Dr.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY, LUCKNOW

ACADEMIC SESSION: 2018– 2019

TAXATION LAW
“Perquisites under the Income Tax Act, 1961
(Focusing on Medical Perquisites)”

Submitted To :-
MR. BHANU PRATAP SINGH
Assistant Professor (Law)

Submitted By :-
VAISHALI KARDAM
SEMESTER VII (Roll No. 159)
B.A.LLB. (Hons.)
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 ACKNOWLEDGEMENT

With due respect, I would like to thank my teacher, under whose guidance and support, I
had been able to make the final draft of this project.

I must also thank ‘Dr. Madhu Limaye Library’ at ‘Dr. Ram Manohar Lohiya National Law
University, Lucknow’ for providing me with enough books and study materials, for the making of
this project.

I must thank my parents for their valuable support and for making me stand of what I am,
and the values I had inherited from them, are the prized possession of my life.

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TABLE OF CONTENTS

1. INTRODUCTION………………………………………………………………….4

a) Classification of perquisites
b) How are perquisites taxed and who pays that tax?

2. PERQUISITES UNDER SECTION 17(2) OF INCOME TAX ACT…………….. 6

3. MEDICAL PERQUISITES………………………………………………………... 8

a) Medical facilities for employees in India

b) Expenditure on Medical Facilities for Employees outside India

4. MEDICAL ALLOWANCE AND MEDICAL REIMBURSEMENT…………….. 10

a) Medical expense Allowance

b) Medical Expense Reimbursement

5. CONCLUSION……………………………………………………………….…… 11

6. BIBLIOGRAPHY…………………………………………………………….…… 13

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CHAPTER I: INTRODUCTION
The concept of perquisites under the Income Tax Act can be understood as when the employers
may grant allowances in addition to the Salary and wages, which are termed as perquisites.
Perquisites are defined as any advantage or as any emolument attached to an office or position in
addition to salary. Ordinarily these are non-money benefits given by an employer to employee in
addition to money pay. However, there might be situations where the employer reimburses costs
or pays for commitments caused by the employee. Perquisites are the advantages or ‘Perks’ that
and employee enjoys with a job.

Oxford Dictionary defines perquisites as- ‘any casual emoluments, fee, or profits attached to an
office or position in addition to salary.’ It simply means that there should be a personal advantage
like an office car used by an employee, rent free accommodation etc. as in contrast with the
‘collective’ enjoyment in case of fringe benefits like entertainment, employee welfare activities,
hospitality, sales promotion publicity etc.

An advantage presupposes presence of two parties, one who is provider of the advantage and the
other who is beneficiary of the advantage. In current occupation, particularly in the private
division, there has been a trend of giving a few advantages to the employee in addition to the
salary. These advantages might be in type of entertainment, free convenience, conveyance, or
education facilities for the children of employees.

Conditions that should be fulfilled to become perquisites:

1. There must be an employer-employee relationship.

2. It should be provided by the employer to the employee.
3. It should be derived by the employer’s authority.
4. There must be a personal advantage for the employee.
5. It should be allowed during the continuance of employment.
6. It should be authorized act by the employer as an unauthorized act never comes in the
purview of the perquisites.1

1
Perquisistes, Amit Chaubey, ‘http://www.slideshare.net/AmitChaubey2/perquisites?qid=055bad4f-e9ab-4f81-a21d-
49bd3757ee46&v=default&b=&from_search=2’ last accessed on 9 October, 2016

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CLASSIFICATION OF PERQUISITES:
Depending upon the tax that can be imposed on perquisites, these can be classifies into following
three heads:

1. TAXABLE PERQUISITES
Some perquisites that are taxable in nature are gas supply in house, professional tax of
employee, reimbursement of medical expense, rent-free accommodation, water and electricity
expense, etc. Taxable perquisites also include any other fringe benefit given by the employer
to the employee like gifts, club and gym facilities and free meals etc.
2. EXEMPTED PERQUISITES
Non-taxable fringe benefits include provision of medical aid, use of health club and sports
club, free medical and recreational facilities, interest free salary loan provided by employer
to employee, travel expenses, laptops and computers provided by the company for the official
use, refreshments provided by employer to employees during office hours and so on.
3. PERQUISITES TAXABLE ONLY BY EMPLOYEES
These perquisites include car owned but the company but sued by employee, education
facilities for children, service of domestic servant etc.

