Perquisites are benefits or amenities provided by an employer to an employee in addition to salary or wages, which are taxable as part of income from salary under the Income Tax Act, 1961. Under Indian law, perquisites are defined in Section 17(2) of the Income Tax Act and include rent-free accommodation, motor car facility, interest-free or concessional loans, club memberships, and other benefits — valued according to the rules prescribed in Rule 3 of the Income Tax Rules, 1962.
Legal definition
Section 17(2) of the Income Tax Act, 1961 defines "perquisite" as including:
(i) the value of rent-free accommodation provided to the assessee by his employer; (ii) the value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer; (iii) the value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases — (a) by a company to an employee who is a director thereof; (b) by a company to an employee being a person who has a substantial interest in the company; (c) by any employer (including a company) to an employee to whom the provisions of paragraphs (a) or (b) of this sub-clause do not apply and whose income under the head "Salaries" exceeds fifty thousand rupees...
Key categories of perquisites and their valuation (Rule 3):
| Perquisite | Valuation Basis |
|---|---|
| Rent-free accommodation (unfurnished) | 15% of salary in cities with population > 25 lakh; 10% in cities with 10-25 lakh; 7.5% in others |
| Rent-free accommodation (furnished) | Unfurnished value + 10% p.a. of cost of furniture |
| Motor car (used for official + personal) | Actual expenditure minus amounts charged for personal use; or specified rates per Rule 3 |
| Interest-free or concessional loan | Interest at SBI lending rate minus actual interest charged |
| Club membership (initial/recurring) | Amount paid by employer |
| Free/concessional education | Cost to employer if exceeding Rs 1,000 p.m. per child |
| Sweat equity/ESOP | FMV on date of exercise minus amount paid by employee |
Tax-free perquisites (not treated as perquisites):
- Medical treatment in employer's hospital or reimbursement up to Rs 15,000 (for treatment in approved hospitals)
- Refreshments/meals provided during working hours (up to Rs 50 per meal through non-transferable coupons)
- Telephone/mobile provided by employer (including personal use)
- Employer's contribution to EPF, superannuation fund, and NPS within prescribed limits
How courts have interpreted this term
Arun Kumar v. Union of India [(2006) 286 ITR 89 (Delhi HC)]
The Delhi High Court struck down the Fringe Benefit Tax (FBT) provision to the extent that it taxed certain employer expenditures that did not constitute "perquisites" in the hands of the employee. The Court held that for a benefit to be a perquisite, there must be a direct nexus between the benefit and the employee who receives it — collective benefits that cannot be attributed to specific employees (such as conference expenses or business entertainment) cannot be taxed as perquisites. The FBT was subsequently abolished in 2009.
CIT v. Lala Shri Dhar [(1972) 84 ITR 192 (SC)]
The Supreme Court held that the term "perquisite" in the context of salary income must be construed broadly to include any benefit obtained by an employee from the employer, whether in cash or in kind, which arises from the employment relationship. The benefit must, however, have a money value — a benefit that cannot be converted to money or that has no ascertainable value in money terms is not a perquisite.
CIT v. Non-Ferrous Materials Technology Development Centre [(2015) 378 ITR 250 (AP HC)]
The Andhra Pradesh High Court held that the provision of a residential telephone to an employee, including personal calls, does not constitute a taxable perquisite. The Court noted that the exemption for telephone facilities was intended to recognise the practical impossibility of distinguishing between official and personal calls when the telephone is at the employee's residence.
Why this matters
Perquisites form a significant part of the total compensation package for senior employees and executives in India. The valuation of perquisites can add lakhs to an employee's taxable income — particularly rent-free accommodation in metropolitan cities (valued at 15% of salary) and ESOPs in high-growth companies (taxed at the difference between FMV and exercise price).
For employers, the correct valuation and TDS on perquisites is a compliance obligation under Section 192. Failure to deduct TDS on perquisites exposes the employer to proceedings under Sections 201/201(1A) for default in deduction and short deduction. The employer must calculate perquisite values according to Rule 3 and include them in the employee's Form 16.
For employees under the new tax regime (Section 115BAC), the impact of perquisites is nuanced. While the new regime eliminates many exemptions, the characterisation of an item as a perquisite (taxable under salary) versus a reimbursement (potentially not taxable) continues to affect total tax liability. Practitioners should note that rent-free accommodation remains a perquisite under both old and new regimes.
Related terms
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Frequently asked questions
Is employer-provided accommodation always taxable?
Yes. Rent-free or concessional accommodation provided by an employer is a taxable perquisite under Section 17(2)(i) and (ii), valued as per Rule 3. The value depends on the city population, whether the accommodation is furnished or unfurnished, and the employee's salary. For government employees, the value is the licence fee determined by the government. Hotels treated as accommodation for more than 15 days are valued at 24% of salary or actual charges, whichever is lower.
How are ESOPs taxed as perquisites?
Employee Stock Option Plans (ESOPs) are taxed as perquisites under Section 17(2)(vi) at the time of exercise — not at the time of grant or vesting. The perquisite value is the difference between the Fair Market Value (FMV) of the shares on the date of exercise and the exercise price paid by the employee. For listed shares, FMV is the average of the opening and closing price on the exercise date. Subsequent sale of shares attracts capital gains tax.
Can an employer avoid perquisite tax by giving cash instead?
No. Cash allowances paid to employees are taxable as salary. The concept of perquisite specifically covers non-cash benefits; however, replacing a non-cash benefit with cash does not reduce the tax liability — it merely changes the character from perquisite to salary/allowance. Some allowances have specific exemptions under Section 10(14), but these are subject to limits prescribed in Rule 2BB.
This entry is part of the Veritect Indian Legal Glossary, a comprehensive reference of Indian legal terminology grounded in statutory text and judicial interpretation.
Last updated: 2026-03-27. Veritect provides this content for informational purposes and does not constitute legal advice.