Taxation · Salaries

Perquisites and Valuation Rules in Salaries for CA Inter

Updated 5 October 2026

A perquisite is a benefit or facility an employer gives an employee beyond salary, and it is taxable as salary. To solve a question, classify the employee (specified or not), pick the perquisite, apply its valuation rule, subtract what the employee paid, and add the net value to salary.

Understand Perquisites and Valuation Rules

A perquisite is a benefit, amenity or facility an employee gets from the employer because of the job. It is usually in kind, such as a free house, a car, a cheap loan or shares at a discount. The law treats it as salary, because the employee gains value without paying for it.

The next question is how much to add. Tax law does not use the employer's generosity. It uses valuation rules in the Income-tax Rules. Each perquisite has its own rule: a percentage of salary for housing, a fixed monthly amount for cars, an SBI interest rate for loans, and fair market value for shares. Your job is to apply the right rule and deduct any amount the employee paid.

The rules also depend on who the employee is, but only for some perquisites. Rent-free accommodation, motor car, loans and ESOPs have their own rules and apply to employees generally. Specified employee status is a gate for several perquisites, such as the services of domestic servants supplied by the employer, gas, electricity and water supplied by the employer, and free education in certain cases. It is not a general test for every perquisite. A specified employee is a director of the employer company, or a person with substantial interest in the employer company (20% or more voting power), or a person whose monetary salary from that employer exceeds ₹50,000, excluding non-monetary benefits and perquisites. A person who is neither a director of the employer company nor a substantial-interest holder in it is specified only if the salary test, applied to salary from that employer, is met. Check this status before you value the perquisites it affects, and confirm the exact limit and the list of status-linked perquisites in the ICAI material for the year.

Keep three terms apart. A perquisite is a benefit enjoyed during employment, such as a free house or a cheap loan. Profit in lieu of salary is a payment or compensation linked to the job, such as compensation on termination of employment or a sum due before joining or after leaving. An allowance is a cash payment, such as city allowance. All three are taxable as salary, but the valuation and the exemptions differ.

The rates, thresholds and monetary limits in the valuation rules are updated from time to time. For tax year 2026-27, check them against the ICAI study material for May 2027 and the Income-tax Rules. In the exam, if the question gives a rate or limit, use it.

Key rules to remember

Net taxable perquisite: Taxable perquisite = Value as per valuation rule − Amount paid or recovered from the employee; The employee's payment is deducted only to the extent it is a recovery for that benefit. A perquisite cannot go below nil, and excess recovery for one benefit is not set off against another.
Salary for rent-free accommodation: Salary = Basic + DA (if it forms part of retirement benefits) + Bonus + Commission + all other taxable cash allowances; Exclude the value of perquisites, employer's PF contribution, and allowances that are fully exempt. If HRA is received, accommodation is not provided, so it does not enter this calculation.
Rent-free accommodation: employer-owned: Perquisite = Stated % of salary for the period of occupation, based on city population, − rent paid by employee; Use the percentage band applicable to the city for the tax year, as given in the question or the ICAI material.
Rent-free accommodation: employer-hired: Perquisite = Lower of (actual rent or lease rental paid by employer) and (stated % of salary) − rent paid by employee; Furniture is added: owned = 10% p.a. of cost; hired = actual hire charges paid by employer. Deduct what the employee pays for the furniture, but only up to the furniture value.
Motor car: expenses met by employer, used partly for business: Fixed monthly amount as per Rules, depending on engine capacity (up to 1.6 litre or above), plus a separate amount for a chauffeur if provided; These fixed amounts apply only where the car is used partly for business and partly for private purposes, and only for the engine-capacity bands given in the Rules. If the employee meets the running and maintenance cost, a lower fixed amount applies. If the car is used wholly for business, with proper records, the perquisite is nil. If the employer owns the car and it is used wholly for private purposes, the perquisite is the actual running and maintenance expenditure of the employer + normal wear and tear at 10% p.a. of cost + chauffeur cost, less any recovery from the employee.
Interest-free or concessional loan: Perquisite = Interest at SBI rate (on the first day of the year) on maximum outstanding monthly balance − interest actually paid by employee; Maximum outstanding monthly balance means the balance at the end of each month. Exempt if the total of loans is ₹20,000 or less, or if the loan is for specified diseases (conditions apply).
ESOP / sweat equity shares: Perquisite = FMV on the date of exercise (allotment or transfer) − amount paid or recovered from employee; For listed shares, FMV is the average of the opening and closing price on the stock exchange on that date. For unlisted shares, it is the value determined by a merchant banker. It is taxed in the year of allotment, not on sale.
Specified employee test: Specified employee = Director of the employer company, or holder of 20% or more voting power in the employer company, or person whose monetary salary from that employer exceeds ₹50,000; Monetary salary means income under the head Salaries from that employer, excluding non-monetary benefits and perquisites. The director and 20% voting conditions refer to the employer company. Apply the test for perquisites that depend on this status, such as the services of domestic servants, gas, electricity and water supplied by the employer, and free education in certain cases. It is not a gate for rent-free accommodation, motor car, loans or ESOPs. Confirm the exact wording of the limit and the list of status-linked perquisites in the ICAI material for the year.

