taxable at 7% for cities <₹10L population, 10% for ₹10L-25L, 15% for >₹25L; if leased by employer, tax if not fully paid by employee (15% or rent, whichever less).
Employer car: Monthly tax ₹1,800 (small, <1.6L) or ₹2,400 (large, >1.6L), plus ₹900 for driver.
Stock options: Taxable as fair market value minus amount recovered from employees.
Implications, Compliance and Benefits
Organizations which provides perquisites are responsible for valuing and reporting them and often paying tax at 30% of the total fringe benefits value.
It is important for the employees to understand these rules for tax planning and compliance, especially with updates like Budget 2025 affecting medical travel exemptions.
Perquisites enhance employee loyalty, attract talent, boost productivity, and improve retention, while employers benefit from structured tax deductions and compliance with legal standards.
Read about Merger Examples in India
Summary
Section 17(2) of the Income Tax Act 1961 is a comprehensive framework for taxing perquisites, with detailed valuation rules and exemptions. It ensures fair taxation while accommodating employee benefits along with updates reflecting current economic conditions as of April 15, 2025.
Related posts
Section 17(2) of Income Tax Act: FAQs
Q1. What qualifies as a perquisite under Section 17(2)?
A perquisite is any benefit or amenity provided by an employer to an employee in addition to salary, such as rent-free accommodation, company cars, interest-free loans, or club memberships, as defined under Section 17(2). These are taxable unless specifically exempt.
Q2. How is the taxable value of rent-free accommodation calculated?
For non-government employees, it’s valued at 15% of salary (cities with population >25 lakh), 10% (10-25 lakh), or 7.5% (<10 lakh), or the actual rent paid by the employer, whichever is lower. For government employees, it’s based on the license fee, reduced by any rent paid by the employee.
Q3. Are all perquisites taxable for every employee?
No, some perquisites are non-taxable, like medical reimbursements (up to ₹15,000/year) or conveyance allowances (within limits). Certain perquisites are taxable only for specified employees, such as directors or those with gross salary above ₹50,000.
Q4. How are company cars valued as a perquisite?
If used for both personal and official purposes with employer-borne costs, the taxable value is ₹1,800/month (engine ≤1.6L) or ₹2,400/month (>1.6L), plus ₹900/month if a driver is provided. For personal use only, the entire cost is taxable.
Q5. What exemptions were introduced for perquisites in Budget 2025?
Budget 2025 clarified that employer expenditure on medical treatment travel outside India for employees or their families is not treated as a perquisite, making such benefits non-taxable under Section 17(2).
