Perquisites are benefits (cash or non-cash) that are provided by an employer to an employee associated with the employment in addition to salary or wages such as motor car, rent-free accommodation, utilities, etc. For computation of taxable income, the procedure for valuation of perquisites is described in the Income Tax Ordinance 2001.
Section 13 of the Income Tax Ordinance 2001 describes in detail the procedure of valuation of perquisites to be included in the taxable income of a salaried person. The valuation procedure applicable for the tax year 2022 is detailed below:-
Valuation of Motor Vehicle
The procedure for valuation of a motor car provided by the employer to the employee for official and/or private use as described in section 13(3) or ITO 2001 and Rule 5 of Income Tax Rules 2002 is explained here under:-
(a) Vehicle provided partly for personal and partly for official use:-
When a motor vehicle is provided by the employer partly for personal and partly for official use, 5% of the cost of acquiring the motor vehicle is added to the taxable income of the person. Where the vehicle is acquired on a lease, the fair market value of the vehicle at the time of commencement of the lease is taken as acquiring cost.
(b) Vehicle provided for personal use only
If the motor vehicle is provided by the employer for the personal use of the employee only, 10% of the cost of acquiring the vehicle or fair market value at the commencement of the lease (if the vehicle is taken on lease) is to be added in the taxable income of the employee for calculation of tax.
Services of Domestic Servants
When services of a domestic servant such as housekeeper, driver, gardener, etc, are provided by an employer to an employee, the salary or wages paid by the employer to such servant is added to the taxable salary of the employee [for details refer to section 13(5) of the Ordinance].
Utilities
Where, utilities (electricity, gas, water, telephone, etc) are provided by an employer to an employee, the fair market value of the utilities (less any amount paid by the employee) is to be added to the taxable income of the employee for that tax year [for details refer section 13(6) of ITO 2001].
Loan at a Reduced Rate
Where an employer pays a loan exceeding one million rupees to the employee on reduced markup as compared to the benchmark rate, or no markup at all, the salary income of the employee shall include an amount as described under:-
a) where an employee has to pay no profit on the loan, an amount equal to profit calculated at the benchmark rate or;
(b) where the employee has to pay a profit at the reduced rate of interest, the difference between the profit payable and that calculated on the benchmark rate.
(c) the provisions discussed in ‘a’ and ‘b’ above will not be applicable if the benefit is due to a waiver of interest by the employee on his account with the employer. [for details refer to section 13(7) of ITO 2001]
Loan Repayable by an Employee
If the employer waives off the amount payable by the employee to the employer during a tax year, such amount shall be added to the taxable income of the employee for that year.
If the employee uses the amount of loan in acquiring an asset or property that generates income taxable under any head of income, the benchmark rate on the amount of loan, or its portion that is utilized to acquire such asset or property shall be added to the taxable income of the employee.
Repayment of Loan on Behalf of the Employee
If the employer pays off any amount payable by the employee to any other person, such amount will be considered as income of the employee and will be added to the taxable income under the head salary.
Provision of Any Asset or Property
Where any property, asset, or services are provided by the employer to the employee, the fair market value of such benefit less any amount paid by the employee for such property or asset will be added to the taxable salary income of the employee.
Valuation of Accommodation Provided by the Employer [Section 13(12)]
If rent-free accommodation is provided by an employer to an employee, the amount that would have been paid to the employee if he was not provided with accommodation is to be added to the taxable income. Normally, accommodation is provided in lieu of House Rent Allowance which is 45% or 30% of the pay depending on the area (big or small cities). The amount of HRA will be added as ‘Provisional HRA’ to the taxable salary of the employee for tax purposes. This is explained in detail in Rule 4 of the Income Tax Rules 2002.
Others
In case of any other perquisite that is not discussed above provided by the employer to the employee, the fair market value of such perquisite (at the time it is provided) reduced by any amount paid by the employee for that perquisite shall be included in the taxable income under the head salary of the employee for that tax year.
Benchmark Rate
Benchmark rate of interest with reference to Section 13 Income Tax Ordinance 2001 as under:-
I) for the tax year commencing on the first day of July 2002, at a rate of 5% per annum; and
ii) for the subsequent tax years the rate will be taken as one percent above the previous year’s rate, a maximum of up to ten percent.
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Disclaimer
“The contents of this post are intended for informational and educational purposes only and are based on data gathered by Team Fiscal Updates. It is important to note that the information provided here should not be relied upon as a reference for any legal documents. If you require assistance with legal decisions, it is recommended to seek proper professional advice. It may also be noted that the provisions of the Income Tax Ordinance 2001 have an overriding effect on all other laws of the country and shall prevail in case of any contradiction in terms of Section 3 of the Ordinance”