How to solve Perquisites and Valuation Rules questions

Use this order for every perquisite question. It stops you from missing the specified-employee condition and the exemptions.

1List every benefit in the question one by one: accommodation, car, loan, shares, servants, utilities, education and gifts.
2Decide whether the employee is a specified employee. Check director status, 20% voting power and the ₹50,000 monetary salary test. You need this for perquisites that depend on status, such as domestic servants, gas, electricity and water, and free education in certain cases.
3Mark each benefit as taxable for all employees, or only for specified employees, or exempt under a limit (for example small loans or small gifts).
4Compute salary for the accommodation perquisite if needed. Include taxable cash items only. Remove perquisites and exempt allowances.
5Apply the valuation rule for each benefit: the percentage of salary, the fixed car amounts, SBI interest on the monthly balance, FMV for shares, or the employer's cost for the rest.
6Subtract the amount the employee paid or the employer recovered for each benefit. Do not let any perquisite become negative.
7Add the net values and write the total as one line: Value of perquisites. Carry it into Gross Salary.
8Check for profit in lieu of salary items separately, and do not mix them with perquisites.

Quickest way: Perquisite grid with one line per benefit

When to use it: Use it when the question lists many benefits and time is short. It works for both MCQs and the written 70-mark part.

Draw a three-column grid: Benefit, Rule applied, Net taxable value. Fill one row per benefit.
In the Rule column, write only the key words: 10% of cost, SBI rate, FMV minus paid, actual cost.
For MCQs, first eliminate options that ignore the employee's payment or that tax an item meant only for specified employees on an ordinary employee.
For MCQs on loans, check the ₹20,000 limit first. If the loan is within the limit, the answer is nil.
In the written answer, show the salary computation, the rule used and the deduction as separate lines. Each line can earn a step mark even if a later figure is wrong.
End with a line that totals the perquisites and states clearly that the figure goes to Gross Salary.

Common mistakes in Perquisites and Valuation Rules

Including perquisites or employer PF contribution in salary when computing the rent-free accommodation value.
Students take total gross salary from the question without checking what the valuation rule counts.
Fix: Rebuild salary from scratch: basic, DA that counts for retirement benefits, bonus, commission and taxable allowances. Leave out perquisites and employer PF.
Treating every perquisite as taxable for every employee.
The words 'specified employee' are skipped in the question and notes.
Fix: Mark each benefit as all-employee or specified-only before valuing it, and run the specified-employee test for the specified-only ones.
Valuing an interest-free loan on the opening balance instead of the month-end balance, or forgetting to deduct interest paid by the employee.
Students want a single yearly calculation and do not read the monthly rule.
Fix: Make a month-by-month balance list, apply the SBI rate to each balance, and then subtract interest actually paid.
Taxing ESOPs when shares are sold, or using the sale price as value.
Students mix the perquisite with capital gains.
Fix: Tax the perquisite at exercise: FMV on exercise date minus the price paid. The later sale is a separate capital gains matter, with FMV on exercise as the cost.
Confusing profit in lieu of salary with a perquisite and applying valuation rules to it.
Both appear under Salaries and both sound like non-cash benefits.
Fix: Ask: is it a facility enjoyed during service (perquisite) or a payment linked to the job, such as termination compensation (profit in lieu)? Valuation rules apply only to perquisites.
Taxing a small loan or a small gift because the rule was not checked.
Exemption limits are learned separately and forgotten under pressure.
Fix: Keep a short list of exemption limits in your revision sheet and check it before valuing: loans totalling ₹20,000 or less are exempt, and gifts with aggregate value up to ₹5,000 in the year are exempt. If the aggregate of gifts exceeds ₹5,000, the entire value is taxable, not just the excess. Confirm the limits in the ICAI material.

