Difference between Allowances and Perquisites

Understanding the complexities of compensation packages is very important for both employees and employers alike. Two components of these packages that often tend to get a lot of attention are allowances and perquisites. Allowances and perquisites, which serve different purposes and have distinct tax implications they are both very important elements in an employee’s total compensation. In this article, let us focus on the difference between allowance vs perquisites. By gaining clarity on these differences, it is possible for employers to structure better compensation packages. Employees, on the other hand, could better understand about the total remuneration and the potential tax liabilities.

Key Takeaways:

What Are Allowances?
What Are Perquisites (Perks)?
Allowances vs Perquisites: Key Differences
Tax Implications: Allowances vs Perquisites
Real-Life Example
Why It’s Important to Understand the Difference
How Asanify Helps with Salary Structuring
Conclusion
FAQs

What Are Allowances?

Allowance is meant to be a fixed amount given to the employee at periodic intervals to cover any sort of special expenses that are incurred while discharging job-related duties. To put it simply, an allowance is a compensation that is provided for the incurrence of specific expenses. Amount paid by the company in the form of allowance is also considered to be a part of the salary. Also, the amount of allowance is considered to determine the total salary for the purpose of taxation. From the point of view of taxes, the expenses could be divided into three main categories.

Fully taxable allowances

Dearness allowance – Dearness allowance or DA is the allowance that is often provided to the salaried people to survive inflation and as a cost-of-living adjustment allowance.
Overtime allowance – When the employees tend to work over and above their working hours, an overtime allowance is provided.
Entertainment allowance – Entertainment allowance is provided for reimbursing the expenses incurred for the hospitality of a client. The lowest of the three amounts that follow is an allowable deduction for government employees, which is one-fifth of the basic salary, the actual amount received or Rs. 5000.
Project allowance – Allowance that is provided to employees for meeting the project expenses is tend to be called project allowance.
Cash allowance – Cash allowance is often provided by the employer for marriage as holiday, or bereavement allowance.
Medical allowance – Allowance that an employer tends to pay to an employee at a fixed price, regardless of the treatment taken by the employee.

Partially taxable allowances

House rent allowance – An allowance that is paid for the accommodation of the employees is known to be the house rent allowance.
Children’s education allowance – It is exempt up to a certain amount per month per child and is subject to a maximum of two children. Likewise, the hostel subsidy is allowed for up to a certain amount per child per month and is subject to a maximum of only two children.

Fully exempt allowances

Sumptuary allowance – This allowance is provided to the judges of the High Court and the Supreme Court.
Allowance paid to government servants in foreign countries – Government employees are paid an allowance when they are serving in foreign countries.

What Are Perquisites (Perks)?

Perks or perquisites are known as the casual salary or the monetary value of an amenity or personal benefit that is connected to the office position and is provided over and above the salary. The employer provides this prerequisite to an employee for either a concessional rate or for free. Further, there is no money provided to the employee if the employee does not make use of these amenities.

However, it does not indicate only reimbursement of important expenditures for discharging official duties. Nowadays, an employee’s salary package also covers the perquisites such as housing, servant, company car, etc. and the basic pay. It may arise while you carry out a profession or an employment.

From the point of view of taxes, there could be three types of perquisites that are provided. They can be provided as follows.

Perquisites that are taxable for all employees

Concession in rent – A Concession in rent for accommodation is a prerequisite that an employer provides to an employee.
Rent-free accommodation – Rent-free accommodation is provided to an employee by an employer. However, one should take into note of fact that rent-free official residence is only provided to the Supreme Court judges and High Court judges, which is free from taxes. Also, rent-free furnished houses provided to officers of parliament are subject to taxes.
Payment by an employer concerning an employee’s obligation – Any obligation that is to be payable by the employee but has been paid by the employer is regarded to be a prerequisite.

Exempt perquisites

Transport facility – Provision of a transport facility that an employer provides to the employee who is engaged in the business of either carrying passengers or goods, to an employee could be free of cost or at a concessional charge.
Telephone – Telephone facilities are something that an employer provides to an employee at their residence.
Refreshment – Refreshments that are provided during the office working hours to the employees.
Recreational facilities – Recreational facilities, such as club facilities, are provided to employees in general.

Perquisites taxable in the hands of specified employees

Here, the word specified employees means a director employee or an employee who has a considerable interest in the organisation or an employee who is drawing more than Rs. 50K salary. The perquisites that are taxable in the hands of specified employees could be provided as follows:

Facility for the use of gas, water, or electricity
Concessional or free tickets
Use of a motor car
Provision of servants such as a watchman, a sweeper, personal attendance, and a gardener.

Allowances vs Perquisites: Key Differences

The following table provides the key differences between allowances and perquisites. This will help you understand how they differ from each other and who can avail of the same.

