Section 17(2)(vi) – ESOPs / Sweat Equity Shares (Taxable Perquisite)

Text of Section 17(2)(vi):

The value of any specified security or sweat equity shares allotted or transferred by the employer or former employer, either
free of cost or at concessional rate, shall be treated as a perquisite and taxable under salary.

Key Definitions:

Term Meaning
Specified Security ESOPs, stock options, or other securities as notified
Shares issued to employees or directors for providing
Sweat Equity Shares
know-how, skills, or intellectual property
Employer/Former Employer Applies even if benefit is received after leaving the job
 Section 17(2)(vii) – Contribution to Recognised Provident Fund in Excess of Limit
What it Covers:
This clause makes employer’s contribution to a Recognised Provident Fund (RPF) taxable as a perquisite when it
exceeds the prescribed limit.

In other words

If the employer contributes to the Recognised Provident Fund in excess of 12% of the employee’s
salary, then the excess contribution is treated as a taxable perquisite under Section 17(2)(vii).

What is Recognised Provident Fund (RPF)?

A provident fund recognized by the Commissioner of Income Tax under EPF laws. Both employer and employee
contribute to it.

What is the limit?

•12% of Salary (as defined for PF purposes – usually Basic + DA if DA forms part of retirement benefit)
 2. Perquisite Taxable Only for Specified Employees

Who is a Specified Employee?

As per Explanation (ii) to Section 17(2) of the Income Tax Act:
An employee is treated as a Specified Employee if any one of the following conditions is satisfied during the
previous year:

1. Employee is a Director of the company

Example: Any board-level executive,

2. Employee has substantial interest in the company

Substantial interest = Employee holds 20% or more equity shares in the company.

3. Monetary salary exceeds ₹50,000 during the previous year

Salary here means monetary component only (basic, DA, bonus, etc. but not perquisites or non-cash
benefits).
Some perquisites are taxable only for Specified Employees, such as:

Perquisite
Free gas, electricity, water
Free or concessional education to the member of employee household
Use of employer’s movable assets (furniture, TV, etc.)
Domestic servants (cook, sweeper, driver, watchman, Gardener, Personal assistant)
Use of company car (if for personal use)
What is a Tax-Free Perquisite?
A tax-free perquisite is a benefit or amenity provided by an employer to an employee which is exempt
from tax under the Income Tax Act, even though it falls under the definition of “perquisite” in Section
17(2).
These perquisites are specifically exempted under Section 10 Rule 3,

List of All Tax-Free Perquisites (As per Rule 3 and Sec 10)

Tax-Free Perquisite Explanation

Laptop or Computer Provided by employer for personal or official use
Mobile Phone or Landline No tax even if used personally
Tea, coffee, snacks, etc. provided during working
Refreshments at office
hours
Medical Insurance Premium Paid by employer under a group health policy
Gift vouchers up to ₹5,000 per annum If employer gives gifts ≤ ₹5,000 in value in a year
Use of Health Club, Gym, etc. If provided within office premises
Cost of training, skill development, conferences, etc.
Training & Education
paid by employer
Leave Travel Concession (LTC) Exempt under Section 10(5), subject to conditions

Perquisites to UNO employees Fully exempt under UN Privileges Act

Rent free house and Conveyance facility to Judges of HC/SC Exempt under Section 10(17)
Exempt under Rule 3 (remote area specifically
Accommodation in remote area
notified)
Group accident insurance, free medical camps, etc. if
Staff welfare schemes
not transferable in cash

Free Uniform Uniforms provided by employer for official duties

Loan to employee ≤ ₹20,000. The amount of loan in

Interest-free or concessional loans ≤ ₹20,000
aggregate should not exceed 20k.
Perquisites to Government Employees posted abroad Exempt under Section 10(7)

Scholarship to employees or their children paid by the employer

Conveyance facility (Cab) provided from residence to the place of employment

Tax paid by the employer on the value of perquisite

Reimbursement of expenses incurred wholly for Like travel, conveyance, hotel stay, etc., if properly
official duty documented

Employer contribution to RPF up to 12% of salary Exempt under Part A, Schedule IV

Employer’s contribution to NPS up to 10% of salary Exempt under Section 80CCD(2)

Exempt under Section 10(16) if received from

Scholarship to employee’s children
employer

The value of rent free furnished residence provided to Minister, Specified officer of Parliament or a leader
of opposition in Parliament

Transfer without consideration to an employee of a movable asset (other than computer, electronic item
and car) by the employer after using it for 10 years or more.
 VALUATION OF PERQUISITE
What is Rent-Free Accommodation (RFA)?
It refers to residential accommodation provided by the employer to the employee free of cost or at a
concessional rate.
The value of RFA is a taxable perquisite under the head 'Salary' (Section 17(2)(i)) and is calculated as per
Rule 3 of the Income Tax Rules.