Worked examples

Example 1

Mr. Rao is employed by a company and is given a house owned by the company for the whole tax year 2026-27. His salary details: basic ₹40,000 per month, dearness allowance ₹10,000 per month (forms part of retirement benefits), city allowance ₹5,000 per month (taxable), bonus ₹60,000 for the year. The company also provides furniture that cost ₹1,00,000 and owns it. Mr. Rao pays ₹1,000 per month to the company for the furniture, and no rent for the house. Assume the applicable percentage for the house is 10% of salary. Compute the value of the accommodation perquisite.

Show the solution

Annual basic = ₹40,000 × 12 = ₹4,80,000.
Annual DA = ₹10,000 × 12 = ₹1,20,000. DA forms part of retirement benefits, so it counts.
Annual city allowance = ₹5,000 × 12 = ₹60,000. It is taxable, so it counts.
Bonus = ₹60,000.
Salary for valuation = ₹4,80,000 + ₹1,20,000 + ₹60,000 + ₹60,000 = ₹7,20,000.
House value = 10% × ₹7,20,000 = ₹72,000. No rent is paid by the employee for the house.
Furniture owned by employer = 10% of cost = 10% × ₹1,00,000 = ₹10,000.
Recovery for furniture = ₹1,000 × 12 = ₹12,000. This exceeds the furniture value of ₹10,000.
Furniture perquisite = ₹10,000 − ₹12,000, floored at nil. The excess ₹2,000 is not set off against the house value.
Net perquisite = House ₹72,000 + Furniture nil = ₹72,000.

Answer: The value of the accommodation perquisite is ₹72,000.

Example 2

On 1 April 2026, an employer gave Ms. Sen an interest-free loan of ₹6,00,000, not for any specified disease. She repaid ₹1,00,000 on 10 October 2026 and no other amount until 31 March 2027. The SBI rate for similar loans on 1 April 2026 was 10% per annum. She paid interest of ₹20,000 to the employer during the year. Compute the taxable perquisite.

Show the solution

The loan is above ₹20,000 and not for specified diseases, so the exemption does not apply.
Month-end balances: April to September (6 months) = ₹6,00,000. The repayment on 10 October lowers the balance at the end of October, so October to March (6 months) = ₹5,00,000.
Interest at SBI rate for April to September = ₹6,00,000 × 10% × 6/12 = ₹30,000.
Interest at SBI rate for October to March = ₹5,00,000 × 10% × 6/12 = ₹25,000.
Total interest at SBI rate = ₹30,000 + ₹25,000 = ₹55,000.
Less interest paid by employee = ₹20,000.
Taxable perquisite = ₹55,000 − ₹20,000 = ₹35,000.

Answer: The taxable perquisite is ₹35,000.

Exam tips

Read the first lines of the question for the employee's status. Director, 20% voting power or monetary salary above ₹50,000 decides whether status-linked perquisites, such as domestic servants, gas, electricity and water, and free education in certain cases, are taxable.
Use the percentage or limit given in the question. Do not replace it with a number from memory. If nothing is given, state the rate you use from the ICAI material for the tax year.
Show the salary computation as a separate working note. In the rent-free accommodation question, most step marks sit there.
Write a one-line reason for each exempt item, such as 'loan within ₹20,000, nil'. Examiners give marks for the conclusion even when the value is nil.
For MCQs, test each option for the employee's payment: wrong options often forget to deduct it. No negative marking, so always attempt every MCQ.

Practice questions from Salaries

Perquisites and Valuation Rules: frequently asked questions

What is the difference between a perquisite and profit in lieu of salary?

A perquisite is a benefit or facility enjoyed during employment, such as a free house or a cheap loan, and it is valued under the perquisite rules. Profit in lieu of salary is a payment connected with the job, such as compensation on termination, and it is taxed at the amount received. Both are part of salary income.

Who is a specified employee for perquisite purposes?

A specified employee is a director, a person with substantial interest in the company (20% or more voting power), or a person whose monetary salary exceeds ₹50,000, excluding non-monetary benefits and perquisites. Their status is a gate for several perquisites, such as the services of domestic servants, gas, electricity and water supplied by the employer, and free education in certain cases. It does not decide rent-free accommodation, car, loan or ESOP valuation. Confirm the limit and the list of linked perquisites in the ICAI material.

How do I value rent-free accommodation?

For employer-owned accommodation, take a stated percentage of salary, based on the city population, for the period of occupation, then deduct rent paid by the employee. For hired accommodation, take the lower of actual rent paid by the employer and the percentage of salary. Add furniture value and deduct recoveries, limited to the value of each benefit.

When are ESOPs taxed as perquisites?

ESOP shares are taxed as a perquisite in the year the shares are allotted on exercise of the option. The value is FMV on the exercise date minus the amount the employee paid. The later sale of shares is dealt with under capital gains.