This document discusses the key differences between allowances and perquisites provided by employers to employees. Allowances are a fixed amount given to employees periodically to cover job-related expenses. They are considered part of salary and fully taxable. Perquisites are non-monetary benefits like company cars or housing provided for free or at reduced costs. Only specified employees like directors pay tax on certain perquisites. The document provides examples of allowances like Dearness Allowance and examples of taxable and non-taxable perquisites.

1. Difference Between
Allowances and Perquisites
MBA II SEM (2022-24)

3. Allowance refers to the financial benefit which an employer provides to employees in addition to the
basic salary they draw, so as to meet the expenses that employees may incur to perform the job or
because of it. Conversely, perquisites refer to a financial benefit which an employer provides to an
employee because of their job or the designation they hold.
These are like add-ons to an employee’s compensation. It facilitates the management of a number of
expenses for which the employee does not need to spend money from his own pocket.

5. Definition of Allowance
Allowance is a fixed amount given to the employee at periodic intervals to cover special
expenses incurred while discharging job-related duties. To put it simply, an allowance is a
compensation for the incurrence of specific expenses.
Amount paid by the company in the form of allowance also constitutes a part of the salary. Also,
the amount of allowance is considered to determine the total salary for the purpose of taxation.

6. Allowance

7. Fully Taxable Allowances
Dearness Allowance: Dearness Allowance or DA is the allowance given to the salaried people as
a cost of living adjustment allowance, so as to survive inflation.
Entertainment Allowance: Entertainment allowance is given for reimbursing the expenses made
on the customer’s hospitality. The lowest of the three amounts that follow is an allowable
deduction for government employees – 1/5th of basic salary, the actual amount received, or ₹
5000.
Overtime Allowance: When employees work over and above their working hours, overtime
allowance is provided to the employees.

8. Fully Taxable Allowances
City Compensatory Allowance: In the urban cities where the cost of living is extremely high, city
compensatory allowance is given to the employees to survive the inflated cost of living.
Project Allowance: Allowance provided to employees for meeting project expenses, is called
project allowance.
Meal Allowance: Allowance provided for tiffin or meal is meal allowance.

9. Fully Taxable Allowances
Cash Allowance: Cash Allowance is provided by the employer such as marriage allowance,
bereavement allowance or holiday allowance, etc.
Servant Allowance: Servant allowance is given by the employer to an employee to get the
services of a servant.
Medical Allowance: Allowance that an employer pays to an employee at a fixed rate, regardless
of the treatment taken by the employee.

10. Partially Taxable Allowances
House Rent Allowance: An allowance paid for the accommodation of the employees is called a
house rent allowance.
Children Education Allowance: It is exempt up to a certain amount per month per child, subject
to a maximum of two children. Likewise, hostel subsidy up to a certain amount per month per
child is also exempt, subject to a maximum of two children.

11. Fully Exempt Allowances
Allowance paid to government servants in foreign countries: Government employees paid an
allowance while serving in foreign countries.
Sumptuary Allowance: This allowance is given to the judges of the Supreme Court and High
Court.

12. Definition of Perquisites
Perquisites or perks are casual emolument or the monetary value of personal benefit or
amenity, connected to the office or position, over and above the salary. The employer provides
perquisites to the employee, for free or at concessional rates. Further, no money is provided to
the employee, if the employee does not use or avail of these amenities.
However, it does not indicate mere reimbursement of important expenditures, for discharging
official duties.

13. Definition of Perquisites
Nowadays, an employee’s salary package covers the basic pay and perquisites such as company
car, housing, servant, etc. It may arise while carrying out employment or profession.
Prerequisite resulting from the employment relationship, then it is taxable as salary. But when it
results from a profession, it is chargeable to tax as profits and gains of business and profession.
Only those perquisites are taxable which has arisen legally. that is to say, if an employee has
taken unauthorized advantage of the employer’s permission, it will not be regarded as a
prerequisite.

14. Perquisites

15. Perquisites Taxable for all Employees
Rent-Free Accommodation: Rent-free accommodation provided to an employee by an
employer. However, one should take note of the fact that Rent free official residence provided to
the high court and supreme court judges is free from taxes. Also, Rent free furnished house
given to officers of parliament is also free from tax.
Concession in Rent: Concession in rent for accommodation which an employer provides to an
employee.
Payment by an employer concerning employee’s obligation: Any obligation which is to be
payable by the employee, but paid by the employer, is regarded as a prerequisite.