WHO PAYES THE PERQUISITES TAX AND HOW THEY ARE TAXED?
According to the Finance Act 2005, perquisites are taxed by the Government in case these perks
are provided or are deemed to be provided to employees by employers. The rate at which
perquisites are taxed is 30% of the value of Fringe Benefits. The perquisite tax is paid by the
Employer who furnishes these fringe benefits to employees. It can be any firm, or an association
of persons, a company or body of individuals. The absolute most prominent perquisites gave by a
noteworthy rate of organizations to their workers are settlement, accommodations, cars and
investment opportunities. Perquisites are taxed according to their inclination and the arrangement
of the same by the employer. In any case, with the economy becoming quickly and globalization
seeping in, many employers have gone global and are adjusting to universal method for dealing
with employees. Perquisites paid as an advantage is an imperative part for employees and has been
isolated as a different taxable segment by the Government of India.

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In Tennant v. Smith2, the house of Lords help that a benefit, which was not capable of being
converted into money, i.e. the right to occupy rent-free premises, was not a perquisite. This section
makes a departure from that principle of law as various benefits and amenities set out in these
clauses are all regarded as perquisites, whether they are convertible in money or not. 3

In CIT v. S.G. Pagnatale,4 it was held that perquisite is something that arises by reason of a
personal benefit and that a mere reimbursement of a necessary disbursement is not a personal
advantage and therefore, not a perquisite.

CHAPTER II: PERQUISITES UNDER SECTION 17(2) OF INCOME TAX

ACT,1961
As has been now said the salaries of employees generally includes advantages in form of health
advantage, transport, convenience etc., which constitute fringe benefits. These advantages are
taxable either in the hands of employer giving them or the employee getting them.

The question was that what benefits could be given to employees but also not taxed in hands of
employer as it is not the income of the employer. The government then came up with the concept
of fringe benefit tax. Many controversies have been there regarding the imposition of fringe benefit
taxes as perquisites under Section 17(2) of the Income Tax Act, 1961. Therefore for understanding
what benefits will be covered we shall see what constitutes perquisites.

Broadly, “perquisite” is defined in the section 17(2) of the Income-tax Act as including:

1) Value of rent-free accommodation provided to the assessee by his employer [sec.17(2)(i)]

2) Value of any concession in the matter of rent respecting any accommodation provided to
the assessee by his employer [sec.17(2)(ii)]
3) Value of any benefit/amenity granted or provided free of cost or at concessional rate in any
of the following cases:

2
3 TC 158
3
Dinesh Vyas, Kanga, Palkhiwala and Vyas- The law and Practice of Income Tax, Volume 1, (9th edn, New Delhi:
Butterworths, 2004), 596.
4
(1980) 124 ITR 391 (Guj)

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  By a company to an employee who is a director thereof;
 By a company to an employee, being a person who has substantial interest in a
company;
 By any employer to an employee to whom provisions of (i) and (ii) above do not
apply and whose income under the head “Salaries” exclusive of the value of all
benefits or amenities not provided for by way of monetary benefits, exceeds Rs.
50,000 [sec. 17(2)(iii)]
4) any sum paid by the employer in respect of any obligation which but for such payment
have been payable by the assessee [sec. 17(2)(iv)]
5) any sum payable by the employer, whether directly or through a fund other than a
recognised provident fund or approved superannuation fund or a deposit-linked insurance
fund, to effect an assurance on the life of the assessee or to effect a contract for an annuity
[sec. 17(2)(v)];
6) the value of any specified security or sweat equity shares allotted or transferred, directly or
indirectly, by the employer, or former employer, free of cost or at concessional rate to the
assessee [sec. 17(2)(vi)];
7) the amount of any contribution to an approved superannuation fund by the employer in
respect of the assessee, to the extent it exceeds one lakh rupees [sec. 17(2)(vii)];
8) the value of any other fringe benefit or amenity as may be prescribed [sec 17(2)(viii)]5

Perquisites and profits may take a variety of forms, e.g. extra payment, voluntary or stipulated, for
something done outside the duties of office; dearness allowance, house rent allowance, and other
allowances like bad climate allowance and extra shift allowance; payment by the employer of
lighting, heating and telephone charges and other outgoings in respect of the employees residence;
free personal use of motor car, lump sum bonus, or bonus calculated from net profits of the
company; allowances paid to meet the extra cost of living in a foreign country; or for maintenance
of education of employee's children.

