Perquisites are benefits provided to an employee over and above his cash compensation. For a long time, perquisites were an area of tax planning for employees and employers alike. However, with the introduction of Fringe Benefit Tax (FBT) by the Finance Act, 2005, the taxability of perquisites has undergone a sea change causing considerable heartburn and confusion.

As per the law today, perquisites can be classified into two categories: 1) Taxable to the employer as fringe benefits.
2) Taxable to the employee as income from salary.

Some perquisites which were earlier taxable in the hands of employee are now taxable in the hands of employer as FBT eg car facility, gifts, club membership fee etc. However, with effect from 2008-09, where the employer is not liable to pay FBT (eg in cases of HUF, proprietorship concerns etc), these perquisites will continue to be taxable in the hands of employee (Notification 271, dated 07.11.2007).

The underlying thought is that all benefits provided to employee are taxable, either in the hands of employee or as a fringe benefit exigible to FBT. However, benefits such as gratuity, leave encashment, transport allowance up to Rs 800 pm, which are exempt U/S 10, are not covered under FBT. On the other hand reimbursement of medical expenses up to Rs 15,000 pa U/S 17 does not fall under section 10 of the Act. Consequently, medical reimbursement up to Rs 15,000 will be chargeable under FBT and any excess reimbursement shall be taxed as perquisite.

If the employer is not liable to pay FBT, medical reimbursement up to Rs 15,000 would not be taxable either for the employee or the employer. Some perquisites continue to be taxable in the hands of employees eg rent-free accommodation, domestic help and utilities, educational facility, interest free or concessional loan, use/ transfer of movable assets other than laptop and computers. So if a company provides a car it will be covered under FBT. However, if the car is transferred to the employee free or at a lower rate then it will be a perquisite taxable to an employee.

Perquisites taxable in the hands of an employee may be monetary or non-monetary in nature. If the tax on monetary perquisites is borne by the employer, such taxes are considered as perquisite in the hands of the employee and are grossed up accordingly. On the other hand, tax paid on non-monetary perquisites is not taxed as income and are exempt U/S 10(10CC), provided the employer does not claim any corporate deduction of the same.

The ITAT recently held that tax paid by employer on salary or monetary benefit will also be considered as non-monetary perquisite and tax on the same would be exempt under section 10(10CC). Consequently, it would not be subject to multiple grossing up in the hands of the employee.

Another major change effected by Finance Act 2007 is the inclusion of ESOPs into the FBT fold. However, in this case also the employer is empowered to recover such FBT from the employee resulting in the ultimate burden being upon the employee. However, ESOPs to non employees including non executive directors would not be subject to FBT and would continue to be taxable in the hands of the recipient.

Thus, perquisites are now an expensive option for employers in India and the compensation mix being offered to employees has changed. Employers now cash out the CTC to shift the tax burden.


Shreyas Shah & Sameer Buchha PricewaterhouseCoopers