Vol. 3 Issue 12.3
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December 21 , 2009
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CBDT releases new perquisite valuation rules
The Finance (No 2) Act, 2009 abolished Fringe Benefit Tax (‘FBT’) on employers and
parallely introduced provisions to cover some items under the erstwhile FBT regime
as ‘perquisites’, taxable in the hands of the employees. Further, since the valuation
rules prescribed for some perquisites such as motor cars, holiday expenses, gifts,
free food and beverages, etc applied to employees whose employers were not liable
to FBT, the abolishing of FBT created expectation for new perquisite valuation rules.
The Central Board of Direct Taxes (‘CBDT’) has now released the much awaited rules
for valuation of perquisites provided by an employer to its employees. The new rules
for valuation of perquisites (‘Rules’) have been notified vide the Income Tax (13th
Amendment) Rules, 2009 incorporating the following amendments:
(i) Substitution of the erstwhile Rule 3 of the Income tax Rules, 1962 with a new Rule
3 from April 1, 2009; and

Indian Corporate Taxation Course,
March 18-19, 2010, Singapore

BMR is "Transfer Pricing Firm of the
Year" and wins "India Case of the
Year" award

BMR named the leading Financial
Advisor in the mid market segment
in India and 10th in APAC

BMR is Tier 1 Firm in India for
second consecutive year

BMR is top mid-market dealmaker





Divya Baweja
Nitin Baijal
Sumeet Hemkar
Vishal Kalra
Anurag Jain (SA)

Bobby Parikh, Mumbai
(ii) Insertion of a new Rule 40F to render the rules relating to valuation of stock
incentives under the FBT regime redundant effective April 1, 2009
The much awaited valuation rules are identical to the erstwhile rules for most
perquisites except for ‘motor car and chauffeur’, ‘stock incentives’ and
‘accommodation provided to Central / State Government employees serving on
deputation with any body or undertaking under the control of such government’.
Key amendments
Residential accommodation
The rule for valuation of accommodation is a replica of the erstwhile rule, except that
Published with kind permission from BMR Advisors
a new explanation has been inserted for Central / State Government employees on
deputation with any body / undertaking under the control of such Government, in
which case the valuation will be as under:
Nature of perquisite

Mukesh Butani, New Delhi
Phone: +91 11 3081 5010
Email ID:
mukesh.butani@bmradvisors.com

Rajeev Dimri, New Delhi
Phone: +91 11 3081 5050
Email ID:
rajeev.dimri@bmradvisors.com

Abhishek Goenka, Bangalore
Phone: +91 80 4032 0100
Email ID:
abhishek.goenka@bmradvisors.com

Sriram Seshadri, Chennai
Phone: +91 44 4298 7000
Email ID:
sriram.seshadri@bmradvisors.com

