Expanded Tax-Free Perquisites Under Finance Act 2025: A Game Changer for Salaried Indians

Introduction

In a major boost to the salaried class, the Government of India has revised long-standing limits on tax-free perquisites through the Finance Act 2025, with the Central Board of Direct Taxes (CBDT) notifying new exemptions effective from April 1, 2025 (i.e., Assessment Year 2026–27).

This marks the first significant enhancement of perquisite limits in over a decade, aimed at increasing real take-home pay, promoting tax-efficient salary structures, and aligning with rising cost-of-living and global medical expenses.

Whether youre a mid-level executive, a startup employee, or someone planning overseas medical treatment for a loved one—this change could have a direct impact on your financial health.

What Are Perquisites and Why Do They Matter?

Perquisites are non-cash benefits given by an employer in addition to the basic salary. These could include:

• Rent-free accommodation
• Company-provided vehicles
• Medical reimbursements
• Educational facilities for children
• Travel and meal allowances
• Club memberships
• Stock options (ESOPs)

Many of these perks have monetary value and are often taxable. However, the Income Tax Act exempts certain perquisites up to a defined limit. These exemptions help reduce your taxable income and allow you to receive more value without attracting additional tax.

What’s New Under the Finance Act 2025?

 1. General Tax-Free Perquisite Limit Raised

• Old Limit: Rs. 50,000 (set years ago)
• New Limit: Rs. 4,00,000 (an 8x increase)
• Applicable From: FY 2025–26 (AY 2026–27)

This new cap applies to perquisites falling under Section 17(2)(iii) of the Income Tax Act and includes various non-monetary benefits offered by employers.

Why it matters: Inflation and lifestyle expenses have increased significantly over the last decade. The Rs. 50,000 limit was outdated, and the revision makes compensation packages more flexible and tax-efficient.

2. Exemption for Overseas Medical Treatment Enhanced

• Old Limit: Rs. 2,00,000 (previously interpreted as a general ceiling)
• New Limit: Rs. 8,00,000
• Under: Section 17(2) Proviso – Clause (vi)

This exemption applies when employers cover medical treatment costs for employees or their family members outside India—including airfare and stay, subject to documentation and approval.

Who benefits: Families with children or elders undergoing surgeries or treatments abroad (e.g., organ transplants, cancer therapies, rare diseases).

Illustrative Example: How This Affects Take-Home Pay

Let’s say an employee earning Rs.18 lakh annually receives the following benefits:

Tax Savings: Rs.4.5L of additional income now exempt = up to Rs.1.35L saved in taxes (at 30% slab + cess).

Who Should Pay Close Attention?

Employees in Sectors Like:

• IT & Software
• BFSI (Banking, Financial Services, Insurance)
• Pharma & Healthcare
• Government PSUs & public sector banks
• MNCs with expat perks

Employee Categories:

• Middle management and above
• Employees frequently traveling for health or business
• Those opting for salary restructuring under CTC model

How Employers Can Take Advantage

This reform encourages companies to:

1. Redesign CTC packages to offer more perquisite-based benefits instead of taxable allowances.
2. Increase non-monetary incentives like housing support, education reimbursement, or travel perks.
3. Support tax-efficient salary planning through HR advisory services.
4. Boost employee morale by offering higher real income without increasing cost burden significantly.

Important Compliance Requirements

Employees and employers must ensure:

• Proper documentation of perquisites (invoices, treatment bills, travel documents, etc.)
• Form 12BA reflects accurate details of perquisites in Form 16.
• Adherence to valuation rules under Rule 3 of the Income Tax Rules, 1962.
• Employers deduct TDS correctly, taking into account revised exemptions.

Tip: Keep digital records and communicate with your HR/payroll department in advance to avoid misreporting.

Strategic Implications in the New Tax Regime

Under the new tax regime (Section 115BAC), many deductions like HRA, LTA, and 80C are not allowed. However, perquisite exemptions are still permitted.

This makes perks one of the few remaining ways to optimize tax in the new structure. Employees sticking with the new regime can use these perks as a tool for smart tax planning.

When Do These Changes Apply?

Summary: Why This Reform Matters

The Finance Act 2025 helps the tax system catch up with inflation, global costs, and modern employment trends. It empowers employees to extract more value from their compensation while giving employers room