Perquisites Under the Income-tax Act, 2025:
What Employees and Employers Need to Know
Your salary is more than what hits your bank account. A company car, a rent-free house, an interest-free loan, ESOPs or even a laptop transferred at exit can trigger taxable perquisites under the Income-tax Act, 2025.
Your Salary Is More Than What Hits Your Bank Account
A company car. A rent-free house. An interest-free loan. ESOPs. Even a corporate laptop transferred to you upon exit. These non-monetary benefits may not look like traditional cash salary, but under Indian direct tax laws, many of them are treated as taxable perquisites.
From 1 April 2026, the statutory rules governing perquisite valuation have transitioned to the framework established under the Income-tax Act, 2025 and the Income-tax Rules, 2026. For HR teams, CFOs, payroll administrators and salaried professionals, understanding how non-cash benefits are measured is essential to prevent unexpected tax demands and withholding defaults.
| Framework Parameter | Earlier Law (Income-tax Act, 1961) | From Tax Year 2026-27 (Income-tax Act, 2025) |
|---|---|---|
| Governing Statute | Income-tax Act, 1961 | Income-tax Act, 2025 |
| Primary Charging Section | Section 17(2) | Primarily Section 17(1) |
| Valuation Rule | Rule 3 | Rule 15 |
"Key Insight: A benefit does not have to be paid in cash to become taxable salary."
Perquisites at a Glance
Below is a summary of common corporate benefits and their general tax valuation methodology under Rule 15:
| Benefit Type | Taxable Valuation Summary |
|---|---|
| Rent-free house | Prescribed % of salary or actual rent paid by employer less employee recovery |
| Company car | Depends on personal vs. official usage proportion and engine capacity |
| Interest-free loan | Benchmark SBI interest rate less interest paid by employee |
| Meal vouchers | Qualifying benefit up to ₹200/meal is Nil (Exempt) |
| Laptop / mobile for use | Nil (Fully Exempt) |
| Laptop transferred | Depreciated value (50% RB) less recovery from employee |
| ESOP benefit | Fair Market Value (FMV) on exercise date minus exercise price |
| Employer gifts & vouchers | ₹15,000 aggregate annual threshold applies |
| Personal credit-card expenses | Employer's cost less employee recovery |
| Personal club expenses | Employer's cost less employee recovery |
Detailed Breakdown of Key Corporate Perquisites
1. Rent-Free Accommodation
If an employer provides residential accommodation without charging market rent, a taxable perquisite arises under Rule 15. The calculation differs based on whether the property is owned or leased by the employer.
Employer-Owned House
| City Population (2011 Census) | Perquisite Valuation Percentage |
|---|---|
| Above 40 Lakh | 10% of salary |
| 15 Lakh to 40 Lakh | 7.5% of salary |
| Other Areas | 5% of salary |
*Note: Any rent recovered directly from the employee is deducted from the above computed perquisite value.
Employer-Leased House
The taxable perquisite is valued at the lower of actual rent paid by the employer OR 10% of salary, minus any rent recovered from the employee.
Furnished Accommodation
If furniture or appliances are provided, add 10% per annum of the original cost of furniture (if owned by the employer) or the actual hire charges incurred (if rented).
Practical Example:
An employee receives a salary of ₹30 Lakh, and is provided an employer-owned house in Delhi (population > 40 lakh). The employer recovers ₹1.20 Lakh annually from the employee.
Gross Perquisite Value (10% of ₹30 Lakh) = ₹3,00,000
Less: Rent Recovered = ₹1,20,000
Net Taxable Perquisite = ₹1,80,000
2. Company Motor Car
The tax treatment of a company motor vehicle depends on whether it is used exclusively for official work, exclusively for personal needs, or for mixed personal and official purposes.
Mixed Official and Personal Use (Employer Bears Expenses)
| Vehicle Specification | Monthly Perquisite Value |
|---|---|
| Engine capacity up to 1.6 litres / Qualifying EV | ₹5,000 / month |
| Engine capacity exceeding 1.6 litres | ₹7,000 / month |
| Chauffeur / Driver provided | + ₹3,000 / month |
Example:
A 2-litre company car with a chauffeur provided for mixed travel creates a taxable perquisite of ₹7,000 + ₹3,000 = ₹10,000 per month (or ₹1.20 Lakh annually).
100% Personal Use
Taxable value equals actual running and maintenance costs + driver salary + 10% per annum of car cost, minus any recovery from the employee.
