Section 17(2)Perquisites in Salary
Section 17(2) defines perquisites, the non-cash benefits an employer provides that are treated as part of salary and taxed in the employee's hands.
In short
- A perquisite is taxed as salary even though no money changes hands, which is why an employee's taxable salary can exceed what reached their bank account.
- Valuation is prescribed by rule rather than left to the employer, and the prescribed value is often not the employer's actual cost.
- Rent-free accommodation, employer-provided cars, interest-free or concessional loans, and ESOPs are the categories that generate most of the tax.
- Some perquisites are exempt or concessionally treated, and several of those concessions are only available under the old regime.
- The employer values the perquisite, includes it in salary, and deducts tax on it through the year under Section 192, reporting the detail in Form 16 Part B.
- Under the Income-tax Act, 2025 the old Section 17 is split three ways: salary is Section 16, perquisites are Section 17, and profits in lieu of salary are Section 18. What the 1961 Act called Section 17(2) is therefore Section 17(1) of the 2025 Act, so the sub-section number has to be read together with the Act it belongs to.
Who it applies to
- Employees receiving benefits from an employer in a form other than cash
- Employers, who must value perquisites and deduct tax on them under Section 192
- Directors and employees with substantial interest, for whom certain perquisites are taxed more widely
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.
Also searched as: perquisites, taxable perquisites, value of perquisites, section 17 2, perquisites in salary, Section 17(2), Section 17(1) of the Income-tax Act, 2025.
Frequently asked questions
Are all perquisites taxable?
No. The Act and the rules exempt a range of items, including medical facilities within prescribed limits, certain retirement benefits, and telephone or internet costs for official use. Several of the wider exemptions are available only under the old regime, so the same benefit can be taxable for one employee and exempt for another depending on their regime.
How is a company car valued as a perquisite?
By a prescribed formula based on engine capacity, whether the employer bears running costs, and whether a driver is provided, expressed as fixed monthly amounts. It does not depend on what the car cost or what the employer actually spends, which is why a company car is often taxed at far less than its real value.
When are ESOPs taxed as a perquisite?
At exercise, valued as the difference between the fair market value on the exercise date and the price the employee paid. A second, separate tax arises as capital gains when the shares are eventually sold. Employees of eligible startups can defer the tax deduction timing, which helps with the cash flow problem but does not change the underlying charge.
Who is responsible for valuing perquisites?
The employer. They must value each perquisite under the prescribed rules, include it in salary, deduct tax through the year under Section 192, and report the breakdown in Part B of Form 16. An undervaluation leaves the employer exposed as an assessee in default and the employee facing an unexpected liability at filing.
Worked detail on this section
Current rates, limits, and step-by-step process live in these guides, which are kept updated as the law moves.
Forms involved
Primary sources
Disclaimer
This page explains what a statutory provision does in general terms. It is not a substitute for the bare act, and it is not professional tax or legal advice. Rates, thresholds, and limits change with each Finance Act, and applicability turns on facts specific to you. Confirm anything that affects a real filing with a qualified Chartered Accountant.