Perquisites Under Income-tax Act, 2025: Tax Rules for Employees

Salary is not limited to the cash amount credited to an employee's bank account. Benefits provided by an employer—such as rent-free accommodation, company car, concessional loans, free meals, gifts, ESOPs and certain employer contributions to retirement funds—may also form part of taxable salary as perquisites.

The Income-tax Act, 2025 has been effective from 1 April 2026. Section 17 of the Act contains the principal provisions relating to perquisites, while Rule 15 of the Income-tax Rules, 2026 prescribes detailed valuation rules.

The new Rules have also revised several long-standing valuation limits relating to company cars, meals, gifts, concessional loans and specified employees.

Which Income-tax Act Applies to Employee Perquisites?

Income earned during FY 2025-26 continues to be governed by the Income-tax Act, 1961 and is assessed in AY 2026-27. Income earned from 1 April 2026 onwards is governed by the Income-tax Act, 2025.

Therefore, an employee filing the return for AY 2026-27 should not apply the new Rule 15 valuation limits merely because the return is being filed after 1 April 2026.

What is a Perquisite?

Section 16 of the Income-tax Act, 2025 includes perquisites within the meaning of salary. Section 17 specifies the benefits that may be treated as taxable perquisites.

Broadly, a perquisite is a benefit, facility or advantage received by an employee from an employer because of employment, in addition to normal monetary salary.

Common examples include:

• Rent-free or concessional accommodation
• Company car provided for personal or mixed use
• Domestic servants provided by the employer
• Gas, electricity or water supplied by the employer
• Concessional education
• Interest-free or concessional loans
• Free meals
• Gifts, vouchers and tokens
• Holiday expenses
• Credit-card and club expenses
• Use or transfer of employer-owned assets
• ESOPs and sweat-equity shares
• Certain insurance payments
• Excess employer contributions to specified retirement funds
• Annual accretion relating to excess retirement-fund contributions

Income-tax Act, 1961 vs Income-tax Act, 2025

Who is a Specified Employee?

Certain benefits become taxable only when they are provided to a specified employee.

Section 17(1)(c) broadly covers:

• An employee who is a director of the employer-company
• An employee having substantial interest in the company
• An employee whose monetary salary exceeds the amount prescribed under the Rules

For Tax Year 2026-27 onwards, Rule 17 prescribes a monetary salary threshold of ₹4,00,000.

Under the corresponding provisions of the Income-tax Act, 1961, the threshold was ₹50,000.

Valuation of Common Perquisites Under Rule 15

1. Rent-Free Accommodation

Where accommodation owned by a non-government employer is provided to an employee, the value of unfurnished accommodation is generally determined according to the population of the city.

Any rent actually paid by the employee is reduced from the calculated value.

Where the employer has taken the accommodation on rent or lease, the value is generally the lower of:

• Actual lease rent paid by the employer or
• 10% of salary

Any rent recovered from the employee is reduced from this amount.

For hotel accommodation, the value is generally the lower of actual hotel charges or 24% of salary, subject to prescribed exceptions.

In case of furnished accommodation, additional value may be added for furniture. Where furniture is owned by the employer, the amount is generally calculated at 10% per annum of the cost of furniture, subject to the prescribed adjustments.

2. Employer-Provided Motor Car

The motor-car valuation rules have changed significantly from 1 April 2026.

Where a car owned or hired by the employer is used partly for official duties and partly for personal purposes, and the employer bears running and maintenance expenses:

Where the employee bears private running and maintenance expenses, the prescribed amounts are generally:

• ₹2,000 per month for a car up to 1.6 litres or an electric vehicle
• ₹3,000 per month for a car above 1.6 litres
• Additional ₹3,000 per month where a chauffeur is provided

Where the vehicle is used wholly and exclusively for official duties, the taxable value may be nil if the prescribed journey records and employer certification are maintained.

Example

Suppose an employer provides an employee with a 1.5-litre car for both office and personal use and bears all running expenses.

Taxable perquisite = ₹5,000 × 12 = ₹60,000

If a chauffeur is also provided:

Taxable perquisite = ₹8,000 × 12 = ₹96,000

This amount is added to the employee's taxable salary.

3. Interest-Free or Concessional Employer Loan

The value of an interest-free or concessional loan is generally calculated using:

• The maximum outstanding monthly balance
• The applicable State Bank of India lending rate on the first day of the relevant tax year
• The purpose for which the loan was taken
• Interest actually paid by the employee, if any

No taxable perquisite generally arises where the aggregate qualifying loan amount does not exceed ₹2,00,000, subject to the prescribed conditions.

Under the earlier Income-tax Rules, 1962, the corresponding threshold was ₹20,000.

4. Free Food and Non-Alcoholic Beverages

Free food and non-alcoholic beverages provided during working hours at the employer's office or business premises, or through qualifying paid vouchers usable only at eating joints, may qualify for relief where the value does not exceed ₹200 per meal.

Tea or snacks provided during working hours and food provided at qualifying remote areas or offshore installations may also be excluded under the Rules.

The corresponding limit under the earlier Rules was ₹50 per meal.

5. Gifts, Vouchers and Tokens

Gifts, vouchers or tokens provided by an employer to an employee or a member of the employee's household may be taxable as perquisites.

Under Rule 15, the value is treated as nil where the aggregate value is below ₹15,000 during the tax year.

Under the earlier Rules, the corresponding threshold was ₹5,000.

Employees should note that the Rule uses the expression "below ₹15,000". It should not automatically be treated as a ₹15,000 deduction from a gift of a higher value.