100% Official Use
Taxable perquisite is NIL, provided detailed journey logbooks and employer certification are maintained as prescribed.
Watch Out:
Simply classifying a vehicle as an "official car" in HR records is insufficient. Contemporaneous documentation of official travel logs is mandatory during tax audits.
3. Interest-Free or Concessional Employer Loan
When an employer advances a loan to an employee interest-free or at a concessional rate, the interest benefit is taxed as salary income.
Rule 15 Valuation Formula:
Taxable Perquisite = (Interest at SBI Benchmark Rate) − (Interest Actually Paid by Employee)
Calculated on the maximum outstanding monthly balance methodology as of the end of each month.
₹2 Lakh Exemption Limit:
Where the aggregate principal amount of qualifying loans granted by the employer does not exceed ₹2 Lakh, the perquisite value is treated as NIL.
4. Free Meals & Meal Vouchers
Qualifying food and non-alcoholic beverages provided by an employer during working hours enjoy specific tax exclusions under Rule 15:
- Up to ₹200 per meal: Food provided at office premises or through non-transferable prepaid meal vouchers usable at eating joints can be excluded up to ₹200 per meal.
- Tea and Snacks: Light refreshments provided during office hours remain fully non-taxable.
Important Distinction:
A cash allowance paid under the label of "meal allowance" in payroll is fully taxable salary. It does not qualify for the meal voucher exemption.
5. Laptops & Mobile Phones (Use vs. Transfer)
The taxation of laptops, tablets and smartphones depends on whether the asset is provided for temporary official use or permanently transferred to the employee.
Provided for Use
Taxable perquisite value = NIL.
The prescribed movable asset valuation specifically excludes laptops, computers, tablets and mobile phones provided for office or personal use.
Ownership Transferred
Taxable perquisite value = Cost − 50% Reducing Balance (RB) Depreciation for each completed year − Employee Recovery.
Transfer Example:
A company transfers a laptop (original cost ₹1,00,000) to an employee after 2 completed years of use. The employee pays ₹5,000 at exit.
Year 1 Depreciated Value: ₹50,000 | Year 2 Depreciated Value: ₹25,000
Taxable Perquisite = ₹25,000 − ₹5,000 = ₹20,000.
6. Employee Stock Option Plans (ESOPs)
ESOPs represent a major portion of compensation for founders, startup executives and corporate leaders. Under Indian direct tax provisions, ESOPs trigger taxation at two separate stages:
Salary Perquisite Tax
Taxable Perquisite = (FMV on Exercise Date − Exercise Price) × Shares Exercised.
For unlisted companies, FMV must be determined by a SEBI-registered Category-I Merchant Banker.
Capital Gains Tax
Taxable Capital Gain = Sale Proceeds − FMV on Exercise Date.
Classified as Short-Term or Long-Term Capital Gain depending on holding period post-exercise.
DPIIT Recognized Startup ESOP Deferment:
Eligible startups recognized under DPIIT can defer TDS withholding on ESOP exercise perquisites until 48 months from the end of the relevant tax year, the date of employee exit, or the date of share sale (whichever occurs earliest).
7. Employer Gifts and Vouchers
Festival gifts, gift cards, shopping vouchers and employee reward tokens provided by employers are governed by an aggregate annual threshold under Rule 15:
• Aggregate Threshold: Where the total value of gifts or vouchers provided during the financial year is less than ₹15,000, the perquisite value is treated as NIL.
• Excess Taxation: If gifts exceed the threshold limit, employer HR and payroll teams must track employee-wise cumulative amounts to determine withholding applicability.
Valuation Matrix for Other Common Perquisites
The table below provides the valuation rules for miscellaneous benefits and employer contributions:
| Perquisite Category | Statutory Valuation Rule |
|---|---|
| Domestic servants (cook, sweeper, gardener) | Actual cost incurred by employer less employee recovery |
| Gas, electricity & water supply | Actual amount paid to supplier less employee recovery |
| Personal credit-card expenses | Fully taxable (unless strictly official with logbook proof) |
| Personal club expenses | Actual employer cost less recovery (initial corporate membership fee exempt) |
| Transfer of motor car to employee | Cost − 20% Reducing Balance (RB) depreciation per completed year − recovery |
| Transfer of electronic assets / laptops | Cost − 50% Reducing Balance (RB) depreciation per completed year − recovery |
| Transfer of other general assets | Cost − 10% Straight Line (SL) depreciation per completed year − recovery |
| Excess employer PF, NPS & Superannuation | Taxable to the extent aggregate employer contribution exceeds ₹7.50 Lakh p.a. |
Who Deducts Tax on Perquisites? (Payroll TDS Withholding)
The employer is legally mandated to include taxable perquisites when computing monthly salary TDS withholding under direct tax provisions.
