Section 17(2) – Perquisites in Salary: What Employees Must Know
Salary is more than just your basic pay. Many companies offer added benefits, like housing, medical cover, car allowances, or club memberships, to attract and retain talent. These extra advantages are known as perquisites.
But here’s the twist. While they feel like “free perks,” some of these perquisites are taxable under the Income Tax Act. And that’s where Section 17(2) of the Income Tax Act comes in. "
Let’s decode this important section in simple words.
What Are Perquisites in Salary?
In everyday terms, perquisites (or perks) are non-cash benefits given by an employer to an employee in addition to salary.
Examples include:
- Rent-free Accommodation provided by the employer
- Use of company car for personal purposes
- Free or subsidized meals
- Payment of income tax on behalf of the employee
- Free medical treatment
- Free education for children
Under the tax laws, some of these are taxable, some are exempt, and others fall in a grey zone.
What Does Section 17(2) of Income Tax Act Cover?
Section 17(2) of Income Tax Act clearly defines taxable perquisites in salary packages. It states what types of benefits an employee receives from the employer and whether they are included in “salary” for taxation purposes.
It broadly covers:
- Accommodation (Rent-Free or Concessional)
- Use of movable assets like cars, laptops, etc.
- Services like club memberships or gas, electricity, and water supplied by the employer
- Life and health insurance premiums paid by the employer
- Medical reimbursements and gifts exceeding ₹5,000 per year
Why Are Perquisites Taxable?
The logic is simple: If the employee is benefiting financially—even if not in cash—it should be taxed.
For instance, Rent-free Accommodation provided by the employer saves the employee from paying rent. That saving is considered income. Hence, it becomes taxable.
Similarly, if your employer pays for your child’s tuition fee, that amount is a benefit, and tax is levied on it.
Accommodation (Rent-Free or Concessional)
One of the most commonly provided perks is Accommodation (Rent-Free or Concessional).
Here’s how it’s taxed:
- If an employer gives you Rent-free Accommodation, the taxable value depends on the city of residence, type of employer (private or government), and your salary.
- For concessional accommodation, i.e., when rent charged is lower than market value, the difference is taxed as perquisite.
For example:
If the market rent is ₹30,000 and the company charges you only ₹10,000, then ₹20,000 is treated as a taxable perquisite every month.
You’ll see this reflected in your Form 16 under Section 17(2) of Income Tax Act.
What Are Tax-Free Perquisites?
Not all perquisites are taxed. Some are exempt under specific conditions:
- Medical reimbursements under ₹15,000 (until FY 2017-18)
- Employer’s contribution to the Provident Fund up to a certain limit
- Free refreshments during office hours
- Laptops and mobile phones are provided for official use
- Gifts below ₹5,000 in a financial year
Understanding the difference between tax-free perquisites under section 17(2) and taxable ones helps employees plan their salary packages smartly.
Real-Life Example: How Perquisites Add to Your Tax
Let’s say Ramesh gets the following from his employer:
- Basic salary: ₹12,00,000
- Rent-free company flat (market value: ₹30,000/month)
- Club membership: ₹50,000/year
Here’s how it’s taxed:
- Flat: ₹3,60,000 added as taxable perquisite
- Club: ₹50,000 added
- Total taxable salary: ₹16,10,000
Without realising it, perquisites raised Ramesh’s tax burden. That’s why it’s crucial to understand Section 17(2) of the Income Tax Act.
What About Hospitals and Medical Reimbursement?
The rules are different for medical reimbursements and treatment in hospitals.
- Medical bills reimbursed by the employer are taxable unless treated in a government hospital or covered under insurance.
- Section 17(2) of the Income Tax Act for medical reimbursement and hospitals has specific exemptions, so documentation is key.
Always keep bills and ensure treatment is within approved limits or schemes.
Section 17(2) Certificate and Proofs
Some employers issue a Section 17(2) certificate for the valuation of perquisites, especially when you are transferring jobs or facing scrutiny.
Your employer is required to value the perquisites as per Section 17(2) and report them in Form 12BA and Form 16.
If you’re negotiating your compensation, it’s a good idea to ask for a clear breakup of these benefits and their taxable value.
Final Thoughts
Section 17(2) of the Income Tax Act plays a key role in defining and taxing the perquisites you receive from your employer. It ensures that non-cash benefits like Accommodation (Rent-Free or Concessional), memberships, insurance, and medical reimbursements are taxed fairly.
Remember:
- Not all benefits are bad. Some tax-free perquisites under section 17(2) can help reduce your burden.
- But if you receive a lot of high-value perks—Rent-free Accommodation provided by the employer being the most common—be prepared to see a higher taxable salary.
Want help reviewing your Form 16 or tax planning based on your salary structure?
👉 Head to www.callmyca.com and speak to a qualified expert today.
