Perquisites and Professional Tax Deduction

Section 17(2) of the Income Tax Act, 1961 lays down an inclusive list of what counts as a perquisite; this section works through the two categories of perquisite this unit's syllabus specifically names — accommodation, and education-related benefits — followed by a short list of perquisites the Act and Rules keep entirely tax-free, and closes with the one deduction (professional tax) that this unit pairs with perquisites.

Perquisites — Section 17(2)

A perquisite is any casual emolument, benefit, or amenity attached to an office or position, granted in addition to salary or wages, whether provided in cash or (more often) in kind.

Rent-free accommodation — Rule 3(1)

Where an employer provides an employee with accommodation free of rent (or at a concessional rent), the value of this perquisite is computed differently depending on who the employer is.

1. Central or State Government employee The value of the perquisite is simply the licence fee that the Government itself determines, under its own rules, for that accommodation — reduced by any rent the employee actually pays to the Government.
2. Employee of any other employer ("private-sector" employee), accommodation owned by the employer, unfurnished The value of the perquisite is a percentage of the employee's "salary" for the year, the percentage depending on the population of the city where the accommodation is situated (as per the 2011 census) — reduced by any rent the employee actually pays to the employer:

(c) Employee of any other employer, accommodation TAKEN ON LEASE OR RENT by the employer (not owned by the employer)

The value of the perquisite is the LOWER of (i) the actual lease rent paid or payable by the employer for the accommodation, or (ii) 15% of the employee's salary for the year — reduced, again, by any rent the employee actually pays.

Here, "salary" means Basic Salary, Dearness Allowance (if it forms part of retirement benefits), bonus and commission, and every other allowance ONLY to the extent it is itself taxable (the exempt portion of an allowance, such as the exempt slice of HRA worked out in Section A, is never included) — but it EXCLUDES the value of any perquisite under Section 17(2) itself, and any allowance that is wholly exempt under Section 10.

Furnished accommodation

If the accommodation described above is FURNISHED rather than unfurnished, the value of the perquisite is the unfurnished value computed above, PLUS:

• 10% per annum of the cost of the furniture, if the furniture is owned by the employer; or
• the actual hire charges paid by the employer for the furniture, if the employer has itself hired the furniture from a third party —

reduced, in either case, by any amount the employee is charged for the use of the furniture.

Education-related perquisites — Rule 3(5)

The syllabus asks you to be able to work through three distinct education scenarios:

1. Free education for an employee's child in an educational institution owned and maintained by the employer — the value of the benefit is NIL (fully exempt) as long as the cost of education (or the value of the benefit) does not exceed ₹1,000 per month per child, with no limit on the number of children. If the cost exceeds this figure, the ENTIRE cost becomes taxable — not merely the excess over ₹1,000.
2. Free or concessional education for an employee's child in any OTHER institution, by reason of the employee's employment — treated identically to (1) above: NIL up to ₹1,000 per month per child; the full amount taxable if this threshold is crossed.
3. The employer reimbursing an employee's own out-of-pocket education expense for a child studying at an institution the employer neither owns nor is otherwise connected with — again the same ₹1,000-per-month-per-child threshold applies, NIL if within it, and the entire reimbursed amount taxable if it is exceeded.

Tax-free perquisites

A short, specific list of benefits the Act and Rules keep entirely outside the tax net, regardless of their value, includes:

• Medical treatment provided to the employee (or a specified family member) in a hospital maintained by the employer, a Government hospital, or a hospital approved for the treatment of a prescribed disease.
• Recreational facilities, including health-club, sports and similar facilities, provided uniformly to all employees.
• Free refreshment provided to all employees during working hours at the workplace.
• Free meals provided during working hours, or through non-transferable paid vouchers usable only at eating joints, up to a modest per-meal value fixed by the Rules.
• Telephone (including a mobile phone) provided by the employer, and the reimbursement of its bill, for use that is substantially official.
• Laptops and computers (whether or not exclusively for official use) provided by the employer for the employee's use.
• Rent-free official residence provided to a Judge of a High Court or the Supreme Court, an official of Parliament, a Union Minister, or the Leader of the Opposition.

Professional tax deduction — Section 16(iii)

Under Article 276 of the Constitution, a State Government may levy a tax on professions, trades, callings and employments — commonly called "professional tax" — though the Constitution itself caps what any State may charge any one person at ₹2,500 per annum; the exact slab an individual actually pays depends on their own State's Profession Tax Act (in West Bengal, the West Bengal State Tax on Professions, Trades, Callings and Employments Act, 1979). …