Good news for salaried taxpayers: Limits for these two tax-free perquisites raised substantially in Finance Act, 2025

On August 18, 2025, the Central Board of Direct Taxes (CBDT) issued a notification which effectively increased the income threshold limits for calculating tax-free perquisites (perks) in salary income. These new limits were introduced in the Finance Act, 2025, via a notification in the India e-Gazette, and will take effect from April 1, 2025 (AY 2026-27).

Previously, the salary income limit for tax free perquisite were Rs 50,000 for specified employees and Rs 2 lakh for overseas medical treatment. Now, these limits have been significantly raised to Rs 4 lakh for specified employees and Rs 8 lakh for overseas medical treatment, thanks to the insertion of new Rules 3C and 3D into the Income-tax Rules, 1962.

The Rs 4 lakh and Rs 8 lakh mentioned above refers to the threshold limit of salary or gross total income of the employee,which allows certain benefits/amenities to be excluded from perquisite taxation; they do not represent the value of benefit/ amenities themselves.

Read on to see how this impacts salaried employees.

What is perquisite taxation?

Chartered Accountant Rahul Singh, senior manager, advisory & research, Taxmann explains:

Section 17(2)(iii) [specified employees]

"When an employer provides the following benefits or amenities to its employees, the value of such benefits or amenities is taxable as perquisite only in the hands of specified employees as per Section 17(2)(iii) of the ITA read with Rule 3 of the Income-tax Rules:

1. Use of a car or any other automotive conveyance [Rule 3(2)]
2. Services of a sweeper, a gardener, a watchman or a personal attendant [Rule 3(3)]
3. Supply of Gas, Electricity or Water [Rule 3(4)]
4. Education facility [Rule 3(5)]
5. Transportation facility [Rule 3(6)]"
6. Others

Specified Employee – Income threshold raised from Rs 50,000 to Rs 4 lakh

Chartered Accountant (Dr) Suresh Surana explains: The term “specified employee” is defined under Rule 3 for the purposes of valuation of perquisites. It refers to:

• A director-employee; or
• An employee who has substantial interest (i.e., owns at least 20% voting power in the company); or
• Any other employee whose income under the head “Salaries” (excluding non-monetary perquisites) exceeds the prescribed limit (Rs 4 lakh).

Amarpal Chadha, Tax Partner, EY India, says: "Specified non-monetary perquisites like motor cars, personal servants, gas, electricity, water, educational facility and transport by transporters provided to employees whose salary income (including monetary benefits) exceeds Rs 4 lakh will be taxable as perquisites. If the salary income is below Rs 4 lakh, then such specified perquisites shall not be taxable."

Chadha adds: "It is important to note that such non-monetary perquisites provided to company directors and employees holding substantial interest remain taxable irrespective of the monetary threshold of salary income. It is also important to note that this provision does not apply to other perquisites like ESOPs or fringe benefits like interest-free/concessional loans, travel, food & beverages, gifts, club membership, etc which remain taxable irrespective of monetary threshold of salary income."

Also read: No income tax for lady who sold land for Rs 4.5 crore; Know how a 1955 circular and established case laws saved the day for her

What is the impact of the changes made to perquisite taxation?

There are two separate changes introduced by these amendments:

• Specified employees: Rs 4 lakh
• Overseas medical treatment: Rs 8 lakh

Example: The effect of this change is that for AY 2026-27 if your salary income is let’s say Rs 3.99 lakh and you are getting free educational facilities for children, etc from your employer, then you don’t need to pay any income tax on such a benefit (perquisite).

Surana explains: “This prescribed limit has now been enhanced to Rs 4 lakh (from Rs 50,000 earlier). The effect of this change is that employees with salary income up to Rs. 4 lakh will not fall under the category of “specified employees” and therefore will not be subject to perquisite taxation on certain benefits (such as free educational facilities for children). Only those with salary income above Rs. 4 lakh will be treated as “specified employees” for these purposes.”

S. Vasudevan, Executive Partner, Lakshmikumaran & Sridharan attorneys agrees with Surana and adds: “This monetary limit of Rs 50,000 was fixed way back in 2001 and hence, the need was felt to increase this threshold to benefit more employees with lower salary income. Thus, for AY 2026-27, in case of employees having salary income (monetary) up to Rs 4 lakh, non-monetary benefits/ amenities received from employers will not be treated as perquisite.”