5
Singhania, Vinod K., and Singhania, Monika, ‘Student’s Guide to Income Tax’, 55 th edi.,2016-17,Taxmann
Publications(P.) Ltd.

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CHAPTER III: MEDICAL PERQUISITES
Medical Facilities for Employees in India [Provision to Section 17(2)]

1. Generally medical facilities are tax free. If there is any hospital, dispensary or nursing home:
 Is maintained by the employer
 Is maintained by the Government or local authority or any other hospital approved by
Central Government
 Hospital approved by the Chief Commissioner having regard to the prescribed
guidelines for treatment of the prescribed diseases,
Then when an employee is granted medical facilities or his family members are granted
medical facilities in that hospital, dispensary or nursing home then in such situation
medical perquisites are treated as tax-free perquisites.
2. Medical insurance premium paid or reimbursed by the employer is not chargeable to tax.
Any insurance premium for insurance of health of employees under a scheme approved by
Central Government. Any reimbursement by employer of any insurance premium paid by
the employee for insurance of his and his family’s health under a scheme approved by the
Central Government is also a tax-free perquisite.
3. The reimbursement of the amount which is actually spent by the employee for some medical
treatment for himself or on her spouse or dependent parents or children given by the
employer is a tax free perquisites up to a maximum of Rs. 10,000/- p.a. This amount has
been raised to Rs. 15,000/- from the assessment year 1999-2000. However, in these cases
medical treatment of the employee and his family members shall be fully tax free even if
the amount paid or reimbursed exceeds these specified limit as stated above:
 Expenditure which is incurred by the employee on himself or his family’s treatment in
respect of the prescribed diseases in a hospital which is approved by the Chief
Commissioner of Income Tax. The employee has to attach a certificate from the
hospital specifying the disease for which medical treatment was required and the
receipt for the amount paid to the hospital to avail the benefit under this section.

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  Expenditure which is incurred by the employee for himself or his family’s medical
treatment in a Government Hospital or in a hospital which is approved by the
Government for its employees.

Expenditure on Medical facilities for employees outside India

1. The expenditure which is incurred by the employer on treatment of the employee or his
any family member which is dependent on him, outside India is treated to be a tax free
perquisite.
2. The expenses on the medical treatment of the employee or any member of his family
incurred outside India shall be a tax free perquisite only to the extent permitted by the
Reserve Bank of India.
3. The expenses incurred on stay abroad for patient and the attendant who accompanies the
patient in connection with treatment of the employee shall also be a tax-free perquisite to
the extent admitted by The Reserve Bank of India.
4. The expenses relating to traveling of the patient and one attendant who accompanies the
patient shall be tax-free perquisite in the case where total income of employer or patient
does not exceed Rs. 2,00,000/- If the income exceeds Rs. 2,00,000/- the travelling expenses
of the patient as well as the attendant shall become a taxable perquisite.

If a sum of money is paid by the employer for expenditure actually incurred by the employee for
medical treatment in a hospital and it exceeds Rs. 15,000/- during the same year, then that is liable
to income-tax in the hands of the employee. However, if any sum paid by the employer for
expenditure actually incurred by the employee for medical treatment in a hospital and it does not
exceed Rs. 15,000/- during the same year, then that is not liable to income tax in the hands of
employee.

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CHAPTER IV: MEDICAL ALLOWANCE AND MEDICAL REIMBURSMENT

As a general principle, any perquisite is one form of a medical allowance is typically taxable. On
the other hand, reimbursement by an employer of medical expenses uncured by an employee is
generally tax-free. Many use the words ‘medical allowance’ and ‘medical reimbursement’
assuming that they have the same meaning. However, these have different treatment of tax as per
the Income Tax Act, 1961. An employee’s salary should be a medical reimbursement and not
medical allowance since allowance in many cases is taxable.

MEDICAL EXPENSES ALLOWANCE

Medical allowance is a fixed allowance which is received by an employee for the discharge of
medical expenses and it is fully taxable. It is fixed allowance paid to the employees of a company
on a monthly basis irrespective of whether they submit the bills to substantiate the expenditure or
not. If employee wants to claim tax benefit, they should submit bills for the corresponding amount
every month under medical reimbursement. Hence, an employee should avoid the receipt of an
allowance for medical expenses but should rather take medical reimbursement, so that it is tax-
free. Fixed medical allowance is fully taxable even if it involves some expenditure for medical
treatment of the employee. It is chargeable to tax. Employees should avoid taking fixed medical
allowance and should take medical reimbursement instead.

