Expenses and benefits-in-kind in Indian payroll
Reviewed by Mellow Editorial Team, HR & payroll content team
Expenses reimbursed to employees and benefits provided in kind are taxable in India in most cases, and it falls on the employer to value them correctly, include them in payroll where required, and deduct TDS accordingly. Getting this wrong leads to either over-deduction (which upsets employees) or under-deduction (which creates a tax liability and potential scrutiny).
What counts as a benefit-in-kind
A benefit-in-kind (BIK) is anything of value you give an employee that is not cash salary. Common examples include:
- Company-provided accommodation (rent-free or concessional)
- Use of a company car or vehicle
- Reimbursed fuel, telephone or internet bills
- Meal vouchers or subsidised canteen facilities
- Medical expenses or insurance premiums paid by the employer
- Gift vouchers, club memberships, and stock options
Expense reimbursements are slightly different — they cover money an employee spends on actual business expenses and then claims back. Pure business reimbursements (for example, a flight booked for a client visit, reimbursed at cost against bills) are generally not taxable. Where expenses have a personal element, or where the employer provides facilities directly rather than reimbursing a claim, the rules are more specific.
How benefits are valued for tax
The Income Tax Act sets out prescribed valuation methods for the most common perquisites. The resulting rupee value is added to the employee's gross salary for the purpose of calculating TDS.
Accommodation: The taxable value depends on whether the employer owns the property or rents it, and on the city population. The rules look at a percentage of salary rather than actual rent. Where accommodation is rented by the employer and provided to the employee, the taxable perquisite is typically the lower of the actual lease rent and the prescribed percentage, reduced by any amount the employee pays for it.
Company car: The valuation depends on whether the car is used purely for official purposes, mixed purposes, or personal use. For mixed use, the rules prescribe a fixed monthly figure based on engine capacity, with a separate allowance for driver costs. Employers must maintain a logbook or similar record if they want to claim the car is used exclusively for official purposes.
Reimbursements: If a telephone or internet bill is reimbursed, it is generally exempt to the extent it is used for official purposes. Employers are wise to set a clear policy and keep bills on file.
Gifts and vouchers: There is a small annual threshold below which gifts are not taxed. Amounts above the threshold are treated as salary.
Stock options (ESOPs): These are taxed as a perquisite at the point of exercise, on the difference between the fair market value on the exercise date and the exercise price. The employer must deduct TDS at this point even though no cash changes hands — this is a common pain point and requires careful planning.
TDS obligations for the employer
All taxable perquisites are added to salary income and taxed under the income tax slabs applicable to that employee. Under the new regime, rates rise to 30% at higher income levels. A 4% health and education cess applies on top of the income tax. Lower-income employees may benefit from the section 87A rebate, bringing their net liability to nil.
As the employer, you must:
1. Calculate the value of each perquisite each month
2. Add it to the employee's estimated annual salary
3. Recalculate the projected TDS for the year
4. Deduct the revised TDS from the employee's salary in that month
This is done as part of the regular payroll cycle. You file this through Form 24Q each quarter. At year end, employees receive Form 16, which must show perquisite details clearly — there is a specific schedule for this in Form 16 Part B.
Record-keeping and declarations
Good record-keeping protects both the employer and employee. You should hold:
- Bills and receipts supporting any reimbursements
- Perquisite valuation workings for accommodation, vehicles, and similar items
- Employee declarations where relevant (for example, a declaration about the proportion of personal versus official car use)
Employees often submit a declaration at the start of the financial year about expected reimbursements and benefits. Employers use this to calculate projected TDS. Where actual figures differ materially, the TDS is revised during the year or corrected in the final months.
The impact of the Labour Codes
India's four consolidated Labour Codes, effective from 2025, change the definition of "wages" in ways that matter here. The Codes require that allowances and benefits form no more than a defined share of total compensation. A narrower wage definition pushes up the base on which provident fund contributions are calculated — EPF is 12% of wages for both employee and employer. Employers who restructure CTC to load up on non-wage components may find that the new definition of wages under the Codes increases their EPF and ESI obligations.
Reviewing your compensation structure against the new wage definitions is worth doing now, especially if you have made changes to how you split salary and reimbursements in the last year or two.
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