Taxable Salary Computation Equation:
Cash Salary + Taxable Allowances + Taxable Perquisites = Total Taxable Gross Salary
Even where no direct cash changes hands (such as rent-free housing, company cars or ESOP exercises), the calculated perquisite value increases the employee's taxable base and salary TDS deduction.
Where Does the Employee Report Perquisites in ITR?
Employment perquisites are taxable strictly under the head "Income from Salaries" in the Income Tax Return (ITR). They must not be misclassified under "Income from Other Sources".
Reconciliation Workflow for Employees:
- Verify Form 16 Part B provided by the employer to confirm perquisite breakup details under Section 17.
- Match perquisite disclosures against AIS (Annual Information Statement) and 26AS statements.
- Report the aggregate salary income in ITR to claim full TDS credit without tax portal mismatches.
- Preserve ESOP valuation reports and exercise advice documents for future capital gains computation upon sale.
Before Payroll Closes: 7 Pre-Payroll Checks for Employers
Most perquisite disputes do not arise because a benefit was provided, but because the employer failed to substantiate how it was valued during audit proceedings. Prior to closing financial year payrolls, HR and finance teams should complete these 7 checks:
Accommodation Valuation
Has the correct city population bracket and rent recovery amount been applied?
Motor Vehicle Logbooks
Is contemporaneous official vs. personal travel documentation maintained?
Concessional Loan Rates
Has the applicable SBI benchmark rate been verified against monthly balances?
Meal Vouchers Structure
Does the meal benefit satisfy Rule 15 prepaid voucher parameters?
Asset Use vs. Transfer
Is the transaction a temporary employee asset allocation or a permanent transfer?
ESOP Merchant Valuation
Is a valid SEBI Category-I merchant banker valuation report available prior to payroll closure?
Employee Recoveries Accounting
Have all employee deductions and payroll recoveries been subtracted accurately from gross valuations?
Frequently Asked Questions (FAQs)
Q1. Is a company laptop provided to an employee taxable as a perquisite?
Generally no. When a laptop, tablet or mobile phone remains employer property and is provided merely for use, the taxable perquisite value is NIL. However, if ownership of the device is transferred to the employee, it is taxable based on depreciated cost.
Q2. Is personal use of a company vehicle taxable?
Yes. Mixed personal and official use of a company car is valued using prescribed monthly monetary amounts under Rule 15 (e.g., ₹5,000 or ₹7,000/month plus driver charges).
Q3. Are meal vouchers completely tax-free for employees?
Qualifying food provided at premises or non-transferable meal vouchers can be excluded up to ₹200 per meal. Cash meal allowances paid via payroll do not qualify for this exemption.
Q4. Is an interest-free loan from an employer taxable?
Potentially yes. The tax benefit is calculated by comparing the concessional interest rate against the prescribed SBI benchmark lending rate, subject to an aggregate loan exemption limit of ₹2 Lakh.
Q5. When are ESOP benefits taxed under direct tax rules?
ESOPs are taxed as salary perquisites on the exercise date (FMV minus exercise price). Subsequently, when the shares are sold, capital gains taxation applies.
Q6. Who is responsible for paying TDS on employee perquisites?
The employer is required to factor all taxable perquisites into the employee's total taxable salary when calculating monthly salary withholding TDS.
Final Perspective
The biggest misconception regarding employee benefits is assuming: "I didn't receive cash, so there is nothing to tax."
Under the Income-tax Act, 2025, the pertinent question is: "Did I receive an economic benefit by virtue of my employment - and how does Rule 15 value it?"
A structured compensation package provides genuine value to employees. An improperly valued perquisite structure leads to payroll errors, short deduction of TDS and unwanted tax notices during return processing.
- CA Aniket Singhal
About the Author & Firm Services
Anmol Aniket and Associates assists corporate clients, founders, CFOs and executives with direct tax advisory, payroll TDS compliance, ESOP valuation and executive compensation structuring.
Disclaimer: This article is intended solely for general informational purposes and does not constitute formal legal or tax advice. Tax treatment depends on specific factual matrices and applicable provisions under the Income-tax Act, 2025.
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