MEDICAL EXPENSES REIMBURSEMENT

Where an employee is allowed to get reimbursement for the medical expenses incurred by him at
a hospital maintained by the employer or a Government approved hospital, the entire amount of
reimbursement is tax-free and is not treated as a taxable perquisite. If an employee receives some
money for his medical treatment or the treatment of any member of his family then a sum up to
Rs. 15,000 p.a. is not treated as a taxable perquisite as per Section 17(2)(b) of Income Tax Act,
1961. This exemption is enjoyed by the employee only if the expenditure is actually incurred on
his medical treatment or for treatment of any member of the family. Family for the purpose of
reimbursement includes spouse and children or parents and siblings of an employee. There are no
restrictions in terms of homeopathic, allopathic or other forms of treatment to claim exemption.

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CHAPTER IV: CONCLUSION

Perquisites are any casual emolument or benefit attached to an office or position in addition to
salary or wages. In essence, these are usually non-cash benefits given by an employer to
employees in addition to cash salary or wages. However, they may include cases where the
employer reimburses expenses or pays for obligations incurred by the employee. Perquisites are
also referred to as fringe benefits.

Broadly, ‘perquisite’ is defined in the section 17(2) of the Income-tax Act as including: Value of
rent-free or concessional rent accommodation provided by the employer, value of any
benefit/amenity granted free or at concessional rate to specified employees etc. , any sum paid by
employer in respect of an obligation, which was actually payable by the assessee, any sum paid by
the employer for assurance on life of the employee or to effect a contract for an annuity and value
of any other fringe benefit as may be prescribed.

Conditions to become perquisites:

a) Allowed by Employer to Employee

b) Allowed during continuance of employment
c) Directly depend upon service
d) Personal advantage to the employee
e) Derived by virtue of Employer’s authority
f) Unauthorized advantage taken by employee without employer’s authority will not become
perquisites.

Perquisites and profits may take a variety of forms, e.g. extra payment, voluntary or stipulated, for
something done outside the duties of office; dearness allowance, house rent allowance, payment
by the employer of lighting and telephone charges and other outgoings; free personal use of motor
car, or bonus calculated from net profits of the company; allowances paid to meet the extra cost of
living in a foreign country; or for maintenance of education of employee's children.

The difference between Medical reimbursement and Medical Allowance is that in medical
reimbursement the employee has to first give the expenses from his own pocket and then give the
bill to his employer, who will then reimburse the actual amount spent. However in medical

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allowances, the employer gives a pre-specified amount to the employee irrespective of the
expenses incurred by the employee. Employee is not even required to furnish the bills to the
employer. Although no income tax on medical reimbursement is levied up to Rs. 15,000, the
amount received as Medical allowance would be fully taxable. Fixed medical allowance is fully
taxable even if it involves some expenditure for medical treatment of the employee. It is chargeable
to tax. Hence, employees should avoid taking fixed medical allowance and should take medical
reimbursement instead.

CHAPTER V: BIBLIOGRAPHY

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Primary Sources:

1. Dr. Vinod K. Singhania and Dr. Monica Singhania, ‘Students Guide to Income Tax’, (55th
ed., 2016-17, Taxmann Publication Ltd).
2. Dinesh Vyas, Kanga, Palkhiwala ‘The Law and Practice of Income Tax’, (9th ed. Lexis
Nexis Butterworths Wadhwa Nagpur, 2008).
3. Dr. Vinod K. Singhania and Dr. Kapil Singhania, “Direct Taxes Law and Practice”, (1st
ed., Taxman Publication Ltd).

Secondary Sources:

 <http://taxmannindia.blogspot.in/> Last accessed 7th October 2016.

 <http://taxguru.in/income-tax/india-tax-hell.html> Last accessed 7th October 2016.

 <http://www.slideshare.net/AmitChaubey2/perquisites?qid=055bad4f-e9ab-4f81-a21d-
49bd3757ee46&v=default&b=&from_search=2> last accessed on 9 October, 2016

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