Aspect	Allowances	Perquisites
Nature	Primarily, cash components are paid out to employees.	Mostly non-cash benefits or services are provided to employees.
Frequency	Typically paid monthly along with the salary.	Provided occasionally or as stipulated by company policy.
Taxability	Some are taxable, while others are partially or fully exempt under specific conditions.	Many are taxable as a part of the employee’s salary; however, some exemptions exist.
Examples	House Rent Allowance (HRA), Leave Travel Allowance (LTA), Dearness Allowance (DA).	Rent-free accommodation, company car for personal use, club memberships.
Governed by	Primarily governed by the Income Tax Act, Section 10, which specifies exemptions.	Mainly governed by the Income Tax Act, Rule 3, which details the valuation for tax purposes.

Tax Implications: Allowances vs Perquisites

The way the government taxes allowances and perquisites is different. Here’s a simple breakdown:

Allowances:

Some allowances are fully added to your taxable income. For example, Dearness Allowance (DA) is usually entirely taxed.
Other allowances have rules that allow you to save on taxes. For instance, with House Rent Allowance (HRA), if you meet certain conditions (like actually paying rent), a part of it can be exempt from tax under Section 10(13A) of the Income Tax Act. So, you might not have to pay tax on the entire HRA you receive.

Perquisites:

Perquisites are generally considered part of your salary and are taxed under the heading Income from Salaries.
The government has specific rules to figure out the taxable value of these benefits. These rules are found under Rule 3 of the Income Tax Rules. For example, there are set ways to calculate how much the benefit of a rent-free house or a company car is worth for tax purposes. This value is then added to your salary and taxed.

In short, while some allowances can be partially or fully tax-free based on specific conditions, perquisites are usually taxed as part of your overall salary, and their taxable value is determined by specific government rules.

Real-Life Example

To understand how allowances and perquisites work, let’s break down a sample ₹10,00,000 CTC for an employee, showing allowances and perquisites and how they might appear on a pay slip and be taxed.

Alan works in Mumbai and has a CTC of ₹10,00,000 per year.

Here’s a possible breakdown of his annual salary:

Basic Salary: ₹5,00,000 (This is usually fully taxable)
Allowances:
- House Rent Allowance (HRA): ₹1,50,000 (Partially taxable, depends on actual rent paid and location)
- Leave Travel Allowance (LTA): ₹50,000 (Exempt under certain conditions, usually for travel)
- Dearness Allowance (DA): ₹50,000 (Fully taxable)
- Conveyance Allowance: ₹24,000 (₹1,600 per month is exempt, so ₹4,800 is taxable annually)
Perquisites:
- Company Car (for personal and official use): Value assessed at ₹72,000 per year (Taxable based on rules)
- Medical Reimbursement: ₹15,000 (Up to ₹15,000 can be exempt with bills)
- Club Membership (company pays): Value assessed at ₹39,000 per year (Taxable)
Employee Provident Fund (EPF) Contribution: ₹60,000 (Employee’s share, deducted before tax)
Gratuity (Estimated Annual): ₹10,000 (Tax treatment upon actual receipt)

Sample Monthly Pay slip Snippet:

Component	Amount (₹)
Basic Salary	41,667
HRA	12,500
LTA	4,167
DA	4,167
Conveyance Allowance	2,000
Company Car Benefit	6,000
Medical Reimbursement	1,250
Club Membership Benefit	3,250
Gross Salary	75,001
EPF Deduction	5,000
Taxable Income (Gross – Exemptions)	To be calculated
Income Tax Deduction	As per tax slab
Net Pay	Calculated after tax

How They Are Taxed:

Taxable Allowances:
- DA (₹50,000 annually) will be fully added to Alan’s taxable income.
- The taxable portion of Conveyance Allowance (₹4,800 annually) will be added.
- For HRA (₹1,50,000 annually), the taxable amount will be calculated based on the actual rent Alan pays, his salary, and the city he lives in (Mumbai has a 50% exemption rule if actual rent and other conditions are met). Let’s assume, for simplicity, ₹60,000 of his HRA is taxable after considering exemptions.

Taxable Perquisites:
- The value of the Company Car (₹72,000 annually) will be added to his taxable income.
- The value of the Club Membership paid by the company (₹39,000 annually) will be added to his taxable income.
- Medical Reimbursement (up to ₹15,000 annually with bills) is often exempt, so we’ll assume Alan submits bills for the full amount, making it non-taxable.

Exempt Allowances (if conditions met):
- LTA (₹50,000 annually) can be exempt if Alan submits travel bills as per the rules.
- The exempt portion of Conveyance Allowance (₹24,000 – ₹4,800 = ₹19,200 annually).
- The exempt portion of HRA (in our example, ₹1,50,000 – ₹60,000 = ₹90,000 annually, assuming he meets the conditions).
- Medical Reimbursement (₹15,000 annually with bills).

Deductions (Reduce Taxable Income):
- Employee’s contribution to EPF (₹60,000 annually) is eligible for deduction under Section 80C (up to a limit).

