New tax norms favour employees living in employer accommodation

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The Central Board of Direct Taxes (CBDT), in a recent notification, modified Rule 3 of the Income-Tax (I-T) Rules, 1961, which deals with rent-free accommodation offered by employers to employees. These changes follow the amendment to the Finance Act, 2023, for calculating perquisites related to concessional housing. A perquisite is an emolument or benefit attached to an office or position paid in addition to salary or wages. These new norms will come into effect on September 1, 2023.

Employees who benefit from rent-free accommodation should pay heed to these new regulations, especially if they are in the higher salary brackets. Says Dipen Mittal, deputy general manager, Taxmann: “The revisions in the computation of perquisite value for rent-free accommodation offer a more accurate reflection of real-world conditions.”

Understanding rent-free accommodation

It is a residential arrangement allotted to an employee at zero or minimal rent. Says Abhinav Jain, manager, CNK RK: “Rent-free accommodation can include a flat, guest house, hotel, service apartment, caravan, mobile home, and more. It is valued as a perquisite for calculating the salary according to Rule 3 of the I-T Rules, 1961.”

“Though there is no rental cost, this benefit is added to an employee’s income and taxed.”

Key aspects of the new norms

Several factors influence the taxable value of rent-free accommodation. These include the employee’s salary, the property’s location, whether it is furnished, and whether it is owned by the employer or rented.

The perquisite value for residents of large cities is 10 per cent of salary (down from the earlier 15 per cent). For medium-sized cities, it is 7.5 per cent (reduced from 10 per cent), and for small cities, it is 5 per cent (compared to 7.5 per cent earlier).

The categorisation of cities has been updated. Cities with a population of over 40 lakh are now considered large cities (up from 25 lakh). Cities with a population of up to 15 lakh are now small cities. And those with a population exceeding 15 lakh but up to 40 lakh are now classified as medium-sized cities.

The population data used for the classification of cities is now based on the 2011 census, and not the 2001 census used previously.

An inflation-linked cap has been introduced for cases where the employee is provided the same accommodation for more than a year.

The impact

Employees occupying rent-free accommodation could see a drop in their taxable perquisite value.  “The revised rules will benefit taxpayers. The reduced percentages will reduce the perquisite value, and thereby the employee’s taxable income.”

Further, the cost inflation index will ensure that taxpayers are not subjected to excess tax in case of a large increase in their salary. Says Mittal: “From Assessment Year 2025–26 onward, the perquisite value cannot exceed the value of the previous year adjusted by the cost inflation index.” In short, this will enable such employees to get a bit more money in their hands.

Adds Jain: “The new norms affect employees who live in cities that have a higher population, both through the reclassification of limits, and through the changes in percentages for valuing the perquisite.”

Key points to note

Perquisite valuation of accommodation provided earlier will be done until August 31, 2023, using the old rates. The new rates will apply from September 1, 2023.

Says Mittal: “Both employees and employers must factor in these changes when computing the perquisite value for Assessment Year 2024–25.”

Those who receive a House Rent Allowance (HRA) should note that this allowance and rent-free accommodation are mutually exclusive benefits.  “If an employee receives HRA, she is not eligible for rent-free accommodation.”

– Both House Rent Allowance (HRA) and Rent Free Accommodation (RFA) are generally part of the employee’s CTC (cost-to-company), depending on company policy

– The major difference is that in the case of HRA, the benefit given to the employee is a cash component and the employee may or may not go for rental accommodation in the place of his employment

– RFA is a benefit given in kind to the employee, whose value needs to be added to the employee’s salary as a perquisite, subject to valuation rules

– To evaluate between the two options, consider factors like whether the employee would occupy rented premises or owns a residential unit, how much is the component of HRA vis-a-vis the value of the RFA, etc

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Pooja Gupta

CA Pooja Gupta (CA, ISA, having 15 years of experience. Educator and Digital Creator

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CA Pooja Gupta (CA, ISA, having 15 years of experience. Educator and Digital Creator

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