Employee perks, also known as perquisites, are benefits provided by employers in addition to salary. Tax experts Sunil Garg and Vimal Jain said employees should understand how perks are taxed as they form an important part of the cost-to-company (CTC) package.
What are employee perks?
Garg said an employee’s CTC generally consists of three parts — basic salary and dearness allowance, allowances, and perquisites.
Allowances include benefits such as travel allowance, food allowance and other fixed payments. Perquisites, on the other hand, are non-cash benefits provided by employers, such as rent-free accommodation, company cars, employer contributions to retirement schemes and Employee Stock Ownership Plans (ESOPs).
“Perquisites are benefits where the employer is bearing an expense on behalf of the employee,” Garg said.
Why are perks treated differently from salary?
Jain said perks are considered a part of salary for tax purposes but are provided indirectly. “Basic pay, allowances and perks together make up the employee’s CTC. Perks are benefits received in an indirect form, such as housing, a vehicle or stock options, and therefore have separate valuation rules under tax laws,” he said.
Are all perks taxable?
According to Garg, salary and most allowances are fully taxable unless specific exemptions are available. Perks are taxed based on valuation rules prescribed by the government. Certain benefits may be partially taxable, while others may enjoy exemptions up to specified limits.
He said employees should carefully evaluate the tax impact of various perks before choosing between the old and new tax regimes.
What are ESOPs and why do companies offer them?
Jain said ESOPs, or Employee Stock Ownership Plans, are used by companies to attract, retain and reward talented employees. “Companies can either increase salaries or offer stock-based compensation. ESOPs help employees participate in the company’s growth and create a sense of ownership,” he said.
He added that ESOPs are particularly popular among startups as they help conserve cash while rewarding employees over the long term.
How are ESOPs taxed?
Garg said ESOP taxation generally happens in two stages. When employees exercise their stock options, the difference between the fair market value of the shares and the exercise price is treated as a perquisite and taxed as salary income.
“For example, if the fair market value of a share is Rs 500 and the employee acquires it for Rs 100, the Rs 400 difference is taxed as a perquisite,” he said.
A second tax liability arises when the employee sells the shares. Capital gains tax is levied on the difference between the sale price and the value already considered for perquisite taxation.
Why is ESOP taxation being debated?
Jain said one of the biggest concerns is that employees may have to pay tax even before receiving any cash gains.
“When an employee exercises ESOPs, the gain is only notional. No money has been received yet, but tax becomes payable. Many believe tax should be collected when the shares are actually sold, and cash is realised,” he said.
He also said the current tax framework is complex and may reduce the attractiveness of ESOPs, particularly for startup employees.
Experts seek simpler tax rules
Both experts said the government has been making efforts to simplify tax laws, but more changes may be required for ESOP taxation. Jain suggested that taxation should be linked to the actual sale of shares, tax rates should be rationalised, and rules for startup employees should be simplified.
Garg said the government has already introduced certain relief measures for eligible startups, but wider benefits could help both startups and employees. “The objective should be to simplify the system and make ESOPs more attractive for employees while supporting startup growth,” he said.
