Section 16(ii) of the Income Tax Act, 1961 is a crucial provision that determines the taxability of perquisites or benefits in kind provided to an employee by their employer. In this blog, we will discuss the various aspects of Section 16(ii), including its applicability, the types of perquisites covered under it, and the taxation of such perquisites.
Introduction to Section 16(ii)
Section 16(ii) of the Income Tax Act, 1961 deals with the taxability of perquisites or benefits in kind provided by an employer to their employee. The provision specifies that any perquisite provided to an employee by their employer, whether in cash or in kind, shall be considered as a part of the employee’s salary for the purpose of taxation.
Applicability of Section 16(ii)
Section 16(ii) applies to all types of employers, whether they are individuals, partnerships, companies, or any other entities. It is also applicable to all employees, including those in the public sector, private sector, and government sector.
Types of Perquisites Covered under Section 16(ii)
Perquisites covered under Section 16(ii) can be broadly classified into the following categories:
a. Accommodation: Any accommodation provided by an employer to their employee, either rent-free or at a concessional rate, is considered a perquisite under Section 16(ii). This includes not only residential accommodation but also hotel accommodation or any other temporary accommodation provided to the employee during business trips.
b. Motor Vehicles: If an employer provides a motor vehicle for the personal use of their employee, it is considered a perquisite under Section 16(ii). The value of this perquisite is determined based on the cost of the vehicle and its running and maintenance expenses.
c. Club Memberships: If an employer provides a club membership to their employee, the value of the membership fee is considered a perquisite under Section 16(ii).
d. Telephone and Internet: Any expenses incurred by the employer on behalf of the employee for telephone and internet usage, including the cost of the device, subscription charges, and usage charges, are considered a perquisite under Section 16(ii).
e. Gifts and vouchers: Any gift or voucher given by an employer to their employee, whether in cash or kind, is considered a perquisite under Section 16(ii).
Taxation of Perquisites under Section 16(ii)
The valuation of perquisites under Section 16(ii) depends on the nature of the perquisite. For example, the value of accommodation provided to the employee is determined based on its fair market value, which is the amount that the employee would have paid for the accommodation had it not been provided by the employer. Similarly, the value of the motor vehicle provided to the employee is determined based on the cost of the vehicle and its running and maintenance expenses.
The value of perquisites is added to the employee’s salary and taxed at the applicable rate of income tax. However, some perquisites are exempt from tax under certain conditions. For example, if the accommodation provided by the employer is located in a remote area, it may be exempt from tax. Similarly, if the motor vehicle provided by the employer is used only for official purposes, it may be exempt from tax.
Employers should maintain proper records of the perquisites provided to their employees and accurately value them for income tax purposes. They should also deduct tax at source on the value of the perquisites and deposit it with the government.
Employees should also report all perquisites received from their employer while filing their income tax returns. This will ensure that they are not subject to any penalties or interest for non-disclosure of income.
It is worth noting that the valuation of perquisites under Section 16(ii) is subject to certain rules and guidelines issued by the Central Board of Direct Taxes (CBDT) from time to time. For example, the CBDT has prescribed different methods for the valuation of different types of perquisites, such as the standard rent method for the valuation of accommodation, the cost to the employer method for the valuation of motor vehicles, and the fair market value method for the valuation of gifts and vouchers.
Moreover, the CBDT has also prescribed certain exemptions and deductions from the value of perquisites under Section 16(ii). For instance, if the accommodation provided by the employer is owned by them, the value of the perquisite would be calculated as the actual rent paid or 15% of the employee’s salary, whichever is lower. Similarly, if the employer provides an interest-free loan to the employee for the purchase of a house or for medical treatment, the value of the perquisite would be calculated as the interest that would have been charged on the loan if it was taken from a bank.
It is also worth noting that the Finance Act, 2020 introduced a new tax regime for individuals and Hindu Undivided Families (HUFs) that offers lower tax rates but eliminates most exemptions and deductions, including those available under Section 16(ii). Under this new tax regime, the value of perquisites would be taxed at the same rate as the employee’s salary, without any exemptions or deductions. However, the taxpayer has the option to choose between the old tax regime and the new tax regime each year, depending on which one is more beneficial.
Conclusion:
Section 16(ii) of the Income Tax Act, 1961 is an important provision that determines the taxability of perquisites provided by an employer to their employee. The provision applies to all types of employers and employees and covers a wide range of perquisites, including accommodation, motor vehicles, club memberships, telephone and internet expenses, and gifts and vouchers. The value of perquisites is added to the employee’s salary and taxed at the applicable rate of income tax, although some perquisites may be exempt from an employee’s income tax liability under certain conditions. It is important for both employers and employees to be aware of the provisions of Section 16(ii) to ensure compliance with the income tax laws.
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Frequently Asked Questions (FAQs)
- What is Section 16(ii) of the Income Tax Act, 1961?
Section 16(ii) of the Income Tax Act, 1961 regulates the taxability of perquisites provided by an employer to their employees.
2. What is considered a perquisite under Section 16(ii)?
A perquisite refers to any benefit or amenity that an employer provides to their employee in addition to their salary, such as accommodation, motor vehicles, club memberships, etc.
3. How is the value of perquisites determined under Section 16(ii)?
The value of perquisites is determined based on the rules and guidelines issued by the Central Board of Direct Taxes (CBDT) from time to time. The CBDT has prescribed different methods for the valuation of different types of perquisites.
4. What are the exemptions and deductions available under Section 16(ii)?
The CBDT has prescribed certain exemptions and deductions from the value of perquisites under Section 16(ii). For instance, if the accommodation provided by the employer is owned by them, the value of the perquisite would be calculated as the actual rent paid or 15% of the employee’s salary, whichever is lower.
5. Are there any tax benefits available for medical treatment or education expenses under Section 16(ii)?
Yes, any sum paid by the employer for the medical treatment of the employee or any member of their family is not considered a perquisite and is exempt from tax up to a certain limit. Similarly, any amount paid by the employer towards the education of the employee’s children is not considered a perquisite and is exempt from tax up to a certain limit.
6. Is it mandatory for employers to deduct tax at source on the value of perquisites?
Yes, it is mandatory for employers to deduct tax at source on the value of perquisites and deposit it with the government.
7. Do employees need to report perquisites while filing their income tax returns?
Yes, employees should report all perquisites received from their employer while filing their income tax returns to ensure compliance with the income tax laws.
8. What is Form 16?
Form 16 is a certificate issued by the employer to each employee at the end of the financial year, which details the salary paid and the tax deducted thereon, including the value of perquisites provided.
9. Are perquisites taxable under the new tax regime introduced in 2020?
Yes, the value of perquisites is taxable under the new tax regime, without any exemptions or deductions. However, taxpayers have the option to choose between the old tax regime and the new tax regime each year.
10. Can the amount recovered by the employer from the employee for the use of a perquisite be deducted while computing the tax liability?
Yes, any amount recovered by the employer from the employee for the use of a perquisite is deductible from the value of the perquisite while computing the tax liability.