Also read: CAs caution joint bank account holders about this critical issue with tax rules that can lead to tax notices

Overseas Medical Treatment: Limit Increased to Rs 8 lakh

This means that if an employee’s gross total income (before claiming this tax exemption) does not exceed Rs 8 lakh, the value of such medical perquisite will not be taxed. If the gross total income exceeds Rs 8 lakh, the amount spent on overseas medical treatment will be treated as a taxable perquisite.

Chadha from EY India says: "Travel cost incurred by the employer for overseas medical treatment of employees and their family members/accompanying attendant will now be exempt where the employee’s gross total income does not exceed Rs 8 lakh subject to the continuing requirement of RBI approval for medical treatment and stay abroad."

Vasudevan from Lakshmikumaran & Sridharan attorneys, explains:

Clause (vi) of proviso to Section 17(2)

• This proviso contains the list of certain benefits/ amenities which shall not be treated as perquisites (i.e. exempted perquisites). Clause (vi) of the said proviso states that expenditure incurred by the employer on medical treatment of the employee or any family member of employee will not be treated as perquisite, subject to certain conditions. The said exemption also applied to expenditure on travel and stay abroad relating to such medical treatment.
• The above exemption to expenditure on travel was subject to the condition that the gross total income of the employee (other than such expenditure) should not exceed Rs 2 lakh. Thus, only employees whose gross total income was up to Rs 2 lakh in a year could have availed this exemption in respect of travel expenditure incurred by employer for medical treatment abroad.
• This monetary limit of Rs 2 lakh was fixed way back in 1993 and hence, the need was felt to increase this threshold to benefit more employees with lower salary income.
• Thus, Finance Act, 2025 amended this provision to provide that the monetary limit will be prescribed by the rules. Consequently, Rule 3D of Income Tax Rules, 1962 has been now introduced to prescribe the monetary limit as Rs 8 Lakh in place of earlier Rs 2 lakh.
• Thus, for AY 2026-27, in case of employees having gross total income up to Rs 8 lakh, travel expenditure incurred by employer for medical treatment abroad of employee or any family member will not be treated as perquisite.

Singh says: "The threshold of Rs. 2,00,000 for gross total income was introduced by the Finance Act, 1993, and remained unchanged for over three decades, despite significant changes in economic conditions, inflation, and the cost of living. Recognising the need to align the provision with contemporary economic realities, the Finance Act, 2025 has removed the fixed threshold limit of Rs. 2,00,000 to determine the taxability of travel expenses related to medical treatment outside India. Instead, it empowers the CBDT to prescribe the threshold limit."

Conditions for overseas medical treatment perquisite

Vasudevan, explains: The tax exemption on perks is subject to the following conditions:

1. Medical treatment abroad must be relating to the employee or any family member (patient).
2. Expenditure relating to travel and stay abroad must be relating to the patient and one attendant who accompanies the patient.
3. Expenditure is to the extent permitted by the RBI (i.e. LRS limit of USD 250,000 per annum).

Also read: 16 transactions which tax dept gets to know via SFT returns; Report them now to avoid possible jail term for misreporting income

How were these amendments made?

Surana explains:

• “These amendments were carried out under the Income-tax Act, 1961 through the rule-making powers conferred on the Central Government by Section 295, read with the relevant provisions of Section 17(2).”
• “It has been notified by the Central Board of Direct Taxes (CBDT) vide Notification No. 133/2025, dated 18th August 2025, inserting Rules 3C and 3D into the Income-tax Rules, 1962. Accordingly, it is a subordinate legislation in the form of a notification under the Income Tax Act, 1961 and not a part of the amendments proposed in the Income-tax (Amendment) Bill, 2025.”
• As such, this particular change could not be debated in Parliament, since it does not form part of the Income Tax Bill, 2025 introduced on August 11, 2025. Instead, it has been introduced directly by way of a CBDT notification in exercise of delegated legislative authority.

Also read: CAs point to glitch in ITR software resulting in taxpayers getting a little less tax refund; what it means for you