Gagan Malik, Singapore
Phone: +65 6408 8004
Email ID:
gagan.malik@bmradvisors.com
Rules for valuation
Existing rule
Value of residential
accommodation provided
by Central / State
Government to an
employee serving on
deputation with any body
or undertaking under the
control of such
Government
Phone: +91 22 3021 7010
Email ID:
bobby.parikh@bmradvisors.com
Licence fee
determined by Central
/ State Government in
accordance with the
rules framed by such
government, as
reduced by the rent
actually paid by the
employee
Where furniture is
provided, 10% of the
cost of furniture or
actual hire charges
payable (where
furniture is taken on
hire), as reduced by
charges payable by
the employee
New rule
(i) 15% of salary* in cities with
population exceeding 25 lakhs,
as per 2001 census; or
(ii) 10% of salary* in cities with
population exceeding10 lakhs
but not exceeding 25 lakhs, as
per 2001 census; or
(iii) 7.5% of salary* in other
areas in respect of the period
during which such
accommodation was occupied
by employee, as reduced by the
rent actually paid by the
employee
Where furniture is provided,
10% of the cost of furniture or
actual hire charges payable
(where furniture is taken on
hire), as reduced by charges
payable by the employee
* Salary for the purposes of valuation of ‘accommodation perquisite’ is unaltered,
except that lumpsum payments received at the time of termination of service or
superannuation or voluntary retirement, like gratuity, severance pay, leave
encashment, voluntary retirement benefits, commutation of pension and similar
payments, have been specifically excluded.
Car and chauffeur
The valuation in respect of motor car, whether owned by the employer or employee
and used wholly and exclusively for official purposes continues to be tax free (ie
valued at ‘NIL’), subject to maintenance of prescribed documentation. Similarly, no
change is made to the valuation norms for a motor car owned by the employer and
provided to the employee exclusively for personal purposes.
A nominal increase in absolute terms is however prescribed in the valuation amounts
where a motor car is owned or hired by the employer and provided to the employee
for official and personal use, and the expenses on maintenance and running of the
Published with kind permission from BMR Advisors
car are met either by the employer or the employee.
Further, a nominal increase in absolute terms is also prescribed in the relief where the
motor car or any other automotive conveyance is owned by the employee, and used
partly for official as well as personal purposes, with the expenses on maintenance
and running being met or reimbursed by the employer.
The prescription under the amended rule is tabulated below:
Nature of
perquisite
Rules for valuation
Existing rule
Motor car
and
chauffeur
New rule
(A) Motor car owned or hired by
the employer and used partly for
official and partly for personal
purposes by the employee or any
member of his household:
(A) Motor owned or hired by the
employer and used partly for
official and partly for personal
purposes by the employee or any
member of his household:
(i) Maintenance and running
expenses met or reimbursed by
the employer
(i) Maintenance and running
expenses met or reimbursed by
the employer
Cubic capacity
of engine does
not exceed 1.6
litres
Cubic capacity
of engine
exceeds 1.6
litres
Rs 1,200 (plus
Rs 600, if
chauffeur is
provided)
Rs 1,600 (plus
Rs 600, if
chauffeur is
provided)
(ii) Maintenance and running
expenses for private and personal
use fully met by the employee
Cubic capacity
of engine does
not exceed 1.6
litres
Cubic capacity
of engine
exceeds 1.6
litres
Rs 400 (plus
Rs 600, if
chauffeur is
provided)
Rs 600 (plus
Rs 600, if
chauffeur is
provided)
Cubic capacity
of engine does
not exceed 1.6
litres
Cubic capacity
of engine
exceeds 1.6
litres
Rs 1,800 (plus
Rs 900, if
chauffeur is
provided)
Rs 2,400 (plus
Rs 900, if
chauffeur is
provided)
(ii) Maintenance and running
expenses for private and personal
use fully met by the employee
Cubic capacity
of engine does
not exceed 1.6
litres
Cubic capacity
of engine
exceeds 1.6
litres
Rs 600 (plus
Rs 900, if
chauffeur is
provided)
Rs 900 (plus
Rs 900, if
chauffeur is
provided)
(B) Motor car or any other
(B) Motor car or any other
automotive conveyance owned by automotive conveyance owned by
the employee but maintenance and the employee but maintenance and
Published with kind permission from BMR Advisors
personal purposes
personal purposes
Actual amount of expenditure
incurred by the employer, as
reduced by:
Actual amount of expenditure
incurred by the employer, as
reduced by:
(i) In case of motor car
(i) In case of motor car
Cubic capacity
of engine does
not exceed 1.6
litres
Cubic capacity
of engine
exceeds 1.6
litres
Rs 1,200 (plus
Rs 600, if
chauffeur is
provided)
Rs 1,600 (plus
Rs 600, if
chauffeur is
provided)
Cubic capacity
of engine does
not exceed 1.6
litres
Cubic capacity
of engine
exceeds 1.6
litres
Rs 1,800 (plus
Rs 900, if
chauffeur is
provided)
Rs 2,400 (plus
Rs 900, if
chauffeur is
provided)
(ii) In case of any other automotive (ii) In case of any other automotive
conveyance – Rs 600
conveyance – Rs 900
Reduction of a higher amount can
be claimed subject to maintenance
of prescribed documentation for
official use
Reduction of a higher amount can
be claimed subject to maintenance
of prescribed documentation for
official use
Employee Stock Options or any other equity oriented incentive scheme (‘ESOPs’)
The Finance (No 2) Act, 2009 has brought ESOPs within the ambit of ‘perquisites’.
As a result, ESOPs are now taxed as perquisite in the hands of employees on the
date of exercise. The taxable perquisite is computed as the difference between the
Fair Market Value (‘FMV’) of the shares on the date of exercise of the options and the
exercise price.
The valuation norms for FMV on the date of exercise of the options are similar to the
valuation norms prescribed under the erstwhile FBT regime, except that now
valuation needs to be carried out on the date of ‘exercise‘ instead of the date of
‘vesting’ of options.
The valuation norms have been summarized below:
Listed companies


Equity shares of a company listed on a recognized stock exchange in India –
FMV is determined as the average of the opening price and closing price of
the share on the date of exercise
Equity shares listed on more than one recognised stock exchange in India –
FMV is determined as the average of the opening price and the closing price
Published with kind permission from BMR Advisors

of the share on the date of exercise on the recognized stock exchange which
records the highest volume of trading in the share.
In cases where no trading in shares takes place on any recognised stock
exchange in India on the date of exercise – FMV is determined as under:
o
o
the closing price of the share on any recognised stock exchange on a
date closest to the date of exercise of the options and immediately
preceding such date; or
the closing price of the share on a recognised stock exchange, which
records the highest volume of trading in such share, if the closing
price, as on the date closest to the date of exercise of the options and
immediately preceding such date, is recorded on more than one
recognised stock exchange
Unlisted companies
FMV is such value as determined by a Category I Merchant Banker registered with
the Securities and Exchange Board of India, on the specified date.
Any other specified security (other than equity share)
FMV is such value as determined by a Category I Merchant Banker registered with
the Securities and Exchange Board of India, on the specified date.
For the purposes of valuation, some key terms have been defined as under:



