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What is the difference between allowance and perquisite?

Definition of Allowance

Allowances are fixed amount given by the employer to the employee for carrying out the job responsibilities in an efficient manner. Allowances are the financial benefits that are provided to the employees by the employers over their regular salary.

Amount paid by the company in the form of allowance also constitutes a part of the salary for example conveyance allowance, phone allowance, etc. Also, the amount of allowance is considered to determine the total salary for the purpose of taxation.  While some allowances are taxable under the head salaries, some are partly taxable or fully non-taxable.

Definition of Perquisites

Perquisites or fringe benefits are perks that employees enjoy over and above their salary. Perquisites are the non-cash benefits, which an employee receives from his employer during the course of employment. The employer provides perquisites to the employee, for free or at concessional rates. Further, no money is provided to the employee, if the employee does not use or avail of these amenities.

Perquisites are both taxable and exempt. It can be in form of company car, fuel reimbursement, medical facilities, credit cards, etc. 

Differences Between Allowance and Perquisites

The difference between allowance and perquisites are discussed in the points that follow:

  1. Allowance refers to the extra amount which an employer pays to the employee to cope with particular expenses for carrying out official duties. On the other hand, Perquisites refers to additional benefit, over and above the amount, which is legally due, because of employment agreement for the services rendered.
  2. Allowances are paid in cash whereas perquisites are usually given in consideration other than cash, however, if it is paid in cash, it is a reimbursement of the bill which is already paid by the employee when it is incurred.
  3. In case the allowances are provided for official purpose, it is exempted from tax, however, when the allowances are provided for personal purposes, it is taxable. Conversely, perquisites are provided in consideration other than cash, then it is valued according to the cost to the employer and so it is taxable.
  4. While allowances increase take-home salary, perquisites do not affect take-home salary.
  5. Allowance increases tax liability, whereas perquisites reduce tax liability.

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Note: This Post was last updated on July 26, 2022

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Sunita

Founder & Director | COO & CHRO at eTaxFinance | Content Writer at eTaxFinance Blog | Department Head for Intellectual Property & Startup Team | Head-Corporate Strategy and Planning