Difference Between Allowance and Perquisites

Throughout history, the method of paying people for their service has always been in financial currency. The same goes for our business world.


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There’ve been contradictions between Allowance and Perquisites but make no mistake, they are not alike. Although they share similar properties, it’s small compared to the differences.

Allowance vs Perquisites

The difference between Allowance and Perquisites is that Allowance refers to the financial benefit that a company gives to employees in addition to the base income they get to cover any costs they could incur while doing their jobs or as a result of those jobs.

On the other hand, perquisites are monetary benefits that an employer gives to a worker due to their position or title.

These operate as extras on top of an employee’s salary. It makes it easier to handle several costs for which the employee doesn’t have to pay out of pocket.

Comparison Table

Parameters of ComparisonAllowancesPerquisites
DefinitionAllowance implies the amount paid by an employer to the employees for meeting certain special expenses, i.e. discharging official duties or to meet personal expenses.  Perquisite refers to a facility, provided to the employee apart from their salary or allowance, owing to his/her designation or length of service.
Paid inCash.Cash or Kind
PurposeOfficial or Personal PurposePersonal Purpose
Impact on SalaryIt increases the take home salary.It does not affect take home salary.
Task LiabilityIncreases tax liability  Reduces tax

What is an Allowance?

Allowance is a fixed amount given to the employee at periodic intervals to cover special expenses incurred while discharging job-related duties. To put it simply, an allowance is a compensation for the incurrence of specific expenses.

Amount paid by the company in the form of allowance also constitutes a part of the salary. Also, the amount of allowance is considered to determine the total salary for the purpose of taxation.

From a tax point of view, the expenses are divided into three main categories:allowances

Fully Taxable Allowances

  1. Project Allowance: Allowance provided to employees for meeting project expenses, is called project allowance.
  2. Dearness Allowance: Dearness Allowance or DA is the allowance given to the salaried people as a cost of living adjustment allowance, so as to survive inflation.
  3. Medical Allowance: An employer pays an employee at a fixed rate, regardless of the treatment taken by the employee.
  4. Overtime Allowance: When employees work over and above their working hours, overtime allowance is provided to them.
  5. Cash Allowance: Cash Allowance is provided by the employer such as marriage allowance, bereavement allowance or holiday allowance, etc.

Partially Taxable Allowances

  1. Children Education Allowance: It is exempt up to a certain amount per month per child, subject to a maximum of two children.
  2. House Rent Allowance: An allowance paid for the accommodation of the employees is called a house rent allowance.

Fully Exempt Allowances

  1. Allowance paid to government servants in foreign countries: Government employees paid an allowance while serving in foreign countries.
  2. Sumptuary Allowance: This allowance is given to the judges of the Supreme Court and High Court.

What is a Perquisite?

The term “perquisites” or “perks” refers to extra compensation that is paid for personal benefits or perks associated with a job or position. The employee receives benefits from the company at no cost or at a reduced cost. In addition, if the employee does not use or take advantage of these advantages, no money is given to the employee.

It does not, however, imply a simple refund of significant expenses incurred while performing official obligations.

Today, an employee’s remuneration package includes their base income and benefits like a corporate car, apartment, servant, etc. It could happen while performing your job or practicing your trade.

There are three categories of perquisites from the perspective of taxes:

Perquisites taxable in the hands of specified employees

  1. Provision of servants such a gardener, watchman, personal attendant, and a sweeper.
  2. Gas, electricity, or water usage facility
  3. Free or discounted tickets
  4. Usage of a motor vehicle
  5. Free or discounted child education services

All Employees’ Perquisites are Taxable

  1. Free housing: A place to live an employer supplies that without having to pay rent. One should be aware that the rent-free official apartment supplied to the judges of the high court and supreme court is tax-free.
  2. Rent concession: Rent concession for housing that an employer offers to an employee.
  3. Shares of a specific security or sweat equity that the employer has distributed or transferred: Direct or indirect allotment or transfer of sweat equity shares or specified securities by the employer or ex-employer, either without charge or at a reduced price to the employer.
  4. Other fringe benefits: The cost of any other benefits permitted by the Central Board of Direct Taxes, including as credit card costs. club expenses, the use of portable assets, interest-free or subsidized loans, etc.

Exempt perquisites

  1. Transport Facility: A transportation facility that an employer offers to a worker who is involved in the business of transporting people or goods. This facility may be provided free of charge or at a discounted rate.
  2. Payment of the annual premium by the employer for a personal accident policy: The employer pays the annual premium for a personal accident policy that was started on the employee’s life.
  3. Refreshment: During working hours, employees are given refreshments in the office.
  4. Cost of employee training: The cost of an employee training program or a refresher management course plus any boarding and accommodation costs payable by the employer.

Main Differences Between Allowances and Perquisites

  1. Allowance is the term used to describe the additional money a company gives an employee to cover certain costs associated with performing official obligations. Contrarily, perks are extra benefits that are given on top of what is legally required as compensation for the services provided by an employment contract.
  2. Perquisites are typically given in exchange for something other than cash, whereas allowances are paid in cash. If an allowance is paid in cash, it is a reimbursement for a bill that the employee has already paid when it arises.
  3. If the allowances are given for work-related purposes, they are tax-exempt; if they are given for personal reasons, they are taxable. On the other hand, if perquisites are given in exchange for something other than money, they are valued according to what it costs the employer, making them taxable.
  4. While perquisites have no impact on take-home pay, allowances do.
  5. While perquisites lessen tax obligation, allowance raises it.


  1. http://webstor.srmist.edu.in/web_assets/srm_mainsite/files/2019/lesson-plan-PG-Gen-II-year-III-Sem-PCM18302.pdf
  2. https://www.jstor.org/stable/27767355
  3. https://awwa.onlinelibrary.wiley.com/doi/abs/10.1002/j.1551-8833.1983.tb05242.x
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