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‘Closing price’ of a share on a recognised stock exchange on a date shall be
the price of the last settlement on such date on such stock exchange. In case
the stock exchange quotes both ‘buy’ and ‘sell’ prices, the closing price shall
be the ‘sell’ price of the last settlement.
‘Opening price’ of a share on a recognised stock exchange on a date shall be
the price of the first settlement on such date on such stock exchange. In
case the stock exchange quotes both ‘buy’ and ‘sell’ prices, the opening price
shall be the ‘sell’ price of the first settlement.
‘Specified date’ means the date of exercise of the option or any date earlier
than the date of the exercise of the option not being a date which is more
than 180 days earlier than the date of the exercise.
‘Merchant banker’ means Category I Merchant Banker registered with the
Securities and Exchange Board of India established under section 3 of the
Securities and Exchange Board of India Act, 1992
Other perquisites – no amendment in valuation norms
Published with kind permission from BMR Advisors
Nature of perquisite
Rules for valuation
Provision of sweeper, gardener,
watchman or personal attendant
Actual cost to the employer, as reduced by the
amount paid by the employee
Supply of gas, electric energy or
water for household consumption
of the employee
Actual cost to the employer, as reduced by the
amount paid by the employee
Where, such supply is made from resources
owned by the employer, the value of perquisite
would be manufacturing cost per unit incurred
by the employer, as reduced by the amount
paid by the employee
Provision of free or concessional
educational facilities
Actual cost to the employer, as reduced by the
amount paid by the employee
Where the educational institution is itself
maintained and owned by the employer or
where free educational facilities for any
member of the employee’s household are
allowed in any other educational institution, the
perquisite shall be determined as cost of such
education in a similar institution in / near the
locality, as reduced by the amount paid by the
employee. However, no perquisite shall arise
if the cost of such education or the value of
such benefit per child does not exceed
Rs 1,000 per month
Provision by an employer, engaged
in the carriage of passengers or
goods to any employee for
personal or private journey free of
cost or at concessional fare, in any
conveyance owned, leased or
made available by any other
arrangement by such employer for
the purpose of transport of
passengers or goods
Value at which such benefit or amenity is
offered by such employer to the public, as
reduced by the amount paid by the employee
Provision of interest-free or
concessional loan (for any
purpose)
Interest computed at the rate charged per
annum by the State Bank of India, as on the
first day of the relevant tax year, in respect of
loans for the same purpose advanced by it
No perquisite arises in case of employees of
airlines or railways
Interest to be computed on the maximum
outstanding monthly balance and reduced by
the interest, if any, actually paid by the
employee or any member of his household
No perquisite arises if such loans are made
available for medical treatment in respect of
specified diseases or where the amount of
loan does not in the aggregate exceed
Rs 20,000. However, the exemption so
provided shall not apply to so much of the loan
as has been reimbursed to the employee
Published with kind permission from BMR Advisors
under any medical insurance scheme
Travelling, touring, accommodation
and any other expenses paid or
reimbursed by the employer for any
holiday availed by the employee
(other than Leave Travel
Assistance)
Amount of expenditure incurred by employer,
as reduced by the amount paid by the
employee
Where such facility is maintained by the
employer, and is not available uniformly to all
employees, the value of benefit shall be taken
to be the value at which such facilities are
offered by other agencies to the public
Where the employee is on official tour and the
expenses are incurred in respect of any
accompanying member of his household, the
amount of expenditure so incurred shall also
be a fringe benefit or amenity
However, where any official tour is extended
as a vacation, the value of such fringe benefit
shall be limited to the expenses incurred in
relation to such extended period of stay or
vacation, as reduced by the amount paid by
the employee
Provision of free or concessional
food and non-alcoholic beverages
Actual expenditure by employer, as reduced by
the amount paid by the employee
No perquisite arises if free food and nonalcoholic beverages are provided by the
employer during working hours at office or
business premises or through paid vouchers
which are not transferable and usable only at
eating joints, to the extent the value thereof in
either case does not exceed Rs 50 per meal or
to tea or snacks provided during working hours
or to free food and non-alcoholic beverages
provided during working hours in a remote
area or an off-shore installation
Gift, or voucher, or token in lieu of Amount of the gift – however, no perquisite
such gift on ceremonial occasions arises if the value of gift / voucher / token is
or otherwise
below Rs 5,000 in the aggregate
Membership fees and annual fees Actual amount of expenditure paid /
for a credit card (including any add- reimbursed by employer, as reduced by the
on-card)
amount paid by the employee
No perquisite arises if expenses are incurred
wholly and exclusively for official purpose,
subject to fulfillment of prescribed conditions
Club facility
Actual amount of expenditure (including the
annual or periodical fee) paid / reimbursed by
employer, as reduced by the amount paid by
the employee
Published with kind permission from BMR Advisors
No perquisite arises if expenses are incurred
wholly and exclusively for official purpose,
subject to fulfillment of prescribed conditions
Where the employer has obtained corporate
membership of a club and the facility is
enjoyed by the employee or any member of his
household, the value of perquisite shall not
include the initial fee paid for acquiring such
corporate membership
No perquisite arises if the use of health club,
sports and similar facility is provided by the
employer to all employees
Use of any movable asset (other
than specified assets, laptops and
computers) owned or hired by the
employer
10% per annum of the actual cost of such
asset or the rent paid / payable by the
employer, as reduced by the amount paid by
the employee
Transfer (direct / indirect) of any
movable asset belonging to the
employer
Actual cost of such asset to the employer, as
reduced by the cost of normal wear and tear
calculated at 10% of such cost for each
completed year during which such asset was
put to use by the employer, as reduced by the
amount paid by the employee
In the case of computers and electronic items,
the normal wear and tear would be calculated
at 50% and in the case of motor cars at 20%
by the reducing balance method
Any other benefit or amenity,
service, right or privilege provided
by the employer
Cost to the employer under an arms length
transaction, as reduced by the amount paid by
the employee
However, no perquisite arises in case
expenses on telephone, including mobile
phone, are actually incurred by the employer
on behalf of the employee
BMR analysis and observations