In Summary for Taxation:

Alan’s total taxable income will be calculated as:

(Basic Salary + Taxable HRA + Taxable DA + Taxable Conveyance Allowance + Taxable Company Car Benefit + Taxable Club Membership Benefit) – Deductions (like EPF under 80C).

The income tax will then be calculated based on the applicable income tax slabs for his total taxable income. This tax will be deducted from his monthly salary as Income Tax Deduction.

Why It’s Important to Understand the Difference

Perquisites and allowances often tend to seem so similar that there could be a lot of confusion between the two of them. Hence, knowing the basic difference between allowances and perquisites is very important. It also helps both employers and employees in understanding various components, such as the following.

For better salary structuring

When a company designs your salary package, knowing the difference between cash allowances and non-cash benefits helps them create a mix that works best for both sides. They can decide which parts should be given as direct money and which as benefits that add value in other ways. This leads to a clearer and more understandable salary breakdown for you.

For accurate tax planning

The way allowances and perquisites are taxed is different, as we discussed. If both you and your employer understand this, you can plan your taxes more effectively. You’ll know which parts of your salary will be taxed fully, which might have some tax benefits, and how to properly declare everything to avoid any issues later on.

To increase take-home pay legally

By understanding the tax rules around allowances and perquisites, both you and your employer can explore options to structure your salary in a way that reduces your overall tax burden, without breaking any laws. This means you could potentially take home more of your earnings by making informed decisions about the different components of your salary package.

How Asanify Helps with Salary Structuring

Asanify’s payroll platform makes handling your salary structure super easy. It takes away a lot of the headache involved in setting up your pay and making sure everything is correct. Here’s how it helps:

Customizable salary heads

Asanify lets you create different categories for your earnings, like basic pay, HRA, LTA, and any other special allowances or perks your company offers. This makes your salary breakdown clear and easy to understand.

Tax treatment automation

The platform automatically figures out how each part of your salary should be taxed according to Indian rules. So, it knows which allowances might have some tax benefits and how to calculate the taxable value of things like company cars, saving you and your HR team a lot of manual work and potential errors.

Pay slip generation with allowances & perquisites

Asanify creates your pay slips clearly showing all your allowances and perquisites separately. This makes it simple for you to see exactly what you’re earning as cash and what benefits you’re receiving, along with how taxes are being handled.

AI-powered compliance for Indian payroll

Asanify uses smart technology to stay up-to-date with all the latest payroll rules and regulations in India. This helps your company ensure that your salary is processed correctly and that all legal requirements are met without you or your HR team having to constantly worry about the details.

Conclusion

In conclusion, allowances and perquisites are additional forms of compensation that are provided by employers to their employees that are way beyond their regular salary. Allowances tend to reimburse employees for specific expenses or provide extra financial support. On the other hand, perquisites tend to provide non-cash benefits and privileges that enhance the overall compensation package of an employee.

While both allowances and perquisites are the best ways to attract a larger number of talents and retain them, they both differ a lot in their purposes. Understanding this difference between allowances and perquisites is very important. Also, why not use a smart HR tool such as Asanify that will provide more clarity and ensure there is compliance when planning your perquisites and allowances.

FAQs

What is the main difference between allowances and perquisites?

Allowances are generally cash payments given to employees, while perquisites are mostly non-cash benefits or facilities provided by the employer.

Are perquisites taxable in India?

Yes, most perquisites are taxable as part of your salary under Income from Salaries. However, some specific perquisites are exempt from tax.

Is HRA an allowance or a perquisite?

HRA (House Rent Allowance) is an allowance, a cash component paid to employees to help with accommodation expenses.

How are perquisites calculated for income tax?

The Income Tax Rules, specifically Rule 3, provide detailed guidelines for valuing different types of perquisites for tax purposes.

Can I choose to receive more allowances instead of perks?

This usually depends on your employer’s salary structure and policies. There might be some flexibility, but it’s not always possible to fully customise the mix.

What is an example of a tax-free perquisite?

Reimbursement of medical expenses up to ₹15,000 per annum (with bills) is often a tax-exempt perquisite.

How does the salary structure affect take-home pay?

The mix of basic salary, allowances (taxable and exempt), perquisites (taxable and exempt), and deductions directly impacts your taxable income and, consequently, your take-home pay.

Do startups offer more allowances or perquisites?

Startups may lean towards offering more allowances due to cash flow considerations, but this can vary greatly depending on the company and its stage.

Can freelancers or contractors receive allowances?

Typically, allowances are part of an employer-employee relationship. Freelancers and contractors usually negotiate a total service fee rather than a structured salary with allowances.

Does Asanify help with tax calculations for perquisites?

Yes, Asanify’s payroll platform automates tax calculations for both allowances and perquisites based on Indian tax regulations.

Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant or Labour Law expert for specific guidance.