The concept of perquisites and profits in lieu of salary as per Section 17(2) and Section 17(3) of the Income-tax Act, 1961

 

Section 17 – Income under the Head Salaries

The term "salary" includes various components as per Section 17(1). Among them, Section 17(2) defines perquisites, and Section 17(3) defines profits in lieu of salary. Both are taxable under the head "Income from Salary".

 Section 17(2) – Perquisites [Perks]

Perquisite means any benefit or amenity provided by an employer to the employee in addition to salary or wages. These can be in cash or in kind.

 Taxable Perquisites Include:

1.      Rent-free accommodation.

2.      Concessional rent accommodation.

3.      Any sum paid by the employer on behalf of the employee (e.g. income tax, bills).

4.      Free or concessional education for children.

5.      Use of motor car for personal purposes.

6.      Sweat equity shares or ESOPs (for specified employees).

7.      Contributions to recognized provident fund exceeding ₹2.5 lakh per annum.

8.      Employer-paid life/health insurance (in some cases).

 The valuation of perquisites is done as per the Income-tax Rules, 1962, especially Rule 3.

 Section 17(3) – Profits in Lieu of Salary

These are payments received by an employee that are not in the form of salary or perquisites, but are related to employment, such as compensation or settlement amounts.

 Examples of Profits in Lieu of Salary:

1.      Compensation received on termination of employment.

2.      Payments from unrecognized provident fund (employer’s portion and interest).

3.      Retrenchment compensation, golden handshake payments (except where exempt under Section 10(10C)).

4.      Payment received before joining a job or after resigning, related to employment.

5.      Any amount received from the employer which is not covered under salary or perquisites but is related to employment.

 Such amounts are fully taxable unless specifically exempted under some other provisions (e.g., gratuity, leave encashment, retrenchment compensation under Section 10).

 Summary Table

Particulars

Section 17(2) – Perquisites

Section 17(3) – Profits in Lieu of Salary

Nature

Non-cash/cash benefits provided during employment

Lump-sum or irregular receipts in relation to employment

Examples

Rent-free house, car, ESOPs, club memberships

Compensation on resignation, payments from URPF, etc.

Valuation Method

Rule 3 of Income-tax Rules

Actual amount received

Taxability

Taxable under "Income from Salaries"

Taxable under "Income from Salaries"

Exemptions

Few exemptions/thresholds exist (e.g. car fuel limits)

Some items exempt under Section 10 (e.g. gratuity)

 Conclusion

Both perquisites and profits in lieu of salary are included in taxable salary under the Income-tax Act. While perquisites are usually ongoing benefits, profits in lieu of salary are one-time or lump-sum receipts arising from employment, even if received after leaving the job.

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