Valuation Depends On:

[Link] of accommodation
[Link] of employer (Govt or other)
[Link] population
[Link] furnished or not
CASE 1: Central or State Government Employees

Valuation = License Fee determined by the government

Add: Value of Furnishing (if any)

If the accommodation is furnished, add:
•10% per annum of cost of furniture, or
•Actual hire charges paid
(Whichever is applicable)
CASE 2: Other Employees (Private/PSU/Local Authority, etc.)
Valuation depends on ownership of the house:

A. Accommodation Owned by Employer

Valuation = % of Salary based on city population

Perquisite value Before 01-09-2023 (2001 Census)

Population % of Salary
<10 lakh 7.5% of salary
10% of salary
10–25 lakh
15% of salary
>25 lakh
 "Salary" for Valuation of Rent-Free Accommodation (RFA)
For the purpose of computing the perquisite value of rent-free accommodation, "salary" includes only specific
components.
Included in Salary:
[Link] Salary
[Link] Allowance (DA) – (Only if it forms part of retirement benefits)
3. Bonus
4. Commission (Only if based on a fixed % of turnover)
5. Fees
6. All taxable allowances
(e.g., HRA, etc.)

But does not include

- Dearness allowance which does not enter into the computation of retirement benefit
- advance salary or arrear of salary
- employer contribution to the provident fund account of the employee
- allowance which are exempt from payment of tax,( Tax free allowance)
- The value of perquisite is specified in section 7(2)
- the amount paid or reimbursed for treatment
- lump sum payment received at the time of termination of service or superannuation or voluntary retirement like
gratuity, severance, pay leave, engagement, voluntary retrenchment benefit, commutation of pension and similar
payments
Perquisite Value on or after 01-09-2023 (2011 Census)

Population %
Below 10 Lakh 5% of salary
10,00,000 to 14,99,999 5% of salary
15,00,000 to 24,99,999 7.5% of salary
25,00,000 to 40,00,000 7.5% of salary
Above 40,00,000 10% of salary
 B. Accommodation Leased/Rented by Employer
Valuation = Lower of:
•Actual rent paid by employer, OR
•15% of salary (Before 01.09.2023) / 10% of salary ( on or After 01.09.2023)

Add: Value of Furnishing (if any) (For CASE 2)

If the accommodation is furnished, add:

•10% per annum of cost of furniture, or

•Actual hire charges paid

•(Whichever is applicable)

Less: Rent, if any, paid by employee

Final taxable perquisite =
Value as per Rule 3 – Rent paid by employee
 In case accommodation is provided for more than one year

The perquisite value of RFA in the subsequent year shall be lower of the following

(i) Perquisite Value computed as per above rule

(ii) First year perquisite value *CII of the subsequent year/ CII of the first year
 Accommodation Provided in a Hotel – Rule 3(1) (For Government and Non
Government )
If an employer provides hotel accommodation to an employee, the value of the perquisite is taxable in
the hands of the employee as part of salary income, unless exempted.

Valuation Rule:

Perquisite Value =

24% of salary OR

Actual hotel charges paid by employer,

Whichever is lower
Exemption:
Hotel accommodation is not taxable if all the following conditions are satisfied:
[Link] stay is for ≤ 15 days, AND
[Link] on transfer of employee from one place to another (official transfer).

Example 1 – Taxable Case

•Basic Salary = ₹6,00,000
•Hotel provided by employer for 30 days
•Actual hotel bill paid = ₹1,80,000
Step 1: 24% of Salary = ₹1,44,000
Step 2: Compare with hotel charges = ₹1,80,000
Lower of the two = ₹1,44,000 → Taxable perquisite

Example 2 – Exempt Case

•Hotel stay provided on official transfer
•Duration = 12 days
•Employer paid ₹60,000 to hotel
Since stay ≤ 15 days and is on transfer, the value is fully
exempt.
 Accommodation Provided at Work Site – Tax Treatment
As per Rule 3(1) of the Income Tax Rules:

Fully Exempt (i.e., perquisite = ₹0) if all the following conditions are satisfied:

Condition 1:
Accommodation is provided at a Remote site OR at a project site or place of work
Examples:

•On shore Oil Exploration site

•Dam site
•Project Execution site
•Mining site
•Power generating site
•Off shore site

Being of a temporary nature and having plinth area (built up floor area) not exceeding 800 square feet, is
located not less than 8 kilometers away from the local limit of any municipality or cantonment board
 If any of the above conditions are not satisfied, the accommodation will be taxed as per normal rules:
•Owned house → 7.5% / 10% / 15% of salary
•Leased house → 15% of salary or actual rent paid, whichever is less