6. Free or Concessional Education

Where education is provided through an educational institution owned and maintained by the employer, the value is generally determined with reference to the cost of similar education in or near the locality.

Rule 15 provides a threshold of ₹3,000 per month per child, subject to the conditions prescribed under the Rule.

The corresponding threshold under the earlier Rules was ₹1,000 per month per child.

7. Domestic Servants, Gas, Electricity and Water

Where an employer provides services of a sweeper, gardener, watchman or personal attendant, the value is generally based on the amount paid or payable by the employer for such services, reduced by any amount recovered from the employee.

For gas, electricity or water purchased from an outside agency, the value is generally based on the amount paid by the employer. Where supplied from the employer's own resources, the manufacturing cost is generally considered.

8. Credit Card and Club Facilities

Personal expenditure charged to an employer-provided credit card or reimbursed by the employer may be taxable after reducing any amount recovered from the employee.

Expenditure incurred wholly and exclusively for official purposes may have a nil taxable value where the prescribed records and employer certification are maintained.

Personal club expenditure paid or reimbursed by the employer may also be taxable. However, certain corporate membership fees and qualifying sports, health-club or similar facilities provided uniformly to employees may receive different treatment under Rule 15.

9. Employer-Owned Laptops, Computers, Tablets and Mobile Phones

Rule 15 specifically excludes laptops, computers, tablets and mobile phones from the general valuation rule applicable to the use of employer-owned movable assets.

For other movable assets, the value is generally:

• 10% per annum of the actual cost of the asset or
• The rent or charge paid by the employer

Any amount recovered from the employee is deducted from the calculated value.

10. ESOPs and Sweat-Equity Shares

ESOPs and sweat-equity shares can be taxable as perquisites.

Section 17(1)(d) covers specified securities and sweat-equity shares allotted or transferred by a current or former employer either free of cost or at a concessional price.

The taxable value is generally calculated as:

Fair Market Value on the date of exercise
minus
Amount actually paid or recovered from the employee 

Rule 15 prescribes how fair market value is determined. Listed equity shares generally use prescribed stock-exchange values, while unlisted shares require valuation in accordance with the prescribed merchant-banker valuation rules.

11. Employer Contribution Exceeding ₹7.5 Lakh

Section 17(1)(h) treats aggregate employer contributions exceeding ₹7,50,000 in a tax year as a taxable perquisite where contributions are made to specified funds such as:

• Recognised provident fund
• Specified pension scheme
• Approved superannuation fund

The ₹7.5 lakh limit is an aggregate limit across the specified funds and not a separate limit for each fund.

Annual interest, dividend or similar accretion attributable to such excess contribution can also be taxable. The computation is governed by Rule 16.

Which Medical Benefits are Not Treated as Perquisites?

Section 17 provides exclusions for certain qualifying employer-provided medical benefits.

These may include:

• Treatment in a hospital maintained by the employer
• Treatment in Government or qualifying approved hospitals
• Treatment of prescribed diseases in approved hospitals
• Qualifying health-insurance premium paid by the employer
• Certain medical treatment expenses incurred outside India

In case of medical treatment abroad, prescribed limits and conditions apply. For specified travel expenditure, Rule 19 prescribes a gross total income threshold of ₹8,00,000.

How are Taxable Perquisites Taxed?

There is generally no separate tax rate merely because an amount represents a perquisite.

The taxable value of the perquisite is normally added to the employee's salary income. The total taxable income is then taxed at the applicable income-tax rates.

Employers are required to consider taxable perquisites while deducting tax from salary under Section 392 of the Income-tax Act, 2025.

In case of non-monetary perquisites, the employer may, subject to the provisions of the Act, choose to bear the tax instead of recovering that tax from the employee.

Form 123: New Perquisite Statement

Under the Income-tax Rules, 2026, Form 123 replaces Form 12BA for reporting particulars of perquisites, benefits, amenities and profits in lieu of salary.

Form 123 operates under Section 392(5)(a) of the Income-tax Act, 2025 read with Rule 204(2) of the Income-tax Rules, 2026.

According to the prescribed guidance, Form 123 is required where salary paid or payable to the employee exceeds ₹1,50,000 per annum.

It is required to be issued by 30 April of the following year.

The form contains details of various perquisites including accommodation, motor cars, servants, utilities, concessional loans, holiday expenses, free meals and education facilities.

Important Changes From 1 April 2026

Common Mistakes Employees Should Avoid

• Assuming every benefit included in the CTC is automatically tax-free.
• Applying Income-tax Rules, 2026 valuation limits while filing the return for AY 2026-27 relating to FY 2025-26.
• Ignoring personal use of an employer-provided motor car.
• Using an incorrect fair market value for ESOP taxation.
• Ignoring aggregate employer contributions exceeding ₹7.5 lakh to specified retirement funds.
• Treating all employer gifts or vouchers as tax-free.
• Claiming official-use exemption without maintaining prescribed records and employer certification.

Conclusion

The Income-tax Act, 2025 continues the principle that employment-related benefits may form part of taxable salary. However, the Income-tax Rules, 2026 have substantially revised several perquisite valuation limits.

From Tax Year 2026-27, important changes include the ₹4 lakh specified-employee threshold, ₹2 lakh concessional-loan limit, ₹200 meal threshold, ₹15,000 gift threshold, higher motor-car valuations, ₹3,000 education threshold and the introduction of Form 123.

Employees should carefully review their salary structure, Form 16 and Form 123 and ensure that taxable perquisites are valued according to the law applicable to the year in which the benefit was provided.

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