Section 17(2)Perquisites in Salary

How it works

Section 17(2) exists because compensation does not have to be paid in money to be worth something. A flat, a car, a subsidised loan, a share option: each transfers value from employer to employee, and the section brings them into the tax net by defining them as perquisites and treating them as salary. The consequence employees notice is that their taxable salary is larger than the sum credited to their account, and the tax on the difference comes out of the cash portion.

The valuation rules are where the substance lies, because the taxable value is prescribed rather than actual. Rent-free accommodation is valued by a formula keyed to salary and the population of the city, not to the rent the employer pays. A company car is valued by engine capacity and whether a driver is provided, in fixed monthly amounts that bear no relation to the vehicle's cost. A concessional loan is valued by reference to a benchmark rate rather than the employer's cost of funds. This means an employer's generosity and the employee's tax can move quite independently, and it also means the calculation is auditable against a rule rather than negotiable.

ESOPs are the category that most often produces a genuinely painful outcome, because the perquisite crystallises at exercise, valued as the difference between fair market value and the exercise price, and tax is due then even though the employee may hold illiquid shares they cannot sell to fund it. A second tax event follows at sale, as capital gains on any further appreciation. Eligible startups get a deferral of the deduction timing, which softens but does not remove the problem.

Not everything an employer provides is taxable. Medical facilities within prescribed limits, certain retirement benefits, telephone and internet reimbursements for official use, and a range of items provided on the employer's premises fall outside or are exempt. Several of the more generous concessions, however, are old-regime features, so an employee under the new regime can find benefits taxable that a colleague on the old regime treats as exempt. Structuring a salary package sensibly now requires knowing which regime the employee is on.

Operationally, the burden sits with the employer. They must value each perquisite under the rules, add it to salary, deduct tax through the year under Section 192, and report the breakdown in Part B of Form 16. Getting the valuation wrong understates TDS, which leaves the employer exposed as an assessee in default and the employee with an unexpected bill at filing.