Comprehensive Guide to Perquisites and Profits in Lieu of Salary Under the Income Tax Act

In India, an individual’s earnings extend beyond just their basic salary or wages. The Income Tax Act, 1961, categorizes additional financial benefits into Perquisites and Profits in Lieu of Salary, both of which are subject to taxation under specified conditions. Gaining a clear understanding of these aspects allows employees and employers to strategically plan their tax obligations.
What are Perquisites?
Perquisites, as defined under Section 17(2) of the Income Tax Act, refer to extra benefits or advantages that an employer provides to an employee in addition to their regular salary. These perks may be in cash or kind and are typically taxable, except in cases where the Act grants specific exemptions.

Classification of Perquisites
Perquisites are broadly divided into two categories:
1. Exempt Perquisites
These are specific benefits that are either partially or fully exempt from taxation if certain conditions are met.
Rent-Free or Concessional Accommodation: If provided by the employer, exemptions may apply based on the employee’s salary structure and location.
Medical Benefits: Treatment in employer-run or government hospitals is non-taxable. Additionally, reimbursement for medical expenses abroad is exempt up to prescribed limits.
Health Insurance Contributions: Employer-paid premiums for group health insurance policies covering employees and their families are tax-exempt.
Employer-Provided Electronic Devices: Laptops and mobile phones provided by the employer for professional or personal use are tax-free.
Provident Fund Contributions: Employer contributions to Recognized Provident Fund (RPF) and Public Provident Fund (PPF) within specified limits are exempt from taxation.
Superannuation Fund Contributions: Contributions up to ₹1.5 lakh per year to an approved superannuation fund remain tax-free.
Leave Travel Concession (LTC): Travel expenses incurred within India by employees and their families are tax-exempt twice in a block of four years under specific conditions.
2. Taxable Perquisites
Certain perquisites offered by employers are considered part of an employee’s taxable salary.
Rent-Free or Subsidized Accommodation: If the accommodation is employer-owned, taxation is determined based on location—15% of salary for metro cities and 10% for other locations.
Employer-Provided Vehicle: If the employer bears fuel and maintenance costs, such expenses become part of the employee’s taxable income.
Interest-Free or Low-Interest Loans: The taxable value is the difference between the interest rate charged by the employer (if any) and the prevailing State Bank of India lending rate. Loans up to ₹20,000 are exempt.
Profits in Lieu of Salary (Section 17(3))
Profits in lieu of salary encompass payments made to an employee as a substitute for regular salary. These payments are considered salary income and are subject to taxation as per applicable income tax slab rates.
Common Instances of Profits in Lieu of Salary
Compensation for Job Termination: Payments received upon resignation, dismissal, or involuntary retirement (subject to exemption limits under Section 10(10C)).
Payment Due to Changes in Employment Terms: Any compensation received as a result of modifications in employment conditions, such as a reduction in benefits or demotion.
Payments from Employer or Third Parties: Any financial sum received from an employer or an affiliated entity concerning employment.
Payouts from a Keyman Insurance Policy: Amounts received by an employee or their legal heir from a Keyman Insurance Policy taken by the employer.
Post-Employment Payments: Deferred bonuses, gratuity beyond exemption limits, and any other amounts received after retirement but linked to previous service.
Pre-Employment and Post-Employment Payments: Signing bonuses and severance packages granted before joining or after leaving employment.
Key Exemptions and Deductions
While most profits in lieu of salary are taxable, certain exemptions can reduce tax liability:
Gratuity Exemption (Section 10(10)): A portion of gratuity is tax-free, depending on the duration of service and employer category.
Leave Encashment Exemption (Section 10(10AA)): Employees who encash unused leave at retirement or resignation may qualify for full or partial tax exemption.
Voluntary Retirement Scheme (VRS) Benefits (Section 10(10C)): VRS compensation up to ₹5,00,000 is tax-free if it meets prescribed conditions.

Differentiating Salary, Perquisites, and Profits in Lieu of Salary
Category | Description | Taxability | Examples |
---|---|---|---|
Salary | Fixed payment for services rendered | Fully taxable under ‘Income from Salaries’ | Basic salary, dearness allowance, commissions |
Perquisites | Additional employer-provided benefits | Some are taxable, others are exempt | Rent-free housing, company car, provident fund contributions |
Profits in Lieu of Salary | Compensation received instead of salary | Taxed as ‘Salary Income’ | Severance pay, VRS benefits, deferred bonuses |
A thorough understanding of Perquisites and Profits in Lieu of Salary is essential for employees and employers alike. While perquisites offer additional financial advantages, they may be subject to tax based on the benefit type. Similarly, profits in lieu of salary—arising from employment termination, job modifications, or deferred payments—are also taxable but may be eligible for exemptions. By strategically structuring compensation packages and utilizing available exemptions, individuals can optimize tax efficiency and financial planning.
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