16. Perquisites Taxable for all Employees
Payment of amount by the employer either directly or indirectly to affect the life assurance of
the employee.
Specified security or sweat equity shares allotted or transferred by the employer: Direct or
indirect allotment or transfer of specified security or sweat equity shares by the employer or ex-
employer either free of cost or at a concessional rate to the employer.
Other fringe benefits: Value of any other fringe benefits prescribed by the Central Board of
Direct Taxes such as credit card expense. club expenditure, use of movable assets, interest-free
or concessional loan, etc.

17. Exempt perquisites
Telephone: Telephone facility which an employer provides to an employee at the residence.
Transport Facility: Provision of transport facility which an employer provides to the employee
who is engaged in the business carrying of passengers or goods, to an employee which can be
free of cost or at concessional rate.
Privilege passes and privilege tickets: Indian railways offer privilege passes or ticket orders to
their employees.
Perquisites allowed outside India by the government: Perquisites allowed to a citizen for
providing services in a foreign nation by the Indian government.

18. Exempt perquisites
Employer’s contribution to staff group insurance scheme.
Payment of annual premium by the employer on personal accident policy: Annual premium
payment made by the employer on personal accident policy initiated by an employee on
employee’s life.
Refreshment: Refreshments are provided to the employees in the office during working hours.
Recreational Facilities: Recreational Facilities such as club facilities are provided to the
employee’s personnel in general.
Amount spent on training of employees: Amount spent on the training of the employees or on
refresher management course plus boarding and lodging expenses incurred by the employer.

19. Perquisites taxable in the hands of
specified employees
Here the term ‘specified employees‘ means – director employee or an employee who has
considerable interest in the company, employees drawing more than ₹ 50k salary. The
perquisites which are taxable in the hands of specified employees are:
Provision of servants like sweeper, watchman, personal attendant, and gardener.
Facility of use of gas, electricity, or water
Free or concessional tickets
Use of motor car
Educational facilities to children, either free or at concessional rates

20. Types of Perquisites

21. Non-Monetary Perquisites
Non-monetary perquisites are in the form of free facilities that the
employees have access to either free of cost or at concessional rates.
It must be noted that these prerequisites are taxable in the hands of
specified employees. These are:
◦ Free domestic servant at employees home-like gardener, sweeper, watchman,
etc.
◦ Free water, gas, and electricity at the home of the employee
◦ Free educational facility for the children of the employee
◦ Use of company’s motor car for free.
◦ The private journey is offered for the free or concessional rate to the
employee or family of the employee.

22. Monetary Perquisites
Monetary perquisites are the perquisites that can be claimed as
reimbursement. These are taxable for all employees. It includes
◦ Reimbursement of certain bills like gas, water, and electricity.
◦ Reimbursement of school fees of the children.
◦ Reimbursement of motor car expenses like petrol or diesel expenses etc.

23. Examples of Allowances

24. Examples of Allowances

25. Examples of Allowances

26. Examples of Allowances

27. Examples of Allowances

28. Caselet
Rajesh is an Indian citizen who works for a multinational company as a software
engineer. As part of his employment package, he receives various perquisites and
allowances from his employer. Let's take a look at the taxability of some of these
benefits:
1.Housing allowance: Rajesh's employer provides him with a monthly housing
allowance of Rs. 20,000 to cover his rent expenses. This allowance is tax-free up to
a certain limit, which is determined by Rajesh's salary and the city in which he lives.
The tax-free limit for Rajesh is Rs. 24,000 per month, so he will only have to pay
tax on the excess Rs. 4,000 per month.
2.Company-provided car: Rajesh's employer provides him with a car for his
personal use. The value of this benefit is considered a taxable perquisite, and the
amount of tax Rajesh will have to pay depends on the cost of the car, fuel
expenses, insurance, and maintenance. Let's assume that the total cost of the
benefit is Rs. 5 lakhs per year. Rajesh's employer will add this amount to his salary,
and he will have to pay tax on the total amount.

29. Caselet…
3. Medical allowance: Rajesh's employer provides him with a monthly medical
allowance of Rs. 5,000 to cover his medical expenses. This allowance is tax-free up
to a certain limit, which is determined by the actual medical bills submitted by
Rajesh. If Rajesh submits medical bills of less than Rs. 5,000 per month, the
balance amount is taxable as a perquisite.
4. Education allowance: Rajesh's employer provides him with an education
allowance of Rs. 10,000 per month to cover the education expenses of his two
children. This allowance is considered a taxable perquisite, and the entire amount is
added to Rajesh's salary and subject to income tax.
In summary, while some allowances and perquisites are tax-free up to a certain
limit, others are fully taxable. It's important for employees to understand the
taxability of the benefits they receive and to keep accurate records of any related
expenses. Employers should also ensure that they are complying with all tax laws
related to perquisites and allowances to avoid any legal issues or penalties.