While significant changes were expected to be made the perquisite
valuation rules, such is not the case and the new rules are largely
similar to the erstwhile rules. The focus of the new rules has been
valuation of ‘motor car and chauffeur’ and ‘stock incentives’.
Belying the ‘aam aadmi’ expectations, the valuation norms for a
majority of the perquisites provided by an employer to the employee
or any member of his household remain unchanged.
The valuation amounts for ‘motor car and chauffeur’ provided by an
employer for official and personal purposes have essentially been
Published with kind permission from BMR Advisors




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increased by 50%; however, the taxability in such cases,
considering the amounts, still remains nominal. Similarly, the relief
for use of employee owned cars for official and personal purposes
has been increased by 50%, resulting only in a marginal relief to the
employees.
The use of telephone continues to be tax exempt, as in the pre-FBT
regime. In case of meal coupons, the earlier tax-free limit of Rs 50
per meal remains unchanged (this limit was increased to Rs 100
under the FBT regime). Similarly, the value of gifts exempt from tax
remains pegged at Rs 5,000.
With the reintroduction of stock incentives being taxed as
‘perquisites’ in the hands of the employees, though in a more
fortified avatar than in the past, the valuation rules for this benefit
were eagerly awaited. The new rules are a replica of the
antecedent FBT rules for valuation of stock options. The value of
benefit is however to be computed at the time of ‘exercise’ of the
options under the ‘perquisite’ regime rather than ‘vesting’ as under
the FBT regime.
In relation to ESOPs some aspects require consideration, since a
number of clarifications that were issued under the erstwhile FBT
regime, which as matters stand today, technically do not apply to
the current perquisite tax regime. Some relevant points in this
respect are:
o Attribution of benefit arising on account of employee stock
options for expatriates was clarified through circulars issued
under the FBT regime. No such clarification is provided
under the new rules and this is likely to recreate the
ambiguity that subsisted earlier.
o The creditability of FBT paid by the employer and recovered
from the employee against foreign taxes payable by the
employee was suspect. With tax now being imposed on the
employee, ambiguity otherwise existing in this context
stands alleviated.
Since the new rules are effective from April 1, 2009, with certain
benefits like stock options, motor cars, etc being taxable from
April 1, 2009, the employers may be obligated to withhold and
deposit taxes during the next payroll to cover any shortfall in the tax
deduction. This may have a cash flow impact for the employees.
In summary, the abolition of FBT through Finance (No 2) Act, 2009
brought much awaited and anticipated reprieve to the corporate
sector, reeling under the additional cost and compliance burden
imposed on it. While this has certainly resulted in cost savings for
employers, it has resulted in increased tax cost burden for the
Published with kind permission from BMR Advisors
employees. The much expected relief for the salaried tax payer
through concessions in valuation of perquisites is however not
forthcoming in the new rules. With the rules now in sight,
employers will need to revisit their employee compensation
packages.
Disclaimer:
This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does not express views
or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a
result of any material contained in this newsletter will be accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and
circumstances. This newsletter does not substitute the need to refer to the original pronouncements.
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Published with kind